The cash-heavy microfinance industry is back on growth track after the infamous demonetisation that was announced by the government in November 2016. The microfinance industry was among the worst affected as drastically reduced repayment rates hurt collections. Udaya Kumar, President, Microfinance Institutions Network (MFIN), says the industry is now on steady growth path, cost of funds has reduced and the repayments by clients have also returned to the normal levels for all the disbursements made by the industry after February 2017. Investor confidence has also significantly increased in the sector as it recorded an increase of 40% in equity investments in the last financial year with total equity funding standing at Rs 9,631 crore. In an interview with Anuradha Choudhary of FE Online, Udaya Kumar talks about the industry\u2019s performance in the recent past, challenges it is facing, growth potential going forward and its role in financial inclusion, among other things. Here are the edited excerpts: Take us through how microfinance industry in India has developed, its key contributions in the last five years and present state? Microfinance industry has grown significantly and steadily in the past five years. After 2010, the sector registered a turn around and since then has exhibited evolved growth. Introduction of microfinance regulations by RBI and self- awareness among the microfinance institutions to lend responsibly by adopting an industry-wide code of conduct has brought in stability and maturity in the sector while increasing its credibility. Over the past years, the government and RBI have also provided conducive policy and regulatory environment. It has allowed MFIs to become key partners to push the government\u2019s financial inclusion agenda. As part of strengthening the MFI industry, RBI appointed the industry body MFIN as well as Sa-Dhan as SROs and bringing Credit Bureau for the tiny loan segments is a unique contributor in this growth trajectory. Other key factors of the growth have been the increased client discipline and continued confidence by the stakeholders like lenders and Investors. Further, there has also been tremendous improvement in the risk management by the sector which is evident from the fact that the sector was able to tide over the impact of demonetisation. This was despite having a greater share of cash-dependent transactions since MFIs cater to low income households with large number of them are in rural hinterland. According to a recent report by MFIN, NBFC-MFIs witnessed a growth of 40% in equity investments on year-on-year basis in FY18 compared with FY17. How do you analyse this growth? The investors\u2019 confidence on the industry has been very positive which is evident from the 40% YoY growth in FY 2017-18, being relatively difficult year for the Industry. This has been largely due to robust and stable growth of the sector including consistent maintenance of NPAs at under 1% level. The industry has been able to maintain client repayment rate of 99% which to a great extent allays the fear of risk involved considering the unsecured nature of the loans. Microfinance sector is highly cash oriented - both on disbursements and repayment. Is that a barrier? What all are the current challenges\/crucial barriers for the industry? MFIs cater to the low income households and provides financial services to the unbanked and under-banked individuals. This segment largely exhibits lower literacy rates and low orientation towards technology apart from lack of infrastructure and ecosystem for digital money. Therefore the transactions are largely cash based. However, NBFC-MFIs have been making efforts to create awareness towards digital transactions and increasing their acceptance among them. Currently, close to 70% of disbursements are done through cashless mode by NBFC-MFIs. However, percentage of cashless repayment is still very low due to nature of collection process. As the adoption of digital transactions grows and accessibility of digital infrastructure improves, we expect cashless repayments too increase as well. MFIN is currently working on a pilot to find an appropriate model to provide a basic standard of digital engagement to facilitate cashless transactions. How does the industry tackle with lack of awareness of financial services, given the low literacy rate in rural areas? MFIs feet on street model has been instrumental in building an extensive reach at the grassroots level, enabling them to cater to financial services needs of the unbanked clients. MFIs normally provides extensive training of financial literacy, money management, interest rates, insurance etc., before providing them micro-credit. This model has also helped in building a strong connect with the clients who are otherwise hesitant in approaching banks and other financial institutions due to their lack of awareness and low literacy level. In fact, many NBFC-MFIs at their individual levels organise various financial and digital literacy programs to help their clients in understanding the basic as well as evolved aspects of financial services. Such initiatives have been helpful in increasing financial awareness among them. What are your views on high rates of interest by microfinance institutions as compared to mainstream banks? Also, if you could throw some light on the current position of NPAs in the sector. NBFC-MFIs follow RBI regulations to fix interest rates. Since NBFC-MFIs are non-deposit taking entities they borrow funds from external sources to cater to the micro-credit requirements of their clients. The interest rates offered by an NBFC-MFI are heavily dependent on the cost of funds that it borrows and RBI stipulations have taken this factor into account as well. However, recently we have observed that there has been a reduction in average cost of funds for the industry and many MFIs have actually passed on the benefit of this reduction to their clients through cutting down interest rates. There has been significant awareness on the MFI industry today as several mainstream banks are into microfinance either directly, through Banking Correspondent route or by acquiring the MFIs the interest rates in general are very acceptable level. In general, the industry has always maintained NPAs at sub-1% level. However, we had experienced an increase in NPAs during demonetisation but the industry has shed off its after effects now. The PAR figures have been continuously lowering and PAR>30 has improved considerably. It has reduced to 4.41% as of March 31st 2018 from 5.98% a year ago. PAR>180 has also reduced to 2.83% from 3.49%. The repayment discipline of the clients have also returned to the normal levels of pre-demonetisation for all the disbursements made by the industry after February 2017. What do you think about regulatory issues in the sector as well as expectations from the government with regards to regulations or policy change, if there is any? The MFIs are the best placed institutions to support the government\u2019s agenda on financial inclusion. For this they would require ease of access to finance for various categories of MFIs (small, large and medium). The financial services that MFIs provide are to low income households and levying GST on the fee, makes it expensive for these households to access the financial services, if the GST could be removed on the processing fee it would have good benefits to the customers. Govt has been supportive and any incentive for small MFIs till they reach a size of sustainability for working backward areas would help more and more institutions will work on this financial inclusion agenda. Growth potential of the industry in the country going forward. The industry is set on a steady growth path and even the small NBFC-MFIs have witnessed significant growth in the past years. Looking at the recent past performance, we expect the growth to be positive in the coming quarters too. Potential for Microfinance, particularly in Semi-Urban and Rural geography is quite large in India and with NBFC-MFIs are stepping up to integrate best practices and technology which would help them provide better customer service as well as achieve operational efficiencies. It would definitely have a net positive impact on the performance of the companies.