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Small borrower, big problem

Demonetisation has hit the microfinance sector hard, pushing the poor out of financial inclusion and towards usurious debt.

Written by Saibal Paul |
Updated: December 23, 2016 12:00:10 am
demonetisation, demonetisation problem, microfinance sector, micro saving, bharat microfinance report 2016, Jan Dhan Yojana, MFI, MUDRA loan, RBI, reserve bank of india, debt, financial debt, indian express news, india news, indian express opinion, opinion The microfinance sector constitutes NBFCMFIs, societies, trusts, cooperatives and other entities. (Illustration by Subrata Dhar)

Microfinance is a set of financial products including micro-savings, credit, remittances, pensions, etc, crafted for the poor and serviced with affordable costs. As per the Bharat Microfinance Report 2016, microfinance institutions (MFIs) are now reaching 40 million clients with 70,000 crore rupees of portfolios; additionally, 60 million clients are being reached by SHGs (self-help groups) for credit. This sector consumes about 46,000 crore rupees of MUDRA. The microfinance sector constitutes NBFCMFIs, societies, trusts, cooperatives and other entities.

But the significance of microfinance is the type of clients being served, over and above the quantum of the portfolio. About 60 per cent of Indian adults did not have access to formal financial institutions. The account opening drive through the Prime Minister’s Jan Dhan Yojana was a welcome initiative; however, most of these accounts were dormant. As fieldwork shows, little has happened in the formal financial sector to actually reach the poor. In this situation, the microfinance sector has seen a growth of upto 60 per cent per annum. But microfinance loans are collateral-free and unsecured in nature, presenting huge potential risks for MFIs. Customers served by MFIs are essentially very poor and usually ostracised by the traditional banking system. Yet, apart from RBI-permissible micro loans per client upto Rs 1 lakh from two sources, MFIs also provision microinsurance and other financial instruments to such customers.

In most cases, MFIs are the only source for credit and financial instruments for the poorest families trying to manage financial needs and unseen instabilities. The predominant microfinance model is a joint liability group, where members of women’s affinity groups take loans from microfinance institutions (MFIs) with shared liabilities for repayment; MFIs source these loans from lending agencies, mostly banks, both public and private. So, the term loans provided by the banks are distributed amongst the clients and the repayment of the clients is repaid to the lenders within an agreed schedule. On the basis of different parameters, including timely repayments, the MFIs get subsequent term loans. Hence, the repayment of term loans to the banks is instrumental in order to ensure the inflow of credit to the clients.

Currently, demonetisation has been having a significantly negative impact on the microfinance sector and its clients; the poorer segments of the population are the worst hit. For security purposes, most of the loan transfers, from MFIs to clients, happen through the national electronic funds transfer (NEFT). However, repayment from them is by liquid currency. This is primarily because the poor use cash and do not use technology for daily chores. Even if they wanted to, the overarching architecture for a cashless economy is yet to be put in place and these people need to be educated to use it.

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In a post-demonetisation scenario, despite being the source of lending term loans to MFIs, the banks are refusing to take discontinued currencies. Due to the sudden shift, clients are unable to exchange the discontinued currencies — which they had saved for repayment.

MFIs are unable to accept discontinued currencies as the banks are refusing to accept these. The situation is very gloomy. Repayment has cascaded down to 30 per cent and in some places, it is reported to be as low as 20 per cent.

The regular portfolio at risk of the microfinance sector is less than half a per cent; this is much lower than the banking industry. As discussed, timely repayment propels the subsequent leg of term loans to MFIs; non-repayment presumably blocks the process and eventually, this will translate to unavailability of financial support for these clients. In the past, it has been seen that once the MFI source is dried up, the clients take refuge with loan sharks.


In order to manage the situation, the Reserve Bank of India has notified all regulated entities on new prudential norms on income recognition, asset classification and provisioning pertaining to advances for the banks. It is to give small borrowers some more leeway to repay their loan dues because of the challenging time that is emanating from the withdrawal of the legal tender status of the old 500 and 1,000 notes.

But the situation is getting even more complex with these new prudential norms as the political class is trying to take advantage of the situation in certain places. In some districts of Maharashtra, Uttar Pradesh and Madhya Pradesh, local political leaders, in search of some instant, cheap publicity, have been cajoling clients by interpreting this notification as a waiver. Political leaders, using their local heft, affiliations and the ignorance of poor people, are in fact spoiling the sector. They are conducting rallies and demonstrations and igniting clients and their families not to repay loans and even, to chase out field workers of the MFIs. In certain areas, repayment has almost stopped.

The microfinance sector is going through substantial challenges. The RBI, in order to protect the market and clients, has propagated strict regulation which covers significant portions of the sector. However, as experienced till now, demonetisation has posed challenges to both clients and the entire sector. It is affecting the credit culture of poor people, who are undergoing stress and falling prey to unscrupulous political leaders, who try to make them ignore repayment, and thereby face greater financial stress.


This entire act will again push the poor out of financial inclusion. Secondly, substantial non-repayment will hinder the flow of term loans from the lenders and gradually, the sector will dry up. The efficient channel for MUDRA loans will also get diluted. Deep-pocket big MFIs can manage for some time; however, the small MFIs will soon face real trouble. The credit need is inevitable especially for the economically deprived. But if MFIs are not in the position to cater to them, such clients will have to seek refuge with loan sharks, which will make them even poorer and unable to emerge from such binding poverty. A life of dignity and real aspirations could forever be wiped off their horizons.

The writer is associate director, Sa-Dhan, The Association of Community Development Finance Institutions. Views are personal

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First published on: 23-12-2016 at 12:00:08 am
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