Microfinance’s biggest strength can be seen in the adverse situations affecting the sector. Between mid-November and December 2016, the country, more acutely the rural parts, witnessed huge cash crunch. But this did not deter women from gradually making timely loan repayments. Barring a few districts, the industry bounced back to over 90% repayments by mid-December 2016. When women come together in a joint liability format, they responsibly help each other in utilising the loans for livelihood enhancement, bringing a strong cooperative outlook towards their collective future.
In the thick of demonetisation, states like West Bengal, Odisha, Tamil Nadu, Chattisgarh, Punjab and Goa had a collection shortfall of not more than 9%. This is no small achievement for the industry, signalling that women are willing to endure small pinches to keep their credit flow intact. The average ticket size of the industry is R11,425, which can be repaid in weekly instalment of R245 for 50 weeks. Smaller repayments make it easy for women to manage their finances, even in difficult times. These loans are utilised for sustaining micro-enterprises including tea stalls, kirana stores, cattle farming or some other income-generation activity meeting essential needs and services.
Even as the microfinance industry and its women members were coping with the cash shortage, another challenging situation was brewing in some parts. A few districts in states like Uttar Pradesh, Maharashtra and Karnataka were witnessing political convulsions.
Local leaders and social activists in places like Amravati, Nagpur, Wardha, Aligarh, Deoria, Moradabad, Belgaum and Dharwad started spreading rumours of loan waivers, asking borrowers not to repay. Pamphlets were being spread and rallies held to campaign that microfinance institutions are not legal companies and one can “hit the employees if they come for repayment”.
It is ironic that the field staff who are barely graduates and hail from the same economically deprived backgrounds as that of the borrower, are being made the target (the sector today employs 1,03,415). The Indian microfinance sector is not new to ill-informed political stirrings in some parts of the country. One such instance is the Andhra Pradesh 2010 crisis. It is unfortunate that the repercussions of such politically motivated actions are faced primarily by borrowers. Estimates suggest that in 2012, there were 9.3 million defaulters in AP alone. Defaulters are blacklisted from getting formal loans.
According to Microsave & IFMR’s June 2012 report, MFIs in Andhra Pradesh greatly reduced or stopped lending operations after November 2010. As a result, usurious moneylenders are back in business. Also, to meet critical household needs, 12% of the study’s respondents sold their assets such as house, vehicle, cattle, jewellery, etc, post the exit of microfinance.
Now, post-demonetisation, often the local leaders who lure women towards a loan waiver are unaware that it takes several years to nurture a microenterprise for sustainable livelihood. And, any disturbance in it would also eventually disrupt the working capital inflow for the business and mar their prospects of growth. And building a credit history in borrowers goes a long way in achieving financial inclusion.
Interestingly, districts which have typically faced issues like drought and crop loss have done well during demonetisation. In Maharashtra—Beed, Latur, Osmanabad among others like Pune, Nashik, Nanded showed remarkable recovery in collections, returning to 99% and above by December 10, 2016. But districts where local leaders continue to rally against MFIs have suffered. Amravati and Wardha have collections hovering at around 40%.
Even as the industry was coping with the initial shocks of demonetisation, alongside the political interference in a handful parts of the country, RBI allowed companies a 60-day extension to classify stressed assets as non-performing.
This move, too, was misrepresented by the local leaders who started conveying to the borrowers that the RBI has given time to repay. Voices to stop repayments were raised at a higher pitch now, including allegations of higher interest rates and coercive practices. To bring some facts here, Sa-Dhan data shows that over 36 NBFC-MFI members have reduced rates significantly in the last financial year. As of March 2016, the top-10 NBFC-MFIs contributing 80% of the sector’s Gross Loan Portfolio (over R40,000 crore) have a weighted average interest rate of 23.13%.
Door-to-door services in remote rural areas involve additional costs as the financial infrastructure here is not developed. Costs can come down if the borrower is willing to incur travel expense. However, the demonstration of the model of microfinance from a borrower’s perspective can be seen in its spread—588 districts in India, where formal finance was close to absent, reaching 39 million clients.
Despite making deeper inroads, NSS data of various years, including the latest one of 2013, too shows that majority of the population is still dependent largely on informal and expensive sources, including moneylenders, to meet their credit needs. On its part, the Indian Government had recognised the importance of microfinance for financial inclusion when it announced the Micro Units Development & Refinance Agency Limited (MUDRA) and Pradhan Mantri MUDRA Yojana. The Pradhan Mantri Jan-Dhan Yojana has met 91.9% of its target by March 2016.
Regulators and policy-makers have time and again recognised that microfinance is critical to reach financial inclusion goals. Lessons from the past also indicate that undue political involvement is always lethal for the borrower’s financial needs. But then, it is these women borrower groups’ willingness to navigate through challenges like demonetisation that keeps the microfinance industry going.
The author is executive director, Sa-Dhan. Views are personal