As the CEO of Sa-Dhan, how do you perceive the organisation’s role in strengthening India’s microfinance ecosystem?
Microfinance sector needs to play a role, as was envisaged in the initial days of microfinance movement in late nineties and early 2000s. The focus should be more on the financial inclusion of the poor by enabling them to borrow responsibly. For this, one has to spend more time with the stakeholders, train them, educate them and make them empowered. Secondly, the end use of the loan should also be ensured, and, to the best possible, loan should be utilised for productive purposes only. As a responsible association and Self-Regulatory Organisation (SRO), Sa-Dhan has a role in guiding the members to practice these, and also ensure it is being done. Otherwise, we often get into difficulties as witnessed in Andhra Pradesh and Assam earlier, and Karnataka, recently.
Sa-Dhan, on its part, needs to devote its time and resources for the capacity building and monitoring of its member institutions and avoid any such recurrence in the country.
What measures have MFIs implemented till now to ensure responsible lending practices, and to resolve the problem of over-indebtedness?
There is already a regulatory framework and fair practices code issued by the Reserve Bank of India (RBI) which stresses on the point of avoiding any kind of over indebtedness for the borrowers. This apart, the SROs, including Sa-Dhan, has issued a Code of Conduct, which puts emphasis on the need for responsible lending and avoiding over indebtedness and stress. Recently, when the issue of over indebtedness was observed in different geographies, Sa-Dhan convened a meeting of the CEOs of its members and took a decision together to have some self-restraining guardrails, where the overall exposure and financing norms were prescribed. This was issued as ‘Seven Sankalps’ in June 2024, which has brought down the heat of over lending across the country.
A year ago, you had proposed a Rs 250-crore fund for emerging MFIs, along with Nabsanrakshan that could extend a guarantee cover for lenders’ borrowings from banks and financial institutions. Tell us about its current status.
The idea was to have a kind of fund for accessing equity capital for the growing MFIs, which require growth capital. We have a similar fund with SIDBI by name India Microfinance Equity Fund (IMEF) created in 2013 with Rs 100 crore first, and subsequently augmented to Rs 300 crore corpus. However, the utilisation of the fund is limited due to some difficulties around the conditionalities of the fund. Hence, we were requesting for a fund with more liberal approach and to be housed with a DFI. Unfortunately, it has not fructified yet. Such a fund can help in making available growth capital to small and upcoming MFIs.
In what ways can microfinance institutions align with broader ESG (Environmental, Social and Governance) goals to drive long-term development?
Microfinance is quite aligned with the ESG goals. Much of the activities financed by the MFIs align with these goals. First of all, the beneficiary of the microfinance is poor and vulnerable. Secondly, it is focussed on women. Lastly, most of the funding takes place in rural areas. Apart from these, MFIs finance smaller activities like small business or agriculture, which generally make use of the local resources and local capabilities, without polluting the environment. Microfinance has a social commitment. It is a social enterprise rather than business activity as we originally conceived. The empowerment of poor and needy is the principle of microfinance.
What are your immediate and long-term priorities for Sa-Dhan to ensure the industry’s resilience and growth amidst changing regulatory and market dynamics?
Our immediate priority is to ensure MFIs practice more responsible lending and client empowerment, as was originally done. So ‘Back to Basics’ should be the motto of all. For the sector to grow, there is a need for a dedicated funding mechanism which can be accessed by MFIs to meet their funding needs. A dedicated refinance mechanism for debt funding and equity fund for equity funding will help them to grow and expand their financial inclusion agenda better. A long-term priority is to facilitate better underwriting of credit to the borrowers. The new regulatory framework rests on two pillars—proper assessment of the household income and household liabilities. At present, both are a challenge, as MFIs are dealing with informal households. We need to find ways to fine tune this, so that microfinance becomes sustainable. Another area is to expand the operations of microfinance to newer geographies so that the benefit of microfinance is made available to more needy people.
How is technology shaping the microfinance industry, and what innovations do you foresee revolutionising the sector in the coming years?
Technology has played a major role in the growth of the country’s microfinance industry, enabling everything from accessing credit bureau data to digital loan transfers and, more recently, digital recovery mechanisms. The onboarding of borrowers, their appraisal and documentation have also got the technology support. This has helped the microfinance to grow almost 20 times in the last 12 to 14 years. Going forward, the use of Artificial Intelligence (AI) for better appraisal and detect fraudulent activities would be something I am looking for. Further, the assessment of informal household income is an area that requires technological support.
How can digital lending platforms and traditional MFIs coexist effectively?
The digital platforms can help in better assessment of the borrowers by capturing data from various sources on a real-time basis. The concepts like Unified Lending Interface (ULI) will bring more transparency and pace to the appraisal process. So, it will be always a good thing for MFIs to join hands with technology platform for better credit appraisal. On the other hand, MFIs can also join hands with digital lending platforms for efficient sourcing of borrowers, their appraisal and also documentation. The technology platforms can enable their reach to deeper pockets which are otherwise not covered in the traditional microfinance. The recent merger of North East Small Finance Bank and Slice is being watched very interestingly, in this regard.
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