Microfinance Sector: Key Problems and Solutions | Digital and Automated Business | Jainam Software

Описание: Must watch this video to know how to empower your microfinance business.

These challenges include: cost of outreach - reaching the non-banked populations of the world means servicing small loan amounts and servicing remote and sparsely populated areas of the planet, which can be dangerously unprofitable without high rates of process automation and mobile delivery.

1. Over-Indebtedness
The microfinance sector deals with marginalized sections of Indian society intending to improve their standard of living, and thus over-indebtedness poses a severe challenge to its growth. The growing trend of multiple borrowing by clients and inefficient risk management are the most significant factors that stress the microfinance industry in India. The microfinance sector gives loans without collateral, which increases the risk of bad debts. Fast-paced growth needs proper infrastructural planning, in which the Indian microfinance sector evidently lacks.

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Further, the lack of any apex control over the MFIs in India is also a leading cause of over-indebtedness. These factors also contributed to the Microfinance crisis of 2008 in India. Over-indebtedness makes the MFIs vulnerable to credit risk and increases the cost of monitoring that they have to incur to stay profitable in the long run.

2. Higher Interest Rates in Comparison to Mainstream Banks
The financial success of MFIs is limited when compared to commercial banks in India. The centuries-old banking system has a strong foothold in Indian grounds and is slowly evolving to meet the needs of the times. Most Microfinance Institutions charge a very high rate of interest (12-30%) when compared to commercial banks (8-12%). The regulatory authority RBI issued guidelines to remove the upper limit of 26% interest on MFI loans.

While many MFI sector players benefited from the RBI guideline update, the borrowers were left for the worse. A massive trend of farmer suicide in states like Andhra Pradesh and Maharasthra is the outcome of borrower indebtedness that resulted from the higher interest rates.

3. Widespread Dependence on Indian Banking System
Because most microfinance institutions function as registered Non-Governmental Organizations (NGOs), they are dependent on financial institutions such as commercial banks for stabilized funding to carry out their own lending activities. Most of these commercial banks are private institutions charging a higher rate of interest. They also sanction loans for shorter periods. The massive dependence of Indian MFIs on banks makes them incompetent as a lending partner.

4. Inadequate Investment Validation
Investment valuation is a crucial capability for the healthy functioning of an MFI. The developing nature of the markets in which MFIs operate, the market activity is often limited. That is why it becomes difficult for MFI to gain access to market data for valuation purposes.

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Lack of consistent and reliable valuation procedures, MFI management teams, are unable to achieve the level of quality information that they need to be able to make investment decisions

5. Lack of Enough Awareness of Financial Services in the Economy
A developing country in the making, India has a low literacy rate, which is still more moderate in its rural areas. A large chunk of the Indian population fails to understand the basic financial concepts. There is a severe lack of awareness of financial services provided by the microfinance industry among the masses. This lack of adequate knowledge is a significant factor that keeps the rural population from accessing MFIs for easy credit to meet their financial needs.

6. Regulatory Issues
The Reserve Bank of India (RBI) is the premier regulatory body for the microfinance industry in India. However, RBI more or less caters to commercial and traditional banks more than it helps MFIs. Even the needs and the structure of microfinance institutions are entirely different from those of other conventional lending institutions.

Some regulations seem to have benefitted the MFIs, but others left numerous issues unaddressed. In spite of sporadic and unprecedented regulatory changes, the Microfinance industry appears to have been struggling to sustain. While new regulations result in structural and operational changes, they also result in ambiguity in norms of conduct. The result is sub-optimal performance and failure in the development of new financial products and services. Conclusively, there is a need for a separate regulatory authority for the microfinance industry.

7. Choice of Appropriate Model
Most Indian MFIs follow the Self-Help Group model (SHG model) or the Joint Liability Group model (JLG model) of lending. They hardly select the model based on scientific reasoning. Most MFIs choose the models randomly, regardless of the situation.