Understanding the role of microfinance & fintech in attaining financial inclusivity in the context of present Indian scenario

Abstract

The trilemma of FinTech, Microfinance, and regulations holds the potential of creating an economically inclusive environment in India. Microfinance is the system which can provide credit and financial products to the poor, who suffer from the problem of a lack of collateral, when the formal financial system becomes handicapped to do so. It was found on the idea of groups involved in peer-pressure to pay back, and joint liabilities. However, even today, the amount of credit deployment in Microfinance, compared to the gross credit deployed in India, is extremely low. The field is exposed to a variety of problems too at the same time – a difference in effective demand and actual demand, for example, leading to MFIs forcefully selling off financial products. Does paying back the loan necessarily imply that the borrower is in a good shape? The answer is NO here too! We analyze the various models in different countries have adopted to make their financial systems more inclusive. It turns out that decentralization in the system, combined with joint liabilities for investment projects, along with formation of cooperatives, can pave the way for economic inclusion. FinTech is that special tool we have today, to increase outreach of the financial system in rural space. The Government of India opening Jan Dhan accounts, UPI, e-wallets, P2P lending, and much more – all are part of the FinTech universe. FinTech allows us to make more secure transactions, remove both middlemen and information asymmetry, and extract useful data to customize offerings in finance. All this, when mixed with Microfinance, can yield powerful results, to make borrowing for the poor more affordable and secure. Finally, regulations around the above two domains plays an important role in the ecosystem. It is all the more important, compared to the formal credit system, because of the sensitivity around the money involved – MFIs and other institutions are playing with small amounts per individual, in absolute terms, but to that individual, it is their life’s savings, combined with the situation they are likely to be in when they come for borrowing money. We propose, at the end of this report, a set of recommendations to upgrade the current system and make the process more viable – both for institutions as well as the poor. These include capping of interest rates while lending money, segregating loans based on the level of urgency involves, promoting the formation of cooperatives and other local institutions to inculcate a sense of independence and unionization amongst the local groups, decentralizing P2P lending operations to rural areas to finish moneylender monopolies. Also, a new credit score, meant to quantify the credibility of an economically weaker section, is proposed, in addition to more customizable financial products based on varying needs. Finally, in the long term, the poor need to become a part of the formal and more structured financial system of the country (with much better access to credit). The first step in this direction would be to integrate urban and rural financial institutions by creating new channels – linking MFIs with major banks and circulating money from the latter to the former and back.