By Indrajit Verma
We all have heard the classic tale of the consistent tortoise’s victory over the swift rabbit. However, there is an alternate version wherein the rabbit and tortoise join forces in a challenging race to win against all odds. The rabbit carried the tortoise on its back while running on the ground and the tortoise did the same while swimming in the river. This helped them reduce the overall time required to cover the total distance. This fable highlights the power of combining varied abilities and diverse strengths to achieve great results.
Building upon the rabbit and tortoise analogy, banks, and micro-finance Institutions (MFIs), binding their unique strengths, can play pivotal roles in providing credit facilities to the underserved population.
Let’s pause for a while to sense the present Microfinance landscape of our country.
In India, non-banking financial companies (NBFC) and MFIs represent the largest segment of micro credit, with a loan amount outstanding of Rs. 1.56 lakh crore, which constitutes 39.1 per cent of the total industry portfolio. Banks are the second-largest with a total loan outstanding of Rs. 1.33 lakh crore. They account for 33.5 per cent of the micro-credit universe. As of December 2023, the total microfinance loan portfolio has almost touched Rs. 4 lakh crore across 721 districts, according to MicroFinance Institutions Network (MFIN).
After Covid-19, this sector has seen a significant increase in the number of clients served and the loan amounts disbursed. As many as eight million new clients were added during FY23 itself.
The microfinance industry reported a healthy compounded annualised growth rate (CAGR) of 24 per cent over FY18-23, making it the fastest-growing retail product among all the major retail segments, such as credit cards, housing loans and auto loans. This validates one thing for sure; there is a genuine need for credit in this segment, and still, there is a gap between demand and supply. As estimated by MFIN, the potential microfinance market size is set to reach Rs 17 lakh crore by March 2026.
Banks and MFIs share the same lending space, yet they remain distinct. Banks offer a plethora of services and have big portfolios, while MFIs, with their unique ‘rurban’ presence, have small portfolios, but a deep presence on the ground. Banking has become more user-friendly and approachable, though a lot more needs to be done to ensure hassle-free credit facilities to the rural hinterland. MFIs have identified this gap and leveraged the opportunity by providing hassle-free micro-credit to underserved clients.
From the perspective of banks, collaborating with NBFC-MFIs through co-lending offers a strategic advantage in geographical areas where banks do not have sufficient reach and MFIs fill this gap. MFIs, with their lean operation models and deep understanding of local markets, can deliver financial services more cost-effectively. It helps the banks to contribute to their social responsibility goals under priority sector lending as well.
The co-lending partnership between banks and MFIs represents a powerful synergy. There is a need to further streamline the technological interface making it more user-friendly and fit for the rural environment.
At present, MFIs face a few other challenges in addition to the irregular flow of funds. Managing human resources, and the placement and retention of the right workforce is an excruciating task. The industry attrition rate stands at 55 per cent, and a stark 86 per cent for probationers, according to data from MFIN. The numbers signal that a sound HR policy and practice is the need of the day to ensure employee retention and a robust organizational culture.
There are also challenges related to operation, as this sector has been vulnerable to fraudulent activities. Miscreants are using the latest technology to indulge in fraud. A robust system and constant review of the same is a must. In some parts, the increasing trend of migration after taking loans is a major concern. Rumour-mongering and illegal campaigns like ‘karz mukti abhiyan’ too cause huge damage. This further emphasises the need for proper training of the field staff, enabling them to handle challenging situations on the ground. We should also recognise that conventional lending norms cannot be directly applied to MFI clients; their uniqueness requires a distinct approach that demands careful handling. The good old MFI practices of involving and engaging with the clients are still relevant.
MFIs typically lend small-ticket loans to women clients from weaker financial backgrounds. They help women from the low-income households to get empowered, thus reducing social inequality.
There are several areas where banks and MFIs are working together to achieve synergy. Co-lending is one such beautiful arrangement, where banks and MFI co-lend the customer. The major funding (up to 80 per cent) comes from the bank at relatively lower rates of interest, and the overall blended rate becomes comparatively lower for the end-customer. The MFI gets free-flow access to the funds, and the banks leverage the field infrastructure of the MFI to increase their market penetration. The customer benefits by getting loans at relatively cheaper rates. This is a triadic model where all the stakeholders benefit.
Additionally, risk sharing is another aspect where banks and MFIs co-create value. By co-lending or participating in risk-sharing agreements, banks and MFIs distribute the associated risk related to lending to underserved sections.
Drawing parallels from the Aesopian tale, banks and MFIs can leverage their unique capabilities to serve the unbanked and marginalised sections of society. Microfinance plays a significant role in driving financial inclusion.
G20 Sherpa Amitabh Kant aptly summarised this when he said “microfinance institutions are integral to fuelling the country’s growth”.
New ideas and innovation along with multi-stakeholder collaboration can create a significant impact in this fastest-growing retail loan segment of Microfinance.
The author is an entrepreneur and an expert in microfinance.
(Disclaimer: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.)
