Mahesh Kumar Jain: Microfinance as the next wave of financial
inclusion
Speech by Mr Mahesh Kumar Jain, Deputy Governor of the Reserve Bank of India, at SIDBI
(Small Industries Development Bank of India) National Microfinance Congress 2019, Mumbai, 26
November 2019.
* * *
Shri Mohammad Mustafa, Chairman & MD, SIDBI, Dr. Charan Singh, CEO and Director,
Foundation for Economic Growth and Welfare, Mr. Gavin McGillivray Head, DFID India, other
dignitaries, participants, Ladies and Gentlemen. Good Morning to all! I am very happy that
senior bankers, sector specialists, academicians and practitioners are coming together on a
single platform to deliberate on the Vision of Microfinance in India at this National Microfinance
Congress and the means to achieve the same in the backdrop of an evolving regulatory,
political and economic landscape. It is indeed a great pleasure to be amongst all of you here
today.
2. This Congress is quite opportune and timely, as after nearly a decade and half of efforts in
financial inclusion, where banks, NBFCs, microfinance institutions (MFIs) and other financial
institutions have played a significant role, today we are at an inflection point needing to unleash
the next set of financial inclusion interventions for converting a large part of our population to
efficient consumers of financial services. With the technological transformation taking place in
associated areas, I see a significant role for the microfinance industry in this process, including
in identifying, enabling and handholding a sizeable set of the last mile population to consume
financial services rationally, to grow out of poverty and become productive citizens of the
country.
3. The Indian microfinance sector has witnessed phenomenal growth over the past two
decades. It is gratifying to note that both the number of institutions providing microfinance as
also the quantum of credit made available to the financially excluded clients have increased
significantly during this period. At this juncture, it is equally important to discuss the way
forward. Therefore, I understand that the deliberations in this Congress will include emerging
concerns / issues faced due to major changes in the sector in recent years; strategic drivers,
trends and possible solutions for stimulating industry growth, innovative, futuristic and
highimpact business models being adopted across the sector as also the opportunity areas of
policy intervention and technological transformation in the industry.
Role of microfinance in the economy
4. Microfinance, involving extension of small loans and other financial services to low income
groups, is a very important 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 standards of living.
5. The journey of financial inclusion in the past two decades has been one of intensive efforts
and incremental experimentation. However, the quantum jump came when Pradhan Mantri Jan
Dhan Yojana (PMJDY) was launched in 2014, which enabled achievement of the objective of
providing bank accounts to adult population in almost every household. The reach of mobile
phones and e-KYC has ensured these accounts are accessible to those who have been
included in the financial services milieu.
6. The 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.
7.Till two decades ago, on the supply side, the absence of technology and infrastructure was a
major impediment as it restricted expansion of banking services to far-flung areas of the
country comprising over 600 thousand villages. The institutionalization of the framework of
Business Correspondents (BCs) has been a major step towards enhancing access to banking
services. The RBI advocated a combination of 'Brick and Mortar' structure with technology for
extending financial inclusion in the geographically dispersed areas. With all these measures,
the number of banking outlets in villages has gone up significantly.
8. The new banking entities (i.e. two new universal banks and ten small finance banks) have
also helped to further the cause of financial inclusion in the country. Considering the strong
linkage between financial inclusion and payment systems, RBI has also taken several steps
including encouraging use of mobile banking, pre-paid instruments such as digital and mobile
wallets, etc. For more than a decade now, banks have worked hard to sustain the momentum
for achieving the objective of financial inclusion.
9. Financial inclusion is becoming a focus area for banks, NBFCs, Financial Technology
(FinTechs) and other financial entities. Small Finance Banks have also 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. Today, when it comes to
financial inclusion and microfinance, there are several channels such as universal banks, small
finance banks, micro finance institutions, BCs, etc. Therefore, as a country that is determined
to achieve universal financial inclusion at affordable cost, this is a defining moment, and we
should seize the opportunity.
10. Several innovative measures have been undertaken by the RBI to facilitate the creation of a
conducive environment and increase the level of penetration of the banking system to serve the
unserved and underserved population for achieving the objective of sustainable and inclusive
economic growth. A co-origination model, which enables the scheduled commercial banks
(excluding Regional Rural Banks and Small Finance Banks) to co-originate loans with the
nondeposit taking systemically important NBFCs has also been rolled out for credit delivery to the
priority sector. This is expected to boost lending to micro enterprises, small and marginal
farmers, Self Help Groups (SHGs), etc.
11. In order to boost credit to the needy segment of borrowers, the Reserve Bank has also
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 priority sector under respective categories subject to certain conditions.
