The trends in industrial Micro-finance

The economic growth of India has been slumping in recent times thanks to the jolts of GST and demonetization. The lower strata of the economy (the bottom of the pyramid) continues to play an important role in the GDP, no matter in which form or shape it might be. With 200 million MSMEs out there with an active need for credit³ and a lot more unmet credit demand from individuals, the microfinance institutions (MFIs) are addressing this gap. Hence it is little wonder that the regulated MFIs in India (more than 70 million in number with 10,553 branches and 80,097 employees) are serving 30 million clients². The government has also recognized the importance of MFIs to the economy. Hence in 2015, the Micro Units Development & Refinance Agency Limited (MUDRA) and Pradhan Mantri MUDRA Yojana (PMMY) came into being with an impressive target of INR 1,22,188 crore³.

Due to the immense importance of MFIs we at Prest Loans- www.prestloans.com thought to put together an analysis of the trends that will govern industrial microfinance.

Trends in industrial microfinance

1)      MFIs to assume the powers of traditional banking institutions- The government and the regulatory bodies have already realized the importance of empowering MFIs to meet the credit demand of the nation. It is understood that if the MFIs can utilize the power of public deposits (which it can’t do in normal circumstances) it can lower its own interest rates and become more competitive (current rates are around 24-26%³). Hence, the times to come will see more MFIs doubling as small finance banks which will be interesting since the big players will definitely have more competition.

2)      Enhanced use of technology- MFI have to keep transaction costs low in order to be profitable. MFIs are also known to ‘try out’ a smaller loan with clients to determine their credit-worthiness before committing to the full amount. These kind of maneuvers are best done using technology. Technology can indeed help MFIs speed up the credit-disbursal process and keep the occurrences of fraudulent activity under check. With digital payments catching the fancy of the nation, customers can be engaged in better ways by employing technology. This is a huge trend for MFIs which is why MFI-NBFCs are using technology similar to other business loans NBFCs like PrestLoans (www.prestloans.com) to up their lending game.

3)      Diversification will be important- MFIs cater to semi-urban and rural areas where their clientele is generally concentrated in a particular community. This exposes them to all the risks of calamities, both natural and political, that can befall the respective community (small groups of people in rural areas are generally easier to incite for some vested political interest). The best way to reduce this “concentration risk” is to diversify the portfolio (technology can help with this as well). This diversification can be geographic or even demographic, within the same geography.

4)      Standardization of transactions- MFIs have traditionally opted for cash-only transactions. With the mandate of Aadhar linking it is more important than ever to record all transactions and execute them over electronic mediums or with due receipts.  This wave of standardization is an important trend and MFIs adhering to this will stand to be greatly benefited. The government of Andhra Pradesh was among one of the first states that regulated the microfinance industry. This trend is expected to continue and permeate across all states and union territories.

5)      Growth of niche skills in the MFI sector- MFIs used to be run by small teams with strong roots in the community, who would have strong interpersonal skills and just the necessary finance skills. But that is changing fast. With the growing need for microfinance coupled with the challenging market scenarios, MFIs will be needing to hire talent for specific skill-sets. It will not be farfetched to see MFI hiring head of finance, technical architects, experience officers and credit officers in the future (and some of them are already doing it!).

MFI lending is already witnessing impressive growth with a compound annual growth rate (CAGR) of approximately 34% in loans disbursed¹. This growth will sustain and improve for those MFIs that are willing to respond to the call of the markets in the form of the above trends. As a NBFC, PrestLoans (www.prestloans.com) is always innovating its products and services to better serve the growing credit demand. With our experience expertise in employing technology to automate processes, we are confident of being a NBFC that ushers in the new era of industrial microfinance.

Sources

1:   Sa-Dhan. (2016). The Bharat Microfinance Report 2016. Retrieved from http://indiamicrofinance.com/2017-2016-bharat-report.html

2:  ADBI. (2016). The status of financial inclusion, regulation, and education in India. Retrieved from https://www.adb.org/publications/status-financial-inclusion-regulation-and-education-india

3: https://www.pwc.in/assets/pdfs/publications/2016/shifting-trends-in-the-microfinance-ecosystem.pdf