India’s Microfinance Story

Microfinance has a long and distinguished history in India. Introduced for the first time by the SEWA Bank, part of the Self Employed Women’s Association (SEWA), in Gujarat in 1974, it has since become instrumental in extending financial services to many who remained excluded from the economic mainstream. Little wonder then that the industry saw growth rates of 40% per annum till very recently. This period of high growth has been punctuated by various crises and macro-economic disruptors, most recently the Covid-19 pandemic.

The impact from the latest downturn was deep, with the number of loans dropping by 97%. The loans disbursed were also 96% lower in value, according to the Microfinance Institutions Network. There were other signs of sickness, with an RBI study flagging huge drop in collection efficiency of securitization pools from 83% to 5% in April 2020. Though these indicators have recovered slightly, question marks remain over the best way ahead for microfinance lenders.

To delve deeper into these important questions, the third episode of The Making With Shereen Bhan in association with HSBC featured Rajat Verma, Managing Director and Head- Commercial Banking, HSBC India, Manoj Nambiar, CEO, Arohan Financial Services and HP Singh, Chairman & MD, Satin Creditcare Network, who brought their wide ranging expertise and experiences to a discussion about the changes in microfinance.

Microfinance’s unfulfilled potential, despite years of high growth rate, is a testimony to the massive opportunity that awaits companies, especially amongst the unbanked masses in rural areas. This unfulfilled potential was reflected in Manoj Nambiar’s opening remarks, as he appraised the state of affairs. “An industry which was worth less than Rs. 10,000 crore in 2010 has matured to an industry worth Rs. 2,40,000 crore today. Even at this supply we believe the market is only one-third penetrated.”

This steady optimism is rooted in the fact that microfinance predominates in the rural market, which has proved more resilient to the pandemic-induced economic downturn. As HP Singh explained, “In the rural economy, which is purely a domestic economy and localized to a large extent, the income levels don’t get so erratic.” He was even willing to put a timeline to the recovery. “Q4 will be a very stable quarter for all of us. Including disbursements, which are picking up now.”

It’s a sequence of events that has reaffirmed the relevance of MFIs in facilitating equitable growth. When pressed by Shereen Bhan to elaborate on the commercial strengths of the industry, Rajat Verma concurred that “there is a model that is scalable. And the story is not yet done. Industry has shown a level of maturity it didn’t have in 2010-2011.” But apart from the industry’s intrinsic qualities, there are a range of external factors that will shape its future.

On top of the list of potential seismic shifts are recommendations from RBI to convert small and payments banks into universal banks. It presents new opportunities for NBFC-MFIs, along with potential pitfalls. Rajat Verma was not convinced, saying “Small MFIs have had a great role to play in networking with society at the ground level. If you institutionalize everything, you may lose some of that.”

The other panellists seemed to agree, with Manoj Nambiar striking a cautious tone. “It’s important to optimise each segment of this journey and then take that turn”, he said, alluding to new opportunities for NBFC-MFIs to foray into banking. HP Singh discussed ideas which could help MFIs ‘optimize’ their operational abilities, quoting examples of his own company’s progressive measures. “We did a lot of process reengineering in our company. We are probably the first ones to do psychometric analyses of microfinance borrowers”. For him, “the main challenge that comes up is the interference of the local bodies. That’s the most important aspect that needs to be looked at”, he said, referring to populist policies that are announced before elections, like loan waivers.

Having faced their share of shocks and upsets has given microfinance leaders belief in their own ability to bounce back. “We are a sector that has learned from crises. And we have ensured that we have our takeaway from each crisis”, said Manoj Nambiar, when asked by Shereen Bhan about the discipline required to tide over this latest rough patch. It was a question that arose from Rajat Verma’s contention that for MFIs, “As an industry, there is very strong business case to say this is our core and to stick to our core, not only because it’s good for society, but also because it seems like a really good business model.”

But that’s hardly curbing ambitions. Microfinance has brought the convenience of financial services to a mass of consumers, whose surging aspirations add value to MFIs as well, just like HP Singh’s company has accomplished with its growing rural housing loan portfolio. The true test of microfinance’s growth in India won’t be told by mere numbers, but by dreams fulfilled.

Watch the full discussion.