12. The Micro, Small and Medium Enterprises form a vital component of the economy in terms
of their contribution to employment generation, innovation, exports, and inclusive growth. In view
of this, the Reserve Bank had constituted an 'Expert Committee on Micro, Small and Medium
Enterprises' (Chairman: Shri U. K. Sinha) to identify causes and propose long-term solutions
for the economic and financial sustainability of the MSME sector. The Committee has made
various recommendations in areas such as legislative and institutional framework, access to
finance, capacity building and new technological interventions for lending to MSME sector. The
recommendations are being examined for implementation.
13. Since 2006, the RBI has adopted a planned and structured approach to address the issues
of financial inclusion by focusing both the supply and demand side. Having spoken about the
supply side, let me now discuss the equally important, but less focussed, demand side aspects
of financial inclusion. With the growing formalisation of financial services, we must now
intensify our efforts on the demand side, which is to focus on enhancing capabilities so that
individuals in the low income groups are in a position to not merely avail the offered services,
but are also capable of demanding preferred products and services suitable to their needs /
choices.
14. The MUDRA is a case in point. While such a massive push would have lifted many
beneficiaries out of poverty, there has been some concern at the growing level of
nonperforming assets among these borrowers. Banks need to focus on repayment capacity at the
appraisal stage and monitor the loans through their life cycle much more closely.
15. The role and importance of the microfinance sector in our economy has also been steadily
growing. According to The Bharat Microfinance Report 2019 prepared by Sa-Dhan, MFIs
operate in 29 States, 5 Union Territories and 570 districts in India. The MFIs are also expanding
into newer territories for reducing their concentration risk.
16. Tailored products for providing credit to those without a credit score, entrepreneurial and
consumption credit, handholding, financial literacy, social occasion credits and insurance (life
and non-life), are all waiting to be tapped in scale and size. Limited forays have been made but
are yet to achieve their full potential.
17. The RBI defines Financial Inclusion as the "process of ensuring access to appropriate
financial products and services needed by all sections of the society in general and vulnerable
groups such as weaker sections and low income groups in particular, at an affordable cost in a
fair and transparent manner by regulated, mainstream institutional players". The National
Strategy for Financial Inclusion (NSFI) 2019-24 has been framed by us. It gives the Vision to
make financial services available, accessible, and affordable to all citizens in a safe and
transparent manner to support inclusive and resilient multi-stakeholder led growth.
Potential of Microfinance
18. A major demographic change is taking place in our country with a huge and growing
working population. There is a big chunk aspiring to grow into the middle class with the support
of institutional credit. Therefore, microfinance can play a big role in meeting their requirements
and fulfilling their goals.
19. The credit needs of low-income groups range from emergency loans, consumption loans,
business loans, working capital loans, housing, etc. In addition to credit, poor households would
benefit from a combination of financial services, including savings, remittances, loans,
microinsurance, micro-pensions, and the like.
20. In today's world, technology is shaping the future of finance. All the key players are
harnessing technology to provide an efficient experience to the end user. In the Indian context,
improving the accessibility of financial platforms using FinTech is key. Therefore, designing
suitable financial products that cater to specific needs of the financially excluded population,
and provide acilities like digital on-boarding, is vital in achieving the objective of financial
inclusion.
21. The goal of universal Financial Inclusion can be achieved only through synergistic efforts
between the mainstream financial entities and other players like MFIs, Fintech etc. as they play
a complementary role in championing this cause. Therefore, banks and NBFCs need to explore
the possibility of establishing business collaboration among themselves, and with FinTech
firms as it could be pivotal in accelerating the agenda of financial inclusion through innovation.
In addition to incorporating emerging technology faster into their businesses, the entities
engaged in microfinance could also look at collaborating with FinTechs and other entities who
can help them mine customer and transaction data, cross-sell products and introduce new
customer-centric products and services, and streamline operations. They will also have the
opportunity and need to raise the digital literacy of their customers that is not highly informed
and aware and, therefore, can be susceptible to frauds.
The way forward
22. Thanks to the growth of the internet and mobile phones, today we are seeing an explosion
of data in several sectors of our economy. Likewise, in microfinance, a lot of formal and
informal data is becoming available in the form of digital footprints by low income customers
who also transact on e-commerce platforms and use the internet. These digital footprints are
being used by leading banks and online lending firms to lend to individuals and micro and small
enterprises. Artificial intelligence (AI) and machine learning are also finding greater application in
the Indian banking and financial services industry.
