Almost a year after the unexpected implementation of demonetisation (DeMo), business confidence is at an all-time high, according to the Business Confidence Index (BCI). This optimism is also reflected in the microfinance sector as loans disbursed, especially by small MFIs in the first quarter of FY18, have more than doubled, compared to the corresponding quarter of FY17. The BCI is based on a sample size of 300 firms across all industry sectors, including small, medium and large enterprises from different regions. The BCI for July 2017 stood at 64.10, compared to the figure of 57.2 in July 2017. This index is largely based on three questions related to the performance of the economy, the respondent’s industry and the respondent’s company. The index is calculated as a weighted average of the Current Situation Index (CSI) and the Expectation Index (EI), with greater weight given to EI as compared to CSI.
Zooming in on the sentiment in the microfinance sector, the broad trend reflects that of the larger economy. Micrometer (Q1FY18), a publication by the MicroFinance Institutions Network (MFIN), explains,“As customer transactions in the microfinance industry are cash-intensive, DeMo severely impacted the microfinance business in multiple ways, including slowing of growth due to non-availability of cash for a few months.” However, the situation has clearly changed since then, and the sector has returned to its pre-DeMo levels, even surpassing them with respect to some indicators.
While the level of loan disbursements by all microfinance lenders in Q12017 was merely 0.2% higher than it was in Q12016, disbursements by small MFIs increased 64%; those of medium and large MFIs remained more or less the same.
At one level, the revival in disbursements has been triggered by an overhaul in processes of banks and lending companies post DeMo. Moving from cash-intensive processes, a number of lenders have adopted online disbursement and collection practices. While this transition took some time to implement, it has resulted in more efficient collection trends and, therefore, greater levels of confidence of lenders; in all likelihood, more secure lending and collection systems have encouraged them to disburse more.
At the same time, there has been a pick-up in consumption with a rise in rural incomes and purchasing power (HSBC Securities and Capital Markets). This has been driven by a plunge in inflation and an improvement in macro indicators for rural India. According to HSBC, the plunge in inflation has helped boost annual real income growth to just under 4% from contracting levels a year ago, while rural unemployment has sunk from about 9% last September to around 4%. Further, near normal rains in 2017 and a bumper crop in 2016 have also generated more jobs for rural Indians.
Looking ahead, there is a fundamental change taking place in the formal finance sector, which, according to some, will be as dramatic as the nationalisation of the banking sector decades ago. There is a view that by 2030, MFIs, small finance banks and other banks that predominantly cater to the rural sector will dominate rural banking and they will remain absolutely viable.
The author is Group chairman, Inditrade (JRG).