India far behind achieving financial inclusion; 19% of its population still unbanked

Financial Inclusion

When the Pradhan Mantri Jan-Dhan Yojna(PMJDY) was introduced, many Indian citiznes from bottom of the pyramid could get exposure to personal finance and banking facilities. However, it seems India has not been able to reach at the financial inclusion level as desired. A recent joint research on financial inclusion done by ASSOCHAM and EY doesn’t reveals that India’s financial services ecosystem lags in terms of physical infrastructure and has failed to reach the poor. It finds that more than 19% of the Indian population is still unbanked or financially excluded

The main objective of financial inclusion is to ensure access to formal credit for people who are dependent upon informal sources for fulfilling their financial needs, at an affordable cost in a fair and transparent manner, and to promote financial education, mentioned the report titled, ‘Evolving landscape of microfinance institutions in India,’ jointly conducted by ASSOCHAM and EY.

The Government and the Reserve Bank of India (RBI) have taken several laudable initiatives to promote financial inclusion. These efforts include launch of co-operative banks and regional rural banks, introduction of mandated priority sector lending targets, formation of self-help groups, appointment of business correspondents by banks to provide door-step delivery of banking services. These steps have helped to bring in a large section of the unbanked population under the formal financial credit system. However, a considerable portion of India’s population still remains devoid of access to basic formal credit facilities mainly due to lack of last mile connectivity.

The Indian microfinance industry is dominated by NBFC MFIs with an 88% market share. According to data from MFIN, there are 12 small MFIs (loan book less than INR1b), another 22 medium-sized MFIs (loan book between INR1b and INR5b) and 22 large MFIs (loan book above INR5b). Large MFIs account for ~90% of the industry’s gross loan portfolio (GLP), client base and debt funding.

During FY12–16, the gross loan portfolio (GLP) of MFIs grew at a CAGR of 48% to reach INR532.3b and the number of clients benefited crossed 32.5m (as of March 2016). Notably, the sector reported a significant surge of 84% in GLP from INR289.4b in FY15 to INR532.3b in FY16, since MFIs indulged in issuing large loans to clients after the RBI relaxed indebted exposure to single borrower from INR 50,000 to INR 100,000. 60% of the GLP was attributed to the rural sector while the remaining 40% was from metros, urban and semi-urban areas (as of March 2016).

In terms of regional breakup, south India had the highest share at 35% of GLP followed by west and north India at 25% share each. The study finds that 31% of the loans were given for agriculture and allied activities while 64% were given for non agriculture and 5% for household finance as of March 2016. Large MFIs, some of which are in the process of converting to small finance banks, reported the highest surge in their loan books.

Post 2010, MFIs consolidated their operations, since the sector faced more stringent regulatory requirements. Number of MFIs declined from~70 in pre-2010 to 55 in early-20167. Growth slowed after FY11 and in FY13, there was a decline in both branch network and employee base. However, following the initial consolidation, microfinance companies started aggressively expanding operations. From FY13 to FY16, branch network expanded at a CAGR of 16% while the employee base increased at a CAGR of 27%. Of the total base of 85,888 employees, 63% are loan officers who provide door-to-door credit as on March 2016.

During the last two years, MFIs have reported a 58% jump in average loan size per customer from INR 10,364 in FY14 to INR 16,394 in FY16, since during the same period gross loan portfolio has increased 3X while client base has only increased 2X. Some industry experts have ascertained the high growth pattern to the rise in clients, increase in general income levels and ease of lending rules by the RBI. In April 2015, the RBI raised the cap on indebtedness to a borrower from INR 50, 000 to INR100,000.