Microfinance as the Next Wave of Financial Inclusion

Mr.M.K.Jain, Deputy Governor of Reserve Bank of India while speaking at the inaugural session of the Small Industries Development Bank of India (SIDBI) National Microfinance Congress 2019 in Mumbai, said that “Microfinance, involving the extension of small loans and other financial services to low-income groups, is a vital economic conduit designed to facilitate financial inclusion and assist the poor to work their way out of poverty. It is argued that microfinance can facilitate the achievement of national policies that target poverty reduction, empowerment of women, assisting vulnerable groups, and improving living standards” he said. The deputy governor further said that the recommendations of the UK Sinha committee, which was created to suggest long-term solutions for the economic and financial sustainability of the micro, small, and medium enterprises (MSME) sector, were being examined for implementation. The committee’s recommendations include setting up a Rs 5,000-crore stressed asset fund for domestic MSMEs.

Key points articulated by Mr. Jain in the session are;

• Reserve Bank of India has been making sustained efforts to increase the penetration of formal financial services in unbanked areas while continuing with its policy of ensuring adequate flow of credit to productive sectors of the economy and also ensuring the availability of banking services to all sections of people in the country.
• To boost credit to the needy segment of borrowers, the Reserve Bank has advised all Scheduled Commercial Banks (excluding Regional Rural Banks and Small Finance Banks) that bank credit to registered NBFCs (other than MFIs) for on-lending will be eligible for classification as a priority sector under respective categories subject to certain conditions.
• Mudra loans have given a “massive push” to lift beneficiaries out of poverty; there have been concerns about the growing level of NPAs.  Hence, there is a need to focus on repayment capacity at the appraisal stage and monitor the loans through the life cycle much more closely.
• Financial inclusion is becoming a focus area for banks, NBFCs, Financial Technology (FinTechs), and other financial entities. The customers in the low-income group should be enabled to not merely avail of offered products and services, but demand them according to their needs. Business collaboration among banks, NBFCs, MFIs, and fintechs would be pivotal to accelerating financial inclusion through innovation.
• The formation of new banking entities (i.e. two new universal banks and ten small finance banks) has also helped to further the cause of financial inclusion in the country. The Small Finance Banks have been set up to further financial inclusion with a client base comprising mainly of migrant labour workforce, low-income households, small businesses, and other unorganised sector entities.
• When it comes to financial inclusion and microfinance, there are several channels such as universal banks, small finance banks, microfinance institutions, BCs, etc. Therefore, as a country that is determined to achieve universal financial inclusion at an affordable cost, this is a defining moment, and we should seize the opportunity.
• RBI has also taken several steps including encouraging the use of mobile banking, pre-paid instruments such as digital and mobile wallets, etc., considering the strong linkage between financial inclusion and payment systems.
•  With the introduction of the Goods and Services Tax (GST), the need for informal sources of funds has been reduced. “The cost of credit for micro and small enterprises will also decrease meaningfully, as lending will shift from collateral-based lending to cash flow-based lending.

The deputy governor also suggested that SIDBI could “hand-hold” microfinance providers in areas such as alternative credit scoring models and in predicting the probability of default. The development finance institution should also take the lead in hosting an ecosystem within a well-defined regulatory sandbox to create the infrastructure to reduce the turnaround time and achieve robust risk mitigation.

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