Abstract
The landscape of financial architecture has undergone significant changes in both depth and width. The responsible finance (RF) is a relatively new socio-economic concept. The very purpose of RF is to deliver fair financial services at the affordable cost to the poor and disadvantaged section of the society. India’s achievement on financial inclusion (FI) can be attributed to the broadening of pathways, channels and technology platforms. India is applying RF matrices across all channels mainly through microfinance institutions (MFIs) to succeed in achieving the goal of RF. However, the very vast and multi-layered canvas of RF in India poses challenges to achieve its goal. An integrated approach of all the stakeholders with serious effort is needed to reach the milestone.
The Responsible Finance India Report (RFIR) 2016 provides an account of developments in RF and social performance in microfinance (MF) and FI in India. The opening chapter of the report sets its agenda right and highlights the stylized facts on different indicators of RF, details the Universal Standards for Social Performance Management (USSPM) and provides overview of the report. The report revolves around the MF sector, keeping its focus on social performance management (SPM) with clients in the core. The roles of MFIs, SHGs, banks, etc., are discussed in the context. The report also highlights the role of policy, including lenders and investors, in shaping the agenda of responsible inclusive finance and the need for their proactive role in institutionalizing RF practices. The initiatives are being taken to develop a client-centric responsible approach for digital financial services (DFS) and other alternate channels are emphasized in the report.
The focus of the report is on documenting the positive steps taken to reach the un-served and poorer sections of the society with financial services, as well as to flag issues that need to be addressed to ensure sustained growth of the MF sector and the economy. It captures the essence of policy and strategy, assesses the existing practices and products and also documents the new initiatives to present the analysis of the sector with globally accepted standards of RF. However, the focus of the report is on capturing sector-wide trends rather than on individual performances.
The various initiatives taken by MFIs to bolster their client-centric responsible approach is the focus of Chapter 2. The analysis of performance of MFIs on RF is carried out using USSPM framework. The role of business correspondents (BCs) and banks are discussed, and it is argued for an activity-focused regulation in place of current, form-based regulation. The interview with Dr Kshatrapati Shivaji, the Chairman and Managing Director (CMD) of SIDBI, presented in this chapter highlights different current and future issues in promoting RF and throws light on the different schemes/programmes, and discusses the critical role of different stakeholders, including Micro Units Development & Refinance Agency Ltd (MUDRA) and SIDBI. The interviews with other stakeholders would have provided insights of their working in this area.
Chapter 3 examines the concept, rules and regulatory framework of self-regulatory organization (SRO) and also discusses the role of RBI. This is followed by the discussion on the role of Microfinance Institutions Network (MFIN) in promoting the RF. The Industry Associations that subsequently became SRO played a key role in formulating code of conduct for the industry, monitoring compliance, mainstreaming best practices, grievance redressal and dispute resolutions. This is complementary to the efforts of the RBI in ensuring orderly growth of the sector in the economy.
To achieve sustainable FI in reality, there is need for setting standards in digital financial services which will ensure quality of financial services and delivery models, channels and technology. The introduction of small finance banks (SFBs), payments banks (PBs) and regular revisions in lending guidelines, accounting for changing client profile and varying customer segments, have encouraged MFIs to perform exceedingly well. The Smart Campaign’s globally accepted industry client protection standards along with RBI’s regulatory guidelines for NBFC-MFIs, etc., can be integrated to provide robust framework that can be adapted for agent networks such as BC models, small banks and universal banks to ensure quality.
The second edition of code of conduct designed in the light of changing landscape of this industry aims to provide robust standards for corporate governance, reduce client over-indebtedness and strengthen grievance redressal management. The different suggestions are made for enhanced role of MFIN in promoting RF. The policy environment has also been favourable in allowing experimentation with alternative models envisioning FI.
The emphasis on clients is indispensable to the journey of RF. This is the essence of Chapter 4. The client protection should be given priority in the FI programmes. With the increasing activities in the financial institutions, technology and programmes, it is difficult to understand ‘what do the clients feel’. In the RF, it is very important that financial institutions recognize—‘the last client is important’. Therefore, the chapter rightly recognizes the importance of field studies to understand the ground realities. This study conducts two studies on clients: (a) client-level indebtedness; and (b) capture of the client voices.
