Providing the poor with easy access to credit in a sustainable manner has been the holy grail for policymakers. Despite efforts like nationalisation of banks in 1969, establishment of regional rural banks and the RBI drive at financial inclusion through priority sector lending by banks, the All India Debt & Investment survey of 1992 revealed wide gaps in credit availability, especially at the bottom of the pyramid.
Post 1991, coinciding with the financial sector reforms, self-help group (SHG) and joint liability group (JLG) lending models were two innovations which have enabled a rapid spread of microfinance across the country. At present, microfinance meets the credit needs of nearly 12 crore families with a total lending portfolio of about ₹4.9-lakh crore. A study by NCAER (National Council of Applied Economic Research) in 2021 estimated the contribution of microfinance to gross value added (GVA) at more than 2 per cent while generating nearly 12 million jobs.
Today, microfinance is available in nearly 85 per cent districts of India with more than two lakh frontline employees distributing credit and associated services.
High frequency of customer interactions through weekly or fortnightly group meetings underpin sustained efforts at financial literacy as well as quick resolution of customer grievances. Since the borrowers belong to the low-income segment and often have low literacy levels, frequent face-to-face interactions are one of the reasons behind the success of the JLG model.
Group Recognition Test (GRT) conducted after the formation of a new borrower group plays an important part in promoting financial literacy. MFIs (microfinance institutions) have been increasingly adopting technology to enhance operational efficiency, improve underwriting models and reduce expenses while continuing the focus on customer-centricity.
Audio-visual content in vernacular languages is widely utilised to continuously impart financial literacy. A separate credit bureau for microfinance was established about a decade back. Intense efforts by MFIs and credit bureaus have led to the development of robust databases and a credit bureau report is an essential part of underwriting now.
Digitalisation initiatives have been aligned to the rapid diffusion of smartphones and growing comfort of borrowers with digital modes of transactions.
Today, nearly 100 per cent of loans are digitally disbursed directly into the bank account of the borrowers and an increasing number of repayments are also being done digitally.
The RBI regulations for microfinance provide an effective framework for customer protection. This framework is supported by RBI recognised self-regulatory organisation (SRO). The SRO supports the MFIs in the implementation of the regulations, takes initiatives for capacity building, improves governance through regular guidance and surveillance and provides a platform for resolving sector level challenges.
In fact, microfinance is the only sector where an SRO has been approved by the RBI. Customer grievance redressal continues to be an important area of focus.
As a result of these efforts, the microfinance sector has grown nearly 20 times in the last decade. The microfinance regulations introduced by the RBI in March 2022 provide a framework for further strengthening of the sector.
The writer is Head, Self-Regulation and Compliance, MFIN