Microfinance — Resilience & Resurgence

Why Indian microfinance will bounce back strongly post pandemic

The microfinance sector facing a daunting challenge because of the Corona pandemic. However, the improvement in collection performance reflects the endurance and resilience of this sector. In 2020, from a meagre figure of 30% in May and 55% in June, the collection has surged to 75% in July. It’s imperative to understand that in several locations the collection is high as 85%-90%.

Despite the current challenges, the future of microfinance is promising due to the following reasons –

1. A country like India has always been credit hungry. Therefore, the credit demand is going to further surge in coming times. In spite of encouraging trends, less than 20% of the overall borrowers are using formal finance. The remaining section is still dependent on friends, family, and local lenders.
2. The pandemic situation is expected to widen the gap between rich and poor. This further infuses credit demand, especially in the rural area.
3. Renewal loans are going to be the biggest bet for the sector and will continuously boost the overall growth of the sector.

What can microfinance institutions do?

1. Microfinance institutions need to put their efforts to consolidate their portfolio by establishing regular communication with their customers. Central Bank’s one-time loan restructuring facility will make it easy for institutions as well as customers to sail through this challenging time.
2. Take one step further on digitization by creating an ecosystem on the collection front. A mixed approach where customers will be given multiple options (through wallet, creating collection centers near customers in collaboration with partners, etc) would be the best bet.
3. Increase individual loan share in your loan portfolio which will help in several ways (fast adoption of new collection approach, less impact of local issue on portfolio that generally impacts group loans portfolio, etc)
4. Understand the new requirement of customers (health insurance, mobile, laptop, etc) in post-pandemic time and provide the right kind of solutions.

Although microfinance performance in the urban sector will still take time to bounce back, the rural sector appears to be much more promising in the coming months. Institutions need to gear up fast to deliver their best in this particular segment.