Microfinance and financial health

After achieving financial inclusion, the next focus for the country has to be ensuring financial health of households—the ability to plan expenditure, borrow, spend and invest.

Written by Guest

July 3, 2023 06:15 IST

The opening of savings accounts and deposits have become a huge success. (IE)

By Jiji Mammen

Financial inclusion was the buzzword till recently. But now, people are talking about financial health more than the financial inclusion. What is financial health? It’s the ability to plan, borrow, spend, and invest. In India, till recently, only 40% of people had bank accounts. However, the situation has changed in the last decade or so, and now, more than 80% of the adult population has a bank account, thanks to programmes like Prime Minister Jan Dhan Yojana (PMJDY) and Swabhiman. But definitely, the PMJDY was a real evolution.

The opening of savings accounts and deposits have become a huge success. Today, we have nearly 50 crore accounts under PMJDY with deposits worth nearly Rs 2 lakh crore. The payment system developed by NPCI, especially the Aadhar Enabled Payment System (AEPS) and Unified Payment Interface (UPI) have revolutionised the financial sector. In March 2023, there were more than 900 crore transactions under UPI worth Rs 14 trillion.

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The use of UPI has become very common in our country, especially in semi-urban and urban areas. Many of the small vendors, like vegetable or fruit sellers, petty business shops, and taxi and rickshaw drivers have a UPI QR code and payment is collected through it. With the success of PMJDY and UPI, can we call ourselves financially healthy? Definitely not. For India, we can consider to be a financially healthy society only if all the financial services like savings, credit, insurance, pension, and so on are made available to the people to their full satisfaction. Above all, proper financial and digital literacy are also necessary.

Along with PMJDY, the government also introduced two insurance products for the aam aadmi. But the traction under these schemes is not very great. Similar is the fate of the pension scheme. The Mudra Yojana started for the small loans can be treated as a success. In the last eight years, it has imbursed loans worth more than Rs 23 trillion to 41 crore loan accounts. Most of these loan accounts exist due to microfinance.

Microfinance has come of age and has become an integral part of the financial system in our country. In India, we have two streams of microfinance—the SHG Bank linkage programme and lending through joint liability groups (JLGs). Today, both the streams account for business worth more than Rs 5 trillion.

Lending under microfinance institutions (MFIs) through the JLG mode helps the borrowers in creating a credit history. Per RBI regulations, all loans issued by MFIs have to be reported in the credit bureau, and this helps to create a credit history. This is one aspect which people tend to ignore while talking about the cost of credit through MFIs. Apart from the cost of borrowing and operational costs which MFIs face, lending to a person without any credit history and collaterals is a great risk to them. In spite of these, they do a great service of providing credit and creating a credit history for economically weaker people in far flung areas who do not have credit history. With the status, they can borrow more and from higher financing institutions.

MFIs are also involved in many other developmental programmes. Recently, they have also initiated a massive financial literacy programme with the support of Sa-Dhan and Depositors Education and Awareness Fund of RBI. It is scheduled to conduct 2,250 workshops during this year across the country, benefitting 1,35,000 people. Thus, MFIs are also doing their bit in financial literacy activities.

Presently, the expansion of microfinance in the country is skewed. Can we promote new and small institutions to take up the lending in areas which are not as penetrated by other formal financial institutions? Data shows that nearly 300 districts have no or very low presence of MFIs. But this would need a concerted effort. First, there should be organisational support which can provide capacity building and handholding to such institutions. Second, there is a need to provide equity support to these institutions. Third, there is also a need for a debt funding facility for these institutions by which they can borrow funds for their operations. Can we have an institution like Palli Karma Sahayak Foundation or popularly known as PKSF of Bangladesh in India to take care of the funding needs of MFIs, especially the smaller ones?