Demonetisation And Microfinance

The overnight demonetisation of Rs. 500 and Rs. 1,000 currency notes shook the entire Indian economy, for good or bad is yet uncertain. An estimated 85 per cent of the value of currency has ceased to be a legal tender and the release of the new currency has been rationed for the next few months. Such a move from the government will likely put a check on black money circulation in medium to long term, however, it will also impact businesses in the short run given the fact that more than 90 per cent of the consumer payments in India still happen in cash. The move is also expected to be a boon for digital financial services ecosystem in India. While the penetration of digital payments infrastructure has rapidly increased in last two years, the value of consumer payments that happen through cards or other digital means in India is still far behind some of the other comparable economies of the world. The POS terminals per 100,000 debits cards is lower in India compared to other BRIC nations (India - 2; Russia - 6.1; China - 12.5; Brazil - 14.8)

Till the time the government is able to remonetize the economy completely, many industries will see subdued transaction levels, most particularly the microfinance industry, which still relies heavily on cash for disbursements and repayments. The MFI industry has grown substantially since the slump in 2010. As per the latest data released by MFIN (Sep, 2016), the total credit portfolio of NBFC-MFIs is little over Rs 50,000 Cr while the total loan disbursements in Q1, FY16-17 alone was over Rs 18,000 Cr.

In the wake of the currency crisis situation, many MFIs have been forced to put disbursements on hold. Also, the repayments in Rs. 1000 and Rs. 500 denominations is being discouraged and shall eventually be discontinued. Many MFIs are also considering the option of rescheduling loans if the currency flow does not improve significantly in next few weeks.

Grameen Foundation India believes that the current situation is ripe for MFIs to transition to cash-lite operations by adopting digital financial services. While few MFIs have sporadically experimented with integrating digital financial services into their core operations, majority MFIs continue to deal in cash. High cost of digital payments, lack of digital literacy amongst target clientele and inadequacy of digital channels have been some of the reasons that the MFIs have cited for not adopting DFS so far. However, given the recent demonization move, it is believed that more and more small/medium businesses will integrate into the formal economy and hence accept digital payments more readily. Such a situation will eventually lead to increase in the volume of digital payments. Also, it will lower the transaction costs for MFIs to adopt DFS (including the newly formed payments bank) as DFS service providers penetrate deeper into the rural hinterlands with increased merchant and agent base.

At Grameen Foundation India, we are implementing multiple projects which are aimed at assisting MFIs to make the transition to digital financial services platform. In one such project, we have enabled a large MFI implement an outsourced digital repayments channel. The project is aimed at enabling rural communities, especially women, to adopt the use of mobile phones as a channel for their loan repayments, with an eventual aim of expanding its use to a more extensive suite of products including airtime top-up, remittances, financial education and savings, among others. We are also helping MFIs implementing and streamlining the BC (business correspondent) model for the mainstream banks. The BC model offers tremendous opportunities for MFIs to go digital in their credit operations, on both disbursements and repayments.

Grameen Foundation has been long advocating the need for MFIs to go digital in their routine operations. The Digital Financial Services landscape in India has rapidly evolved in the last few years. MFIs need to re-think about the inhibitions that had earlier restricted them to adopt digital channel.

While the move for using digital channels is welcome (and almost inevitable), based on our experiences, there are a few key lessons that MFIs should keep in mind for a successful digital channel adoption. To start with, MFIs need to do a careful analysis of their business requirements and find compatible DFS provider. We have often seen that pilots fail because of unrealistic expectations between partners. Also, the success of such implementations rely heavily on effectiveness of change management drive that MFIs need cautiously think through and implement. Change management plays an important role in aligning the staff to the larger organizational strategy and most importantly alleviates the job security fear that staff perceive in such a move. Lastly, MFIs also need to focus on client education for such digital transformation. Given the scale at which this transition needs to be adopted at client level, the MFIs need to adopt user-centric approaches to design the communication content and adopt effective channels to deliver such communication.