23. It is interesting to see that leading e-commerce companies have tied up with banks and
NBFCs to offer working capital loans to their suppliers at competitive terms. Most of the
suppliers are micro and small entrepreneurs
24. The introduction of GST, which is one of the largest and most significant tax reforms in the
world, is also helping formalise the informal economy in a significant way. As a result of a
much-improved digital footprint, individuals engaged in proprietary businesses, micro and small
enterprises, now become attractive clients for banks and NBFCs, thereby reducing their
dependence on informal sources of funds. The cost of credit for the micro and small
enterprises will also decrease significantly as lending will shift from collateral-based to cash
flow-based.
25. While opening a new world of opportunities, the application of technology in finance has its
own share of risks and challenges for the regulators and supervisors. Early recognition of these
risks and initiating action to mitigate the related regulatory and supervisory challenges is key to
harnessing the full potential of these developments. This also brings in the need for a
transparent, technology and data-driven approach. Similarly, systemic risks may arise from
unsustainable credit growth, increased inter-connectedness, pro-cyclicality, and financial risks
manifested by lower profitability. Data confidentiality and consumer protection are major areas
that also need to be addressed.
Summing up
26. To sum up, the microfinance sector is undergoing a multitude of changes amidst growing
competition, rising expectations of masses, technological advancements and an evolving
regulatory landscape. The sector is, therefore, expected to widen the horizon beyond micro
credit to transform the livelihoods of the borrowers. Being constantly mindful of the
technological transformation in the banking and financial services industry, the sector must
continue to pursue the adoption of innovative, futuristic and high-impact business models. The
focus of the sector must be on Digital Microfinance.
27. Keeping in view the need to increase transparency, address customer-centric issues and
safeguard the interests of low-income customers, microfinance lenders must put the interests
of their clients first and implement the Code for Responsible Lending and the Code of Conduct
in both letter and spirit. Redressing consumer complaints quickly and effectively should be on
top of the agenda for MFIs and the Self Regulatory Organisations (SROs).
28. The Microfinance institutions must broaden their client outreach to reduce concentration
risk and to serve a wider clientele base. From a financial inclusion perspective, they should also
critically review their operations to ensure that some of the regions do not remain underserved.
29. While the growth of the microfinance sector in the past few quarters has been quite healthy,
we must be cognizant of the vulnerability of the sector to factors such as external
developments, technological changes, event risks and income inconsistencies of the
borrowers. The growing use of technology would give rise to operational risks and there would
be concerns related to client data protection which would need to be addressed.
30. Banks, NBFCs and financial institutions are well placed to innovate in cutting-edge
technologies be it AI, machine learning, blockchain etc. SIDBI could handhold the micro finance
providers in this process, specifically with regard to lending to the micro and small enterprises,
in areas such as alternate credit scoring methods, predicting probability of default, etc. With
fast changing technology, SIDBI could also take the lead in hosting an ecosystem, within a
welldefined regulatory sandbox, to create an infrastructure, which will reduce the turnaround time
and provide customer-centric products with robust risk mitigation. This could also act as a
crucible to test cutting-edge products for micro-entrepreneurs and a vehicle to provide
feedback to regulators.
31. I am sure that the deliberations at this National Microfinance Congress would seek to arrive
at concrete action points for time-bound implementation towards the betterment of the
microfinance sector.
I wish the Microfinance Congress and its participants all the very best!
References
Annual Report of the RBI for the Year 2018-19 and 2017-18
The Bharat Microfinance Report 2019, published by Sa-Dhan
www.business-standard.com/article/pti-stories/mfin-sa-dhan-release-code-for-responsiblelending-for-micro-credit-industry-119091600745_1.html, September 16, 2019, accessed online
on November 23, 2019
Opportunities and Challenges of FinTech (Shri. Shaktikanta Das, Governor, Reserve Bank of
India, March 25, 2019, Keynote Address Delivered at the NITI Aayog's FinTech Conclave)
qz.com/india/1139501/indias-online-lenders-are-looking-at-social-media-and-otherunconventional-data-to-determine-credit-worthiness/, accessed online on November 23, 2019
www.financialexpress.com/opinion/one-year-of-gst-formalising-the-informal-economy/1229009/
July 3, 2018 accessed online on November 23, 2019
Financial Inclusion in India - The Journey so far and the Way Ahead (Shri. S. S. Mundra, Deputy
Governor, September 19, 2016 - at the BRICS Workshop on Financial Inclusion in Mumbai)
Formalizing India's informal economy, Shri. Anil Padmanabhan, July 11, 2016, accessed on
www.livemint.com on November 23, 2019
Strengthening Governance in Microfinance Institutions (MFIs) - Some Random Thoughts
(Keynote Address by Shri. Anand Sinha, Deputy Governor, Reserve Bank of India at FICCI's
Workshop on 'Strengthening Microfinance Institutions (MFIs): Good Governance and Strategic
People Practices, April 23, 2012 at Mumbai