MFIs in India: Need social impact monitoring

ECONOMY/ GOVERNANCE

Topic: General Studies 3:

• Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment 
• Mechanisms, laws, institutions and Bodies constituted for the protection and betterment of these vulnerable sections 

MFIs in India: Need social impact monitoring

Context:  The microfinance industry in India witnessed unprecedented growth over the last couple of decades; from just a few players offering SHG loans to a matured market, the industry has come a long way.

What are MFIs?

• Micro finance Institutions, also known as MFIs, a microfinance institution is an organisation that offers financial services to low income populations.
• Usually, their area of operations of extending small loans are rural areas and among low-income people in urban areas. 
• MFIs provide the much-needed aid to the economically underprivileged who would have otherwise been at the mercy of the local moneylender and high interest rates.
• The model had its genesis as a poverty alleviation tool, focused on economic and social upliftment of the marginalised sections through lending of small amounts of money without any collateral to women for income-generating activities. 
• MFI loan portfolio has reached Rs 2.31 lakh crore at the end of FY2020, touching the lives of 5.89 crore customers.
•  Some of the MFIs, that qualify certain criteria and are non-deposit taking entities, come under RBI wings for Non-Banking Financial Company (NBFC) Regulation and supervision. These “Last Mile Financiers” are known as NBFC MFI.
• The objective of covering them under RBI was to make these NBFC MFIs healthy and accountable. 

Digitalisation and growth of MFI sector

• Over the years, the sector has incorporated several changes in its operating model, including digital interventions across the lending value chain.
• MFIs have adopted digital technologies in order to eliminate the redundancies, enable quick customer on-boarding, loan disbursals and even cashless collections.
• The use of digital technologies has enabled MFIs not only to reach a greater number of clients and thereby grow at a much faster pace, but also to do so in an efficient manner by streamlining processes and reducing turnaround times.

Challenges associated with MFI 

• Social Objective Overlooked: In their quest for growth and profitability, the social objective of MFIs—to bring in improvement in the lives of the marginalised sections of the society—seems to have been gradually eroding. 
• Impact of COVID-19: It has impacted the MFI sector, with collections having taken an initial hit and disbursals yet to observe any meaningful thrust.

• Inadequate Data: While overall loan accounts have been increasing the actual impact of these loans on the poverty-level of clients is sketchy as data on the relative poverty-level improvement of MFI clients is fragmented.

• Loans for Conspicuous Consumption: The proportion of loans utilised for non-income generating purposes could be much higher than what is stipulated by RBI. These loans are short tenured and given the economic profile of the customers it is likely that they soon find themselves in the vicious debt trap of having to take another loan to pay off the first

Way Ahead for MFIs

1. Digital technologies should be utilised even beyond the lifecycle of the loan. 

• MFIs should ensure that the ‘stated purpose of the loan’ that is often asked from customers at the loan-application stage is verified at the end of the tenure of the loan.
• This post-verification process will ascertain whether the loan amount has brought in any meaningful improvement in their lives; digital records of this should be maintained for further scrutiny and new loan sanctions.

2. Create authenticated customer data

• In an industry that is dominated by cash, determining household income for loan eligibility purposes poses a serious challenge. 
• Field officers should be prudent enough to include income from all sources as overestimating or incorrectly estimating would mean that genuinely deserving customers aren’t offered any. 
• If captured and reported properly, this data could serve as critical underwriting inputs when these customers (having proved their credit worthiness in the microfinance industry) chose to avail financial services from commercial banks, 

3. Social Impact Scorecard

• RBI should encourage all institutions to monitor their impact on the society by means of a ‘social impact scorecard’
• This customer data in scorecard that is verified and captured digitally can be used to evaluate the impact of each loan in the lives of the clients, subsequent improvement in their earning capacity over the years, other direct/indirect benefits rendered from loan utilisation and finally how soon MFI customers are able to transition out of the MFI fold.
• This ‘social impact scorecard’ could also be leveraged when MFIs themselves seek funding to support their operations, which can serve as the crucial differentiating ‘intangible factor’ to enable commercial banks, development institutions and others in making lending decisions to MFIs.

Conclusion

MFIs need to focus on creating a sustainable and scalable microfinance model with a mandate that is unequivocal about both economic and social good.

Connecting the dots:

• Constitution’s 97th Amendment Act
• Farmer Producer organisations and its impact on agricultural sector