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I hope you had a good week. Welcome to the 26th edition of The Pattern, a weekly newsletter where we track the significant rumblings in the world of finance and technology and make sense of it for you.
This week, I want to start with a rather wise statement provided by Bill Gates in 1994. He said, “banking is necessary, but banks are not.”
While this comment at the time may have sounded like a bunch of technocrat gibberish, it’s proven prescient over the last two decades. As the pioneers in turning brands into banks, we have seen banking (and especially credit) move out of the bank branches into the last mile - be it through digital banking apps or new-age FinTechs or through a vast ecosystem of enterprise and MSME platforms developing their credit offerings (most of them use FinBox FinTech Infrastructure to do this).
More players, bigger field
Reports trickled earlier this week that the Reserve Bank of India is evaluating the possibility of enlisting non-government organizations to help extend credit to the population in backward districts and the hinterlands.
The report stated that this would span 117 districts, and these NGOs will become microlenders with funding from SIDBI and similar intermediaries.
This is an exciting move from the regulator as it will effectively allow entities outside its jurisdiction to provide services under its otherwise tightly regulated regime. While most financial institutions and fintechs are still grappling with the digital lending guidelines, this move demonstrates that the regulator is looking at expanding the credit delivery space rather than restricting it - just as long as it adheres to the law of the land, in letter and spirit.
But, it’s worthwhile to look at the state of microfinance currently - as it is deemed to be the most significant contributor to credit access in the Indian hinterlands.
As per the latest report by the self-regulatory organization Sa-Dhan, the total outstanding credit in the microfinance space grew 4.69% yearly to a total of Rs 2.62 lakh crore. This is impressive, but the breakdown shows that more than 55% of this book comes from banks and small finance banks. Another 10% comes from large NBFCs, while microfinance institutions contribute only about 36% of the pie.
This means that banks are not only still the most prominent microfinance players in the country, but their penetration is perhaps more profound than even the most prominent microfinance organizations.
The question of delinquency
In the larger scheme of things, microfinance can be a force for good and enable credit delivery to the segments where it’s needed the most. But it’s also a double-edged sword where delinquencies become cyclical. Hence, credit often leads to debt traps that may not hurt the profitability of the largest lenders but disincentives players big and small from taking it seriously.
According to the data, the delinquency rates for all lenders hover between 7.5-12% for 180+ DPD. This is certainly higher than the level of comfort for most entities. The only exception is NBFC lenders with a delinquency rate of about 4.25% - probably owing to minimal penetration and total book size.
Why is this important?
Because as we have discussed several times earlier, lending is a business of collections. If the loans are not repaid in time, it’s a death sentence for lenders.
And adding NGOs to the mix could be more complicated than it looks. Their unregulated mode of operation could make it difficult for the regulator to track and stem malpractices.
Second, the lack of expertise and experience in the credit business could mean that some actors may end up doing more harm than good.
Third, overall, NPAs are incredibly high across microfinance and MSME segments, implying that even the most seasoned players are struggling to recover the money they lent. It’s anybody’s guess how a net new, non-financial entity will play this game.
This brings me to the second most important piece of news this week that comes from the quarters of Cashfree, a digital payments company, that has just signed an agreement to enable last-mile doorstep payment collection for DASH, a GTM platform for brands in Tier 3 segment.
The payments platform will be using a SoftPos tech to enable this. SoftPoS converts any mobile device into a payment processing machine by seamlessly allowing payments through cards, QR codes, and other modes.
The overall message of this partnership is that while strides are being made in digital payments penetration, there’s a lot more to be done for digital payments and digital finance to become self-driving forces in the lowest socioeconomic rung.
This means that not just credit but payments for commerce, too, need an assisted tier of enablement to happen smoothly. There’s still some time to go before we can claim the country's 100% digitization of finance. Before that happens, it’ll be a lot of hard work and sweat for the financial intermediaries to make their ambitious goals come true while balancing inclusion and innovation.
This is precisely what RBI Deputy Governor M Rajeshwar Rao said in a recent address. It’s the perfect summation of the issue and offers clues on the way forward - especially how the regulator perceives it.
“But we cannot remain content with this, and efforts continue to achieve universal access to financial services and products. At the same time, the policy focus is being repositioned from ‘access of financial services to ‘Usage’ and ‘Quality’ of financial services…As UPI transformed the way people pay, the Account Aggregator has the potential to transform credit by making it more seamless and accessible for everyone using digital infrastructure. The JAM trinity has done wonders for FI. The next trinity consisting of UPI, e-KYC, and AA is expected to enable the next revolution in banking to provide customized and inclusive credit services.” - RBI Deputy Governor M Rajeshwar Rao.
That’s all from me this week. As always, leave some reading recommendations below.
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