New Financial Inclusion Landscape in India
Reforms undertaken in the aftermath of the 2010 microfinance bubble laid a new foundation for the sector.
A conversation with Abhishek Agrawal, Country Head India, Accion, on financial inclusion and microfinance institutions (MFI) in India.
Abhishek Agrawal, Accion's Chief Regional Officer for India, serves on the boards of several companies and has extensive experience in financial management, strategy and business planning, as well as microfinance operations. In addition, Abhishek worked for over 12 years as CFO in several countries.
The landscape of MFIs and financial inclusion has changed dramatically in India. The 2010 MFI crisis in Andhra Pradesh, India, was a turning point for the sector. The bubble drew public criticism for causing widespread indebtedness resulting in suicides. To respond to this crisis, the industry introduced several reforms which shook and shaped the microfinance landscape. During the journey from this infamous MFI bubble to today's more regulated landscape, a lot has changed.
Can you share your thoughts on the reforms introduced in the aftermath of the MFI bubble?
Abhishek: Looking at the past events, I can distinguish the following three periods:
- The Unregulated era: The pre-2010 era was characterized by a lack of regulation. There was a bombardment of products in the market, and the market was not a sufficient size or of sufficient scale to absorb shocks. The public sector offerings in the space were poor.
- The Correction era: 2010-2012 marked a phase of correction in the space. The Reserve Bank of India (RBI) regulations were put into place and "Know Your Customer" (KYC) norms were enforced. It was an era of reformation and recovery.
- The Growth era: For MFIs and financial inclusion, the post-2012 era is a period of tremendous growth. The market is mature and regulated, yet has the freedom to innovate. Developments in technology are bringing in new use-cases and spawning new models. This is coupled with strong public sector action and governmental backing for financial inclusion.
The current government in India has been firmly backing financial inclusion initiatives. In 2014, the financial inclusion campaign was launched. It included re-enforcing schemes like the Pradhan Mantri Jan Dhan Yojna (PMJDY), which pertains to the opening of bank accounts. The RuPay scheme, a domestic card scheme launched by the National Payments Corporation India (NPCI) was created to fulfil the need for a domestic electronic payment system. The Micro Units Development and Refinance Agency Bank (MUDRA) launched in 2015, to provide loans at low rates to MFIs and non-banking financial corporations (NBFC), which then provide credit to MSMEs.
What was the impact of these initiatives on the financial inclusion landscape in India?
Abhishek: Nowadays we are experiencing the golden era for financial inclusion initiatives in India. Apart from all of the extremely important schemes already mentioned, like the PMJDY and its linking to RuPay and the MUDRA loan initiatives, a key factor has also been the strong push to the unique identifier, Aadhaar. Aadhaar is an online system that provides unique 12-digit ID numbers to residents of India. MFIs generally struggle to identify clients and uniquely map them given that clients can hold many forms of IDs. It is common that a client applies for a loan at one MFI with their passport, for example, then at another MFI using their PAN card. Some of the Indian IDs see high rates of counterfeits and are thus rejected by authorities. Other Indians do not own passports, and those without an income cannot afford to pay for IDs such as the PAN card. These numerous factors make it difficult for MFIs to identify a client one hundred percent accurately. Having a unique ID thus solves the problem of identifying clients, benefiting not only MFIs but a lot of other sectors. Financial inclusion has been high on the government priorities list, and it was very beneficial for the cause.
Abhishek, could you say a few words about Accion's current key initiatives?
Abhishek: Accion is engaged in various activities to build capacity and capabilities on the field, with MFIs and also broadly in financial inclusion.
- Accion is working to understand and capture the "missing middle" segment in India, which comprises of people earning between 100,000-500,000 rupees (c. 1500-7500 dollars), who are currently not captured by the MFIs or by formal finance.
- Entrepreneurship training: Accion is engaged in providing entrepreneurial training, including training on accounting skills, through its Business Enterprise Program.
- Use-case for alternate channels: Accion is building new use-cases for alternative emerging channels for financial services (e.g. digital wallets)
Abhishek enthusiastically spoke about the tremendous potential in India for new use-cases for MFIs, small businesses and financial inclusion. "One billion verified clients with one billion mobile phones", he said, "the possibilities are exciting".