The findings of the surveys provide pointers for future work for both the policymakers and the practitioners. The more and more insights to the FI can be obtained from different primary surveys which will provide the ground reality, particularly on the quality aspects of RF. The evidence from the field shows that MF clients are not totally ignorant about the banking systems and operations, and use of technology. In this new generation of MF, where low-income households will have access to different kinds of institutions (SFBs, PBs, MFIs), models (group lending, individual lending) and products (credit, deposit, remittances), it is important to take stock of strengths and weaknesses of each of these variations and work towards aligning the offerings to client expectations.
The report identifies emerging risks to client-centricity and customer protection, and suggests actions for policy as well as institutions to strengthen the state of RF in India. The views on the risk associated with MF are presented in Chapter 5. The study conducts the analysis at the levels of region, states and districts. The assessment of credit discipline is done based on the empirical data. The report points to development of hot spots in terms of over-lending, agent activities and financial disciplines. It is evident from various parts of the country that over-indebtedness is found to be more prevalent among low and unstable income groups, particularly households that relied on agricultural and wage-based occupations. Thus, there are signs of distress emerging from the analysis, which cautions us not to ignore these early warning signs. The report presents discussion around these issues, which are critical, given the high growth that the sector has witnessed in recent years.
The extraordinary growth demands constant review of risks associated with repayment, over-indebtedness and concentration. MFIs have amply demonstrated significant progress in transparency and grievance redressal, but a lot needs to be done in prevention of over-indebtedness and fair treatment of the clients. Higher-sized loans and multiple loans to a client are causing repayment stress. High interest rate on loans is a very important factor, adding agony to it. This finds little discussion in this chapter. The study indicates that the gap in the benefits of RF is wider in district level than state level. These point to the need for individual client-level study to understand the real issues and concerns at the ground level. It is, however, very difficult to conduct such a study at country level with limited time and resources.
The report draws attention towards the SHG-Bank Linkage Programme (SBLP) and flags the gaps in the programme from the RF angle in Chapter 6. The programmes under National Rural Livelihoods Mission (NRLM), Self-help Promoting Agency (SHPA) assistance, Joint Liability Group (JLG), etc., are helping to promote RF in India. Though the different organizations under the umbrella of SBLP are overlapping in their roles and functions, there have been constructive linkages built in to a synergistic relationship. However, the rising non-performing assets (NPAs), mono product, under financing, lack of proper grievance redressal system, regional skew, etc., are affecting the programme performance.
The geographical outreach in terms of number of SHGs credit linked, credit and loan size shows highly regional imbalances. The southern region topped in all these parameters. The southern region’s share in number of SHGs credit linked during 2010–2016 stands at around 55 per cent, whereas it is only 3.23 per cent for northeastern region. Both the regions have, respectively, 63.24 per cent and 1.42 per cent share in SHGs provided credit during 2015–2016. Again, during the same year, the average loan size to SHGs was highest for southern region at `258,996, while it was `84,375 for the northeastern region.
The state-level analysis on SHGs savings and credit linked, NPAs, repayment rates, etc., also shows skewed pattern. The findings like loan size having no relationship with NPAs and, particularly, ill health and livelihood challenges (e.g., drought) being the primary causes of non-repayment of loans are important, but need thorough research as the study also finds 100 per cent repayment rate of similar client segment in same area, though borrowings are from different sources.
The chapter conducts the case study on the effects of digitalization of SHG records and recognizes its huge positive implications for RF. The burning issue of social empowerment, particularly women empowerment, is also briefly touched upon. The study shows that SBLP has a strong impact on women empowerment and household finances. The study advocates for outcome-based funding, which is the new norm in development finance, globally. The author raises host of these issues in this chapter and is confident that being acted upon, the RF agenda will get a definite fillip.
Finally, Chapter 7 highlights the new initiatives taken in the direction of strengthening RF in India. The chapter starts with the analysis of the new initiatives of MUDRA, Pradhan Mantri Jan Dhan Yojana (PMJDY) and peer-to-peer (P2P) and their plausible role on FI. The critical challenges faced by entrepreneurs are raised, and the role of MUDRA is analysed. Particularly, in the context of the role of MUDRA as ‘funding the unfunded’, the case for focusing ecosystem building is advocated. The other roles of MUDRA to strengthen RF are also discussed.
