Financial Inclusion through Microfinance: Role of Financial

Technology after Demonetization Drive

1-Abstract

Microfinance is one of most adversely affected sector after the demonetization policy on
8th November, 2016 whereas it largely contributes to the financial inclusion of unbanked and
undeserved people to meet immediate and small scale financial needs. The derived trends
towards digitized financial inclusion after ‘Make in India’ and demonetization of 500 and 1000
currencies, Financial Technology (Fintech) was widely explored even in microfinance sector
also. Therefore, this study deals with such kind of financial technologies in microfinance sector
and how does it effect on financial inclusion in India.

Keywords: Financial Inclusion, Microfinance, Demonetization, Financial Technology, Business

Correspondents

2-Introduction

Financial inclusion is the delivery of financial services and bring the all the people into
the mainstream of banking sector. In this regard, Microfinance plays pivotal roles as it serves
small scale financial services by which it helps the lower income and financially illiterates to get
familiar with mainstream banking services. In India, Financial inclusion is vigorously promoted
especially after the launch of Pradhan Mantri Jah-Dhan Yojana (PMJDY) to ensure delivery of
banking services at an affordable cost. The derived trend towards digital or cashless economy
after the demonetization declaration on 8th Novemebr, 2016, digital financial inclusion got wide
momentum so as to sort out the supply side issues of financial services, which are still remain
unabridged.

The role of business correspondents (BCs) as an intermediary is much prospected and

explored in this context, they act as agent of banks to work as bricks and motor branches.
Further, Government of India and RBI recognize Microfinance Institutions (MFIs) to work as
BCs by setting up Customer Service Points (CSPs) with digital devices like Point of Sale (POS),
Mobile and internet banking etc. Moreover, there is paradigm shift in microfinance sector, where

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many corporate like TATA and Banks are investing as the part of CSR and to fulfill the Priority
Sector Lending (PSL) regulations.

As the consequences of demonetization drive, many Microfinance Institutions (MFIs)

drastically effected due to liquidity crunch. Further, Government of India (GOI) extensively
promoted and widely practiced digital movement in financial sector such as Internet and cashless
transactions. Most of Microfinance customers not accessing such services, still cash based
economy is the smooth way to carry out financial transactions among them. So that an
introspective study is required to know how demonetization impacts on microfinance sector and
what are the future prospects of financial technology on microfinance sector.

3-Objectives

 To analyze the impact of demonetization on Microfinance sector

 To study the product and services of financial technology exist in microfinance sector
 To examine prospective devices and avenues for financial inclusion through
Microfinance after demonetization drive

4-Research Methodology

This study is employed to do an exploratory study on recent trends in microfinance as

post impact of demonetization and financial technology and how does it effect on financial
inclusion through Microfinance. In this regard, secondary data have been collected from different
sources such as PMDJY and National Payment Corporation of India (NPCI). Data have been
illustrated with descriptive analysis to draw the conclusion of the study.

5-Impact of Demonetization on Microfinance Sector

Microfinance is an Industry with ₹ 60,000 crore where almost all the transactions carried
out in the form of cash. The decision to demonetizing the Indian currencies of 1000 and 500
taken on 8th, Nov, 2016 by PM of India drastically hurtled on tiny and small scale sectors which
are contributing much to the Indian Microfinance sector. Due to non-availability of cash during
post demonetization, Some MFIs like Bandhan Bank have stopped all loan disbursements for a
week and borrowers were in liquidity crunch and they were not in a position to serve their loans

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which led to delay and huge drop in collection rates (Care Rating, 2017). The below table shows
the collection efficiency and disbarment of during pre and periods of demonetization.

Table-1:-Collection and Distribution in MF sector during Pre and Post Periods of

Demonetization
1 Nov to 7 Nov to 14 Nov to 21 Nov to 28 Nov to 5 Dec to
Parameters
6 Nov 13 Nov 20 Nov 27 Nov 4 Dec 11 Dec
Collection
99% 83% 80% 109% 92% 86%
Efficiency
Disbursement as %
80% 50% 64% 82% 85% 34%
of collection
Source: CARE Ratings; Note: Data compiled from 11 NBFC-MFIs

The above table (Table-1) demonstrates that there is slow down in collection efficiency
during post periods which are 92% on 28th November and very less during 5-11 December period
(86%). Disbursement also was disrupted very much during 5-11 December period which steeply
sloped to 34%, whereas it was 60-65 at average level during pre demonetization period.

