ArthFinance – Striving For Prosperity Everywhere
‘Microfinance industry has been growing at a steady rate of 20% in terms of volume.’
The above massive growth of microfinance institutions reported by SIDBI in 2019 suggests that the Indian economy has a huge potential in this sector and which can be harnessed conveniently if worked upon. In the economic pyramid funnel, microfinance institutions like Arth focus on the lower strata of the pyramid, which is composed of the financially weaker section of the society. Of these poverty-stricken strata, the majority of the population dwell in rural areas that have an acute shortage of proper world-class amenities required to enhance the financial conditions of the people. Moreover, a high proportion of our population is still under the BPL category. It needs some extra efforts to gain financial inclusion.
Microfinance institutions have performed quite commendable in the timeframe by providing credit schemes to more than 64 million people till now, based on their requirements. This sector has been playing a prime role in shifting the unorganized loans in rural areas to a well-structured, organized platform by eliminating the various cheating and frauds happening in the informal loans.
More and more rural people are coming to the surface and taking part in the microcredit schemes to gain financial freedom by establishing their new business units/ services and supporting the agricultural sector. One of the major beneficiaries of Arth microfinance is the rural women, who have the potential to be the bread earner for the family as well as taking care of the household. These women need guidance and support to come out from the web of the paternalistic dynasty and sharpen their entrepreneurial and leadership skills. To facilitate a well-structured microcredit disbursal, we need to penetrate their society at the local level by making one person as a mediator from their group only. These women are partaking to create an SHG and take care of each member’s needs upon loan sanctioning. With all these domains to work upon, there are certain needs of these microfinance ecosystems which need to be looked upon:
Alternate channels for capital funding: When it comes to seeking fundings, the best and most reliable source is the nationalized banks. Although medium to small MF institutions also look for other financial institutions for funding as banks are overwhelmed with the borrowing capacity required by various players of the economy. The case with smaller MFs is that their credibility is still low and growing. Hence, they need to take on help from other alternative financial institutions that can trust them and push money.
Customer centricity: Microfinance institutions works on the model of legitimate banks for the poverty-stricken people heavily residing in rural areas. One way to penetrate in the region is by making credit access easy and promoting financial literacy. While there is slightly less scope of monetary benefits in microcredits when compared to loans given to people by banks as house, car, and educational loans, which have a high-interest rate, the prime focus of these institutions should never fluctuate from these lower strata of our financial population pyramid.
Credit risk assessment process: Microfinance institutions deal with the low-income level people who often do not have any legitimate credit history officially, and hence it becomes hard to analyze their intentions. There is a lack of written data records for those people. Hence, it becomes very necessary to do a thorough background check by going in the field to analyze the financial conditions of the beneficiary. Further compliance to rules may become a challenging task if a proper risk assessment is not done.
All these challenges and needs are essential to look upon by both government and organizations to keep this sector booming and help the poor people in gaining financial independence. There are some ways in which the MF institutions can gain more traction in the coming years.
Affordable Borrowing: What interests the most curiosity in poorer people is that they have to pay less interest in the principal sum borrowed by them. These are poor strata of people who put in each penny to make a large saving. Providing them access to affordable loans is a crucial step to make them use micro-credit schemes. MF should lookout for new investment channels and access and analyze new business models, which helps in saving money.
Reaching to more and more customers: This is a challenging job, as going to each unbanked persons and trying to give them knowledge about financial principles is a hard job. One thing is that they reside in rural areas, which are sometimes inaccessible and are not literate enough. MF institutions should come up with customer focussed products and services which are easy to integrate into their everyday tasks. One such example can be of microinsurance.
Providing allied skills training: It becomes important to give them training for skills and entrepreneurship abilities which they can further use to grow their services/ business. Uneducated people cannot survive long term business and can get in a debt trap, which can put a hold on their business model. They should be rained and provided enough knowledge on how to use the credit resources wisely. It will also help in better compliance in the future leading to a better credit rating.
Also, focussing on women entrepreneurs is crucial in uplifting the society as a whole. When a woman gets financially independent, the whole household gets benefitted. In long term macroeconomic consideration for our economy, microcredit institutions are a necessary building block just like banks. Microfinance intuitions are also digitalizing their internal processes for a faster and more streamlined experience. These online platforms can help them grow in other areas quickly and escalate their operations. MFs are like a pillar of our economy as they are putting their hard work in making the rural sector of our economy a more independent entity, which ultimately works alongside the urban and metro cities’ economy to foster our country’s GDP. Becoming a 5 trillion economy by 2025 will only be possible when we bring more and more poor people into the financial mainstream as early as possible.
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