Impact of Demonetisation on Microfinance Sector
We all know that on November 8th, 2016 our Prime Minister Narendra Modi has announced the ban of high-value notes with immediate effect. Microfinance Institutions are providing their services to individuals and micro enterprises in agreement to repay on a daily, weekly or monthly basis. Almost all the transactions that carried out in the microfinance are done in cash. It is estimated that the value of 500 and 100 rupees notes in circulation is more than 80% of total currency circulation. RBI has given directions to individuals to exchange their old currencies but no proper guidelines to microfinance institutes.
As of March 2016, the total loan portfolio of MFIs has reached an all-time high of over Rs. 63,853 crores clocking 31% growth, but if Bandhan’s loan portfolio of Rs. 9,524 crore of 2014-15 is taken out the actual growth rate of the sector between 2014-15 to 2015-16 is over 60%. Source
Majority of micro finance institutes are operating in rural areas of India and considering the fact that 62% of India population is rural. Almost all of them use cash to their regular transitions, banning of high valued notes is a big problem. People in cities with so many banks took almost 2- 3 months to become normal. We can only imagine with less number of banks and resources the situations of farmers and daily wage labor.
Most of the micro finance institutes and regional rural banks provide loans to women as the credibility of repayment is high when compared to men. The risk portfolio of microfinance sector increased from 1% to 14% in the month of January and February 2017.
Impact on Micro Finance Institutes.
• Microfinance institutions and crowdfunding organisations have collected the money from people and banks but cannot disburse to the beneficiaries because of the shortage of cash (in terms of notes).
Saying that demonetization will not check black money, he said: “It’s like the PM is cleaning a pond to kill the crocodiles, forgetting that crocodiles can survive even on land. Big crocodiles have survived. Small fish have died.” Source - Sitaram Yechury
• Majority of borrowers cannot repay the loans or EMI’s, it impacted the creditworthiness of MFI’s and the individuals reducing the overall repayment percentage of microfinance institutions and crowdfunding organisations.
Conclusion:
I am not criticizing the government for the implementation of its demonetisation. I believe that demonetization is used as a tool to fight black money. The government has introduced alternatives to banned notes like 500 and 2000 notes. We need to consider the fact that while taking such decisions, the government did not provide an alternative to the old notes as it would alarm all black money holders. RBI also printed new RS 200 notes to bring the situation under control. Many political parties and organizations argue that the demonetization had very little impact on black money.
With the people of 1.3 billion and on a mission to make the country more digital, there will be some challenges, but we all see positive impacts of demonetization in near future. If microfinance industry is going more digitalized, it will have a positive impact on the poor and unbanked people in India.
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That was great information. thx. i had an issue with all the math on that . LOL
great job....thanks for shearing
Seems like you did some research for this post . Good job.
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Ya it imapacts in many sectors leading to downfall of gdp of india
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Excellent article once again. You have quoted Sitaram Yenchury, but still not blamed the government, i would say that was diplomatic of you and I respect your decision. But, i feel free to criticise the government. When it came to demonetization the government should have been able to replace the currency in limited period of time, the government had not prepared and ended up messing the whole process. Same with GST, the implementation was hasten and then, total of seven amendments were issued. Notifications and Clarifications were also order of the day and still the confusion prevails. The mis-management of the economy by this government is evident and therefore, people like Subramanian Swamy, Yashwant Sinha and Arun Shourie have been critical of the government. These are BJP's own people. Instead of answering points they have raised all types of allegations were made against them. To qoute Economist Prabhat Patnaik "demonetization and GST not only damaged the informal sector but, its multiplier effect has also damaged the formal sector". Hope the government leaves its stubborn attitude and now atleast makes a proper effort to improve the economy.