When it comes to poverty then, India, for a long time after Independence, has remained a poverty-stricken nation due to the exodus of wealth by the colonial powers. For a long time and still, India has been an agrarian nation where the majority of the population is involved in agricultural activities.
However, with the rise of urbanization in the country the modern banking solution has still not entered the rural areas, and many individuals are yet to be served with the basic banking system.
Microfinance is the tool through which the banks can cater to the rural population and bring the people under the modern banking system. In that also, there are several bottlenecks which lead to slow down in the sector and raise the cost efficiency issues for the banks, which makes this whole effort of microfinance an unprofitable venture.
In this blog, we will look into some of the areas from where the problem is arising and how the banks can revive their position and find growth in the microfinance sector.
Defining Microfinance Institutions
The role of microfinance is to provide financial assistance with small ticket sizes and, therefore, can cater to the large population base, which is impactful for the rural population of the country. There are DSA partner apps that have registered DSA that can help people with microfinance loans and other banking facilities.
When a country is going through an economic development phase, in that scenario government focuses on the microfinance sector, which allows the rural segment of the economy to take debt and grow accordingly.
It also helps the rural section of the economy to get into the financial system and provides a traditional banking system, which is transparent and provides economic opportunity to people.
The Primary Bottlenecks in the Industry
There are, however, certain bottlenecks that are present in India, and these are the factors that provide hindrance to the system.
The Issue with High-Interest Rates
The cost of borrowing is still high and it stays within the range of 24% interest rate to 30%. Without any significant policy changes, the industry is more skewed towards benefitting the commercial banks and NBFCs rather than improving the situation of the customers.
Getting Leveraged With Many Debts
Since the ticket size of microfinance is small, many individuals face the problem of taking multiple loans with small tickets, which results in paying a large chunk of income for EMI financing. It puts pressure on the customer, which results in loan failure and, therefore, puts stress on the microfinance industry.
Reliance of NGOs on Commercial Banks
NGOs are an important part of the microfinance industry; however, the dependence of funds remains on commercial banks as those institutes don’t find it viable to do microfinance lending.
However, the NGOs don’t have the checks and balances like banks and, therefore, end up lending to the wrong customers, which results in defaults and thus makes the NGO rely solely on the commercial bank for the release of new trench of cash.
Low Financial Literacy Among the Target Customers
The risk of low financial literacy is a serious problem as people in rural areas don’t have the right means to learn about personal finances. One of the major problems of the banks in the rural areas is that the customer pool is not well aware of financial tools. Hence a bank needs to invest a lot in fieldwork and then find customers who can return the money in time.
The Cost of Reaching the Customers
The cost of reaching customers is expensive in rural areas. Therefore, many financial institutions avoid the microfinance sector, which can take a lot of costs if the bank doesn’t have the right procedures and techniques to do that.
The DSAs are the key players who can help the banks to get customers. DSA, full form is a Direct Selling Agent who can bridge the gaps between borrowers and lenders and help to create a customer base.
Changes That Can Improve the Microfinance Industry
Here, we have mentioned some of the checkpoints which can be followed to improve the microfinance industry.
- Bringing transparency to the interest rate.
- Keeping vigilance and regulation.
- Microfinance focused on rural areas.
- Use of digital applications in the service.
- Keeping adequate field supervisors.
These are some of the problems that need to be addressed to find growth in the microfinance sector and bring financial products to the rural population of the country.