During Pre-demonetization period, MFIs collectively disbursed INR 2.2 to 2.3

billion/day. However, disbursals have declined 45-50% since 8 November. MFIs have recycled
collections into disbursements as they have not been able to withdraw money from banks
(Motilal Oswal, 2016).

6-Financial Technology (Fintech) through Microfinance sector

Fintech is the acronym of financial technology that describes an emerging financial

service sectors in current scenario. Presently many MFIs are utilizing advantages of Technology
moreover the post demonetization period is mainly focused on digital economy and cashless
transactions. Business correspondents are the key players in Microfinance sector with technology
based transactions they are provided Point of Sale (POS) devices and doing E KYC through the
finger print technology. The below table depicts the POS based transactions during last months
of 2016 and over all figure of financial year 2015-16.

Table-2:- Usage Point of Sale (POS) and m-Wallets

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 POS 2015-16 Sep. 2016 Oct. 2016 Nov. 2016 Dec 16
Usage at POS
785.67 77.93 88.86 97.60 111.45
For Credit Cards (in Miln)
Usage at POS
1,173.61 125.19 140.59 234.79 321.54
For Debit Cards (in Miln)
m-Wallets (in Miln) 603.98 75.3 99.57 138.09 213.11
Total Number of POS 1385668 1480309 1512068 1589263 1705423

Source: RBI Bulletin, February, 2017

From the table (Table-2) it can be drawn that, usage of POS for debit cards and credit
cards has increased in the month of November as an effect of demonetization. Total number of
POS increased to 15, 89,263 in November 2016, which were only 15,12,068 in October 2016.

7-Emergence of New financial avenues in Microfinance sector

The derived trend towards digital or cashless economy after the demonetization
declaration on 8th Novemebr, 2016, digital financial inclusion got wide momentum so as to sort
out the supply side issues of financial services, which are still remain unabridged. The role of
business correspondents (BCs) as an intermediary is much prospected and explored in this
context, they act as agent of banks to work as bricks and motor branches. Further, Government
of India and RBI recognize Microfinance Institutions (MFIs) to work as BCs by setting up
Customer Service Points (CSPs) with digital devices like Point of Sale (POS), Mobile and
internet banking etc. Moreover, there is paradigm shift in microfinance sector, where many
corporate like TATA and Banks are investing as the part of CSR and to fulfill the Priority Sector
Lending (PSL) regulations. Following are the some of the initiatives taken in Microfinance
sector as a impact of financial technology

7.1-Business Correspondents

The business correspondents are the agent of banks, which work as brick and motor
branches especially in unbanked areas. It was created in January 2006 in response to guidelines
issued by the RBI. Banks have been permitted NBFCs, NGOs, SHGs, MFIs, Civil Society
Organizations, Post Offices, etc to work as BC to extend financial services to the unbanked areas

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like assisting for opening bank accounts and in banking transactions. They carry mobile devices
and villagers are doing his thumb impression or electronic signature for their money remittance.
The financial inclusion programs like Bank-led approaches especially PMJDY have been
brought significant impact on increasing number of Business correspondents. Through the
Business Correspondent connectivity, branch outlet had been extended to 534477 villages (As on
31st March 2016) which increased sixteen-fold as compared to 31st March, 2010 (Sa-Dhan
2016). In this sector, FINO Fintech Foundation (FFF), a mainstream microfinance business
registered under Section 25 Company, carries out prominent tech based branchless banking
services as a business correspondent (BC) agent to the banks, governments and other financial
institutions. This entity has been given the mandate to form and promote 700 SHGs in Khagaria
and Begusarai districts (350 in each district).
7.2-MicroATMs

MicroATMs is new financial ecosystem that will use as a handheld device based on
biometric authentication systems which are capable of providing financial services. These
ATMs use fingerprint recognition technology or Aadaar as identity proof along with UPI or bank
identification number to authenticate the individual account holder. This kind of MicroATMs are
helpful to customers to perform basic financial transactions like Deposit, Withdrawal, Funds
Transfer, Mini Statement and other remittance. Apart from Micro ATM or POS devices, m-
Wallets also play significant role through simplified digital transactions. As on November 2016,
138.09 million transactions were done through m-Wallets, whereas it was only 99.5 million in
the month of October, 2016 (RBI bulletin, 2017). Hence, it can be commented based on that, the
digital transactions have got wide acceptance and momentum during post period of
demonetarization.

