Microfinance: Going Digital while retaining the Humane Touch
About the summit:
Given the recent disruptions in the environment and regulatory reforms, it is necessary to bring micro-lenders, bankers, policy-makers, allied financial service providers and researchers together with a common forum. To this end, the Association of Micro Finance Institutions – West Bengal, along with its member MFIs and knowledge partner KPMG – is hosting the 4th Eastern India Microfinance Summit 2018 titled, “Microfinance: Going Digital while retaining the Humane Touch” on 14th December 2018 at The Park Hotel, Kolkata. The objective and purpose of the summit is to actively engage key stakeholders in discussions relevant to current and future aspects of financial inclusion.
Discussions in the 4th Eastern India Microfinance summit will focus on the following themes:
• The next wave of growth for Microfinance:
The MFIs have typically been growing through increase in rural penetration (across different product) and expansion to more geography. The MFI penetration is on a rise in North, East and Central regions in addition to Northeast India which have been underpenetrated and this trend is likely to continue
Large MFIs which have converted to SFBs are tapping the market through wider product offerings in on the liability as well as the asset sides. They are e also extending their presence in urban areas for increase in overall ticket size and volume
With the underlying growth potential remaining strong, the MFIs have attracted investors’ interest leading to a spurt in M&A and PE activities. While the growth has been significant, there has been an increase in competitive intensity
As MFIs seek to continue on the growth path, they are evaluating geographical expansion, product portfolio expansion opportunity to cross-sell other financial products such as mutual fund and insurance. Besides, they are also investing in technology and looking for strategic alliances with Fintech players.
The success of these strategic initiatives will depend on regulatory environment, development of technology-based ecosystem and management of credit and operational risks
• Allied ecosystem for MFIs
As the competitive intensity for MFIs increase, the pressure on NIM will increase considerably. So, the need for the MFIs to focus on non-interest income/ credit plus products becomes very important.
The MFIs can help improve social impact through distribution of products such as solar lamps, LED bulbs and lights, sanitation products, purifiers, etc.
The MFIs can additionally enhance penetration of insurance in General and Life insurance sector with simple, contextual and small ticket size products, based on the needs of the segment.
The MFIs will need to strategize to build technology or buy technology solutions available in the market and leverage their presence in order to achieve social and financial goals by expanding the products or services for the target segment.
For a sustainable growth of MFIs, an ecosystem needs to develop and all other stakeholders such as solar, LED light manufacturers, insurers, water purifier manufacturers, technology solution providers need to play a role in enhancing the lives of the financially and socially backward sections of the society. This can be done by offering them access to cheap energy solutions, hygiene related products, protection and medical coverage in addition to meeting credit needs for basic occupation and other personal needs.
• Collaboration with Fintech firms:
Scalability of the microfinance model has been driven by branch-led expansion which is an expensive strategy especially when the threat of disruption to the model has increased.
Competition from Fintech players operating in the same space of small ticket loans is increasingly felt in the urban areas and rural adoption is not very far away.
While implementation of core banking systems and loan management systems are underway at many MFIs, there is a need to digitize across the value chain focusing on customer onboarding, underwriting, collections and governance mechanisms.
The MFIs have a strong local presence and connect with groups or individuals at the time of sourcing and collections, with both field-based and branch-based collections models prevalent in the market.
Technology can be incorporated while retaining the human touch which is characteristic of MFIs.
Collaborations with Fintech firms across distribution, collection, cross sell, monitoring and customer education is imperative.
The focus of technology strategy needs to be increasing operating efficiency, reduction of cost, arranging wide cross-sell, and data analytics with clear goals.
• Regulatory and Risk management implications in the changing landscape:
As MFIs embark on the journey to enter the next phase of growth, a regulatory framework needs to be put in place to ensure the following:
Widening of the MFI space across lending ecosystem – the segments currently targeted by banks such as lending to small and medium enterprises, loan against property (LAP), personal loans etc.
The regulator may review the cap for MFI loans besides the need for additional SROs, employee associations etc.
