‘Political Interference At Grassroots Level Upset Growth Of Microfinance In India’

In an interview with BW Businessworld, Ratna Vishwanathan, CEO, Microfinance Institution Network India, MFIN, says how post demonetisation, the sector is back on track. However, more than demonetisation, the low-level political interference remains one of the biggest hurdles in making micro finance a success story in India.

Excerpts:

To begin with, Ratna where are we on microfinance in India today?
There is a general dialogue happening today on where the microfinance industry is headed, with the eruption of small financing banks which has almost 48 per cent of the industry moving out. Three years ago when the largest MFI Bandhan moved out, 25 per cent of the industry went with it. Three years later, we were back to pre Bandhan portfolio. Even today there are large institutions moving out but at the same time we have newer ones coming in and the current mid sized ones growing immensely into larger portfolios.

Today there is a great deal of comfort with the fact that the NBFCs MFIs is a 100 per cent regulated sector by the RBI. If you compare the microfinance sector, it is much better as compared to other financial service sectors in terms of regulation. Therefore, both these factors will ensure that microfinance in India, services and grows.

How big a role did regulation play, especially RBI in bringing sanctity in the sector?
Since 2011, when the sector came under RBI, it became far more structured and cautious. See, the key thing in microfinance has always been the focus on poor people. So it has a cross-cutting edge to it which the other service sectors take different hues on, depending on the geography. Here, the common denominator is the people at the bottom of the pyramid.

Another key area is the research to strengthen the sector. Microfinance is now heading in a direction where it is more visible. We were very inward focussed earlier. Over the last few years, that has changed completely.

Microfinance is a cash oriented sector with almost 99% collection efficiency in cash. With demonetisation coming, how badly was the sector hit and more importantly, have we recovered?
We had a fallout which we were not expecting.We did get affected with collections coming down, but it was temporary. Today the cash is back in the market.

There is low-level political interferences in certain geographies, which is not a part of demonetisation but more of an opportunistic seasoning of a situation and twisting it to your own advantage. As a result, we have had the disruption in certain geographies, but it is back on track.

But to what extent did demonetisation upset the functioning of microfinance?
I wouldn’t say that demonetisation has upset the way microfinance works. Even today we have a lot of cash in the system for two simple reasons- A large part of your borrowed population is either in Peri-urban or urban India. People are either unbanked or underbanked in these areas. This was the primary reason why microfinance came up with the door step delivery model dealing with the population that were not literate and were vary of interacting with the banks. Their earning is daily earning and every time they have to go to the bank they incur a loss of a day wage. Cash and transit at the end of the day is a huge risk.

So have you made progress in bringing down that cash in the microfinance system?
See, we would definitely like to bring the cash down and the urban focussed MFIs are moving in that direction, particularly in disbursement. The collection is through still a big challenge. But for the rural population, we will have to find ways and means to bring this whole digital conversation in the rural space, in a way that people are comfortable in understanding and learning the technology. They need to be made aware of the security issues around the technology. Only then we would be able to move to a less cash-oriented economy.

But at the moment we are way back when it comes to digital penetration in rural …
Absolutely. Look at the infrastructure. We are sitting in Delhi and I have troubles in connectivity. Do you really expect where the electricity is in premium, net coverage is low, these kind of transactions depending highly on technology are possible. It a huge challenge. The response is however very good. The sector is very keen with the whole digital agenda, but its a long conversation. It needs to be supported by adequate infrastructure and become sustainable.

The door service delivery model, that you talked about, how successful has it been in solving the cash efficiency problem?
Absolutely yes. It has been very successful. We send the branch officer and set up a meeting in the neighbourhood. Women come to the centre, they give their instalments, take a fresh loan and they go home. They do not have to go to the bank. So the ease of doing business is immense. At the end of the day, that is the USP of the service delivery sector- ease of doing business.

How is the debt and the equity flow in the sector, especially private sector?
Debt forms the major part, with 80-85% borrowings from the banks. But having said that, there is a huge lot of equity investors that want to invest in the sector today is doing very well. It’s a relatively low risk, small tab sizes. MFIs are however varying because absorbing the private equity also requires very quick returns and large interests. So, therefore, the transition will happen, but gradually.

What do you have to say about the vulnerability towards natural calamities. Taking reference from the Jantar Mantar situation, is waiving off the loan the only solution, every time a calamity hits? How does it work in microfinance’s context?
Microfinance has been working in the present shape since the last 5 years now. Every year we have a calamity. People still come and pay back. This is the beauty of the doorstep model in microfinance. It's a conversation between the MFI and the client regarding the issue. These are comfortable conversations which are validated by the fact that those borrowers are still with us. Having said that, it is not the best way to handle risk. Maybe we can look at reinsurance to tide over areas which is consistently risk prone as a model.

Agriculture sector by nature asks more for a loan waiver. Ours is primarily unorganised non-farm enterprise which doesn’t get hit that much by seasonal vagaries.