7.3-Peer-to-Peer (P2P) Lending/Payment

The explosion of smart phones and app technology enabled Person-to-person payment
(P2P), which is an online technology that allows customers to transfer money from their bank
account or electronic cards (debit or credit) to another individual's account via the Internet or a
mobile phones. Some Mobile Bank apps are providing these services like State Bank Buddy with
the option of ask Money by which customers can send or accept money to any contact in their

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facebook or phone book. The RBI identified that there are around 30 such platforms are working
in India in different names and apps like PayPal, popmoney, Venmo, Facebook Messenger etc.
Across the world, peer to peer lending or payment has helped millions of people to get hassle
free loans at competitive rates and considerable returns on investments for lenders.

7.4-Online Wallet or Mobile Money Wallets

The introduction of online wallets has provided to consumers more efficient method to do
online transactions at considerable rate. Further, this is the best way of digital transaction
especially for handling daily petty cash transaction like recharging Mobile, Purchasing good
from Kirana stores etc. The report released by ASSOCHAM said that mobile-wallet market in
India is expected to hit Rs 1,51,200 crore by financial year 2022, which is just about Rs 150
crore now (The Economic Times, Jan-03, 2017). Very recently many banks started this services
and government of India started BHIM APP to facilitate money transactions by which other
person can send money to his BHIM App account and he can ask others to transfer money for
immediate financial needs.

7.5-Payment Banks

This is a new model of banks conceptualized by RBI to fulfill credit and remittance needs
of small businesses, low income households, unorganized sector, farmers etc. These banks can
accept a restricted deposit of Rs. 1 lakh per customer and may be increased further. These banks
are not allowed to issue loans and credit cards but current account and savings accounts (CASA)
can be operated by such banks and can pay interest on these balances. Further, these banks can
issue services like debit cards, forex cards to travelers and ATM cards and enabled to transfers
and remittances through online banking, mobile banking, purchases in cashless, chequeless
transactions through a phone. Airtel launched India's first live payments bank with 7.25%
interest on savings accounts in Rajasthan as a pilot project and Paytm is the second to start such
services in the country. RBI grants in-principle nod to 11 companies for Payments Bank license
on August 2015. 

8. Conclusion

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 In contrast to mainstream banking sector, microfinance is deeply channelized in different
nook and corner of rural India. Still many poor and low income people extensively depend on
microfinance institutions for their daily and tiny financial needs. while gauge the effect of
demonetization on microfinance sector, it adversely effected even on mainstream MFIs like
Bandhan bank, which stopped disbursing new loans and resultant cash crunch in the country.
Already Non Performing and stressed Asset (NPA) is the major disruption to this sector. Even
demonization is considered short term pain for long term gain, its positive impact as derived
motto of digitalized financial technology will be resulted only through the appropriate financial
literacy. In this regard, Business Correspondents also have to play significant role to educate the
borrowers to overcome any kind of slowdown in their business activities and to encourage
banking habits in order to move towards non-cash based model.

9. Reference

1. RBI. (2017). Reserve Bank of India Bulletin. Volume LXXI Number-1. January-2017.
Accessed at http://www.bulletin.rbi.org.in
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Economics Division of Credit Analysis & Research Limited (CARE Ratings).
3. Motilal Oswal. (2016). Expert Speak: Impact of demonetization on MFI sector.
http://www.motilaloswal.com/Research-Research-actual.aspx?Search=27769. 13-Dec-2016
4. John D. Villasenor, et al. (2016). The 2016 Brookings Financial and Digital Inclusion Project
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9. Care Rating. (2014). Indian Microfinance Sector: Entering a phase of moderate credit risk,
three years post AP crisis. Care Rating Professional Risk Opinion. Banking and Finance.
March,7. 2014.

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