A balanced approach can be adopted to help fuel the MFI growth through product expansion. Of course, at the same time, we need to ensure that the borrowers are not overleveraged.
Potential introduction of borrower / household level monitoring of the debt burden especially for smaller ticket loans.
Over leveraging of this borrower segment through multiple credit facilities in a household and absence of a common bureau could have an adverse impact especially in light of external shocks of the system including and not limited to the likes of demonetization, rumors, political stability etc.
The MFIs need to put in place a risk framework for the following reasons:
The entry of SFBs and Banks in this borrower segment will impact A. Pricing; B. Ticket sizes; C. Product features; and D. Repayment behavior; and sustainability of the MFIs that would have to compete with the SFBs, Larger NBFCs and Banks.
Impact of changes in the collection model – from group meeting and collections to individual collection model. This may have an impact on the repayment behaviors and collection efficiency levels thereby impacting the credit quality.
Need to evaluate the overall indebtedness of the borrower and household at the time of underwriting would be critical going forward given the exposure of this segment to multiple lending forms. This would be a significant change in the operations (including manpower costs) of the MFI which primarily relied on income declaration and residence proofs of the borrowers.
MFIs may need to introduce additional cross-sell products including top ups, demand loans, secured loans to compete with the array of products being offered by the SFBs and Banks to this borrower segment.
At an overall level, Regulatory framework needs to be balanced across different types of players who are currently offering microfinance – Banks, SFBs, NBFC-MFIs, NGOs, BCs, etc.
Some of the key discussion points to understand the microfinance industry nationally as well in Eastern India Perspective:
• In the current scenario, Public Sector Banks are grappling with multiple challenges on NPA, Fraud Risk Management, PCA framework, limited credit growth, etc. Over the past couple of years, it is evident that Public Sector Banks ability to support NBFCs as well as NBFC-MFIs has declined considerably.
• The major role of MFIs is to catalyze the rural economy through requisite financing. In the absence of Bank funding, NBFC-MFIs have struggled to raise funds at competitive rates in the aftermath of IL&FS crisis. A regulatory framework for Banks (particularly Public Sector Banks) to support NBFCs and MFIs may be put in place to ensure that there is consistent fund flow.
• MFIs have been forced to become crisis resistant as they bore the brunt of financial crises arising at National level and State levels.
• Several Microfinance bodies including AMFI-WB need to visit the prevailing Regulations for the microfinance industry which was in force since 2012 by Malegaon Committee. Over the past 5 years, there have been several significant changes impacting the Microfinance industry with different types of players, technology and financial disruptions, different risk elements – however the underlying regulations remain the same.
• The average ticket size of Microfinance has been steadily increasing. Given that the loans are unsecured, the financing institutions have been providing for higher risk weightage on the loans. Also pricing is a concern for the MFIs given that there is an upper limit cap for the NBFC-MFIs whereas there is no lower cap for institutions such as Banks who have access to lower cost of funds.
• There is a significant overlap in the loan portfolio of NBFCs-MFIs, SFBs, banks and MSME lending institutions as there is no integrated platform which lists individual exposures from all these entities. This has increased the risk of delinquencies in MFI loans.
• AMFI-WB also felt to provide more priority domestic equity. The foreign equity cap in NBFC-MFIs needs to be made mandated. While mature MFI institutions have their roots in NGOs and development organizations, many new MFIs have a background of banking and have a backing of private equity players, have shifted their organizational strategy to be sales and growth driven rather than focusing on development impact.
• Indian Microfinance Fund was created during 2012 which was facilitated by Sri Pranab Mukherjee with an amount of 100 Crore. The amount remains same even after six years in spite of huge growth in the industry in last couple of years.
• As far as West Bengal State is concerned – the employment generation through this industry is directly more than 27 thousands and most of them are coming from low economy families with limited educational qualifications. The MFI segment created huge micro and small entrepreneurship in the state covering more than 7.5 million women folk who are mostly from underprivileged segment. The Government need to be more proactive in terms providing safeguard to this industry in matter of smooth issuing Trade License, Shop and Establishment registration and ongoing compliance processes