Though the PMJDY has impressive outreach, but it fails in critical areas of concerns in terms of depth of services. There has been significant progress towards the aim to open a bank account for every Indian household. However, the newly opened accounts have yet to translate into widespread usage. While bank accounts represent around 65 per cent of the adult population, nearly a quarter of those accounts remain dormant. The issues related to opening of bank accounts to empowering people for the usage and awareness of services are touched upon, albeit briefly.
In the wide spectrum of financial sector such as MF sector P2P platforms have emerged, globally. However, in India, this sector is still at a blossoming stage. The report covers the two prominent P2P lenders in MF, Rang De and MicroGram, using the RF lens. The case study of these two P2P platforms provides the understanding of alternative lending models. The relatively low interest rates offered by them may be lessons for other MFIs to learn. However, the report takes serious note of letting them free from regulations, and suggests for applying them the same regulations on client protection as applicable to NBFC-MFIs.
In the final section, both MFIs and SBLP are integrated to strengthen the impact and ensure promoting RF. A number of policy suggestions made in the operational, regulatory aspects and reducing geographical imbalances can help in achieving the objectives of RF in India. Finally, the report is very optimistic in highlighting the conducive environments available at present and hoping that all stakeholders will harness the opportunities to make India a more inclusive India.
The painting of the vast and varied canvas of RF poses huge challenges. No doubt this report dares to flag different issues, fairly reviews the current status and prescribes important policies to achieve its goal. The new expectations from this sector are rising and posing challenges to fulfil these expectations. Though product diversification is one of the immediate expectations, designing and delivering new products are challenging. It is a challenge to customize credit products because credit is extended to poorer section of the society whose income are highly exposed to natural shocks. The challenges for the institutions to build capacity and understanding of clients are enormous and require consistent effort and monitoring.
To keep the MF sector in India on growing path, it is not easy, though the sector is relatively matured. For better product offerings and delivery mechanism with client-centric approach, it is essential to adopt efficient and standardized screening system with effective rules and regulations. This can help institutions to service wider client segments, including vulnerable populations, without compromising on the quality of the products. There should be flexibility in the approach to craft innovative models based on strong understanding of the clients. There is perhaps need to develop integrated approaches of financial literacy to other financial services such as insurance, credit and, indeed, the next frontier of cashless and mobile financial services.
More participation of institutions from the supply side is needed to cope up the demand side of the RF. At the same time, revisions in the regulations and self-discipline by lenders are needed to keep the sector distant from potential risks. The client protection being in the centre stage, the extension of insurance coverage to the last client may be an option to be explored. Given that the majority of people are engaged in the informal and agriculture sectors, it poses a big challenge to bring them under the umbrella of insurance cover. The ‘go local’ approach to risk management is another area which needs attention in the report. The role of Micro Insurance Academy (MIA) on promoting poor rural communities to actively participate in their own risk management solutions needs critical assessment. The Community-based Mutual Aid Schemes (CBMAS) is another such initiatives in this direction.
Today the clients are very mature and aware of the developments going on in the domain of RF. The practice of engaging with clients through ‘training’ on all credit-related process and practices will help in the direction of FI of the disadvantaged section of the society. The government has been promoting to move towards cashless economy under the banner of ‘Digital India’. Pioneering start-ups are leveraging digital and mobile trends to make financing available in ways that are cheaper, faster and more convenient to India’s underserved small businesses. The benefits of digital economy come with negative implications for which we need to be vigilant.
The leverage to digital technology to deliver financial services has been tempered by the realities on the ground. There is a need to building an extensive electronic commerce ecosystem with safety measures in place to ensure that consumers and small businesses are not left behind in this transformation. India is moving slowly towards more digital financial transactions. However, moving to cashless economy and adding power in the fingers to achieve FI is a long way to go in India. The usage of digital technology remains limited to only advantaged or educated section of the society. There is need to develop and enhance infrastructure facilities in the economy, particularly in the rural areas where it is needed for inclusive finance. To achieve the goal of the RF, several forces need to function in tandem.
This report is no doubt very comprehensive and informative, and makes valuable contribution to the literature of RF, particularly in India. The presentation is very simple, and the issues are dealt in non-technical language. The report is, without a doubt, a useful reference for the policymakers, government and practitioners in the field specifically for those banks, institutions and non-governmental organizations who are working in the area of MF and RF. The students pursuing research in these fields may find this report very useful.