Microfinance in India-Need for structural change

A Large portion of India is under-served for Banking Services. This vast under-served population depend on NBFCs, most of which are not authorized by RBI to accept deposits. In spite of several scams and loss of savings with these NBFCs, people in remote living in remote villages still deposit money with these scrupulous organizations mainly because of no other option.

Inaccessibility of these inhabitants coupled with tiny size of volume, formal banking as well as financial channels do not reach them. The cost of accepting deposits as well as lending along with collections is huge due to accessibility and tiny size of deposits as well as loans.

Banking Correspondent model and UPI can mitigate this to a large extent. Due to direct benefit transfer, almost everybody has a bank account. However, the access problem continues as Bank timings not matching the available time of the account holders. They move out before the bank branch opens and return after the bank branch closes. ATM counters in or adjacent to railway station, bus stands and market can mitigate this issue.

Another major hurdle is reluctance of shopkeepers to accept UPI payments. Steps should be taken for universal acceptance of UPI payments by all shopkeepers. Banks should also consider the cash flow in any account for sanctioning loans and advances to their customers. If both the payment and receipt is done online, the need to visit the Bank branch is reduced considerably.

This will also help the credit history of under-served population.