Hit by demonetisation, MFIs plan to go cashless

According to RBI norms, SFBs are required to be operational by April next year

With the daily operations of microfinance institutions (MFIs) coming to a halt on account of demonetisation, the sector is looking to go cashless. Replacing the system of disbursements recovery in cash, MFIs are planning to route the transactions through bank accounts. The first ones planning to go digital are the proposed small finance banks (SFBs). Almost all of the proposed SFBs are expected to be launched in the next quarter.

According to Reserve Bank of India (RBI) norms, SFBs are required to be operational by April 2017. At least two SFBs – Suryoday Micro Finance and Utkarsh Microfinance – are planning to launch their banks in January 2017. The former has set a soft launch date of January 14.  

“We’re keeping a flexible launch date. Technically, demonetisation will not impact the launch date of our bank, as we wanted to launch towards the end of December or beginning of January. Now, it is clearer that we’ll be able to launch our bank in January. In the interim period, we’ll look out if we need a more robust IT system to facilitate online transactions,” said R Baskar Babu, CEO, Suryoday Micro Finance.

Suryoday has already rolled out cashless system of transactions on a pilot basis in Pune.

“For the next couple of days, there is surely going to be some pain. However, in the long term, this is a positive move as MFIs would be forced to go cashless. In fact, we’ve started on a pilot basis a project to undertake all out transactions cashless,” said Babu.

Varanasi-based Utkarsh Microfinance was planning to route all microfinance transactions through banks after graduating into an SFB in the long run. However, now the MFI is looking to implement the plan ahead of schedule.

“We’re planning a soft launch on January 14. While in the short-term, the MFI sector has been adversely impacted due to demonetisation, in long run, it should have a positive impact, helping the clients move towards a cashless system. We had anyway planned that once we become a bank, we’ll open an account of all our customers with the new bank, and do disbursements as well as collections through the accounts. That process has now got fast-forwarded and clients are also looking at that option now. There will be less of resistance from rural borrowers than what it was earlier,” said Govind Singh, managing director, Utkarsh Micro Finance.

Rough estimates suggest that disbursements worth Rs 250 crore and collections worth Rs 200 crore are undertaken entirely in cash in the MFI sector that on a daily basis, says Ratna Vishwanathan, CEO of  Microfinance Institutions Network (MFIN). Between November 9 and 18, the sector collectively was due to collect Rs 2,100 crore. Against this, the MFIs could collect about half or about Rs 1,100 crore dues.

“We’re not launching in this phase, and our launch is a few months away, around the next quarter. We were anyway moving towards using bank account as a means to interact with customers,” said Rajeev Yadav, CEO of Disha Microfin.

Meanwhile, the RBI on Monday extended relief to small borrowers, including MFI borrowers, by extending the repayment time by 60 days for dues payable between November 1 and December 31, 2016.

“We had sought the dispensation to allow us to collect notes of Rs 500 and Rs 1,000 for a limited time with an upper ceiling. Also, most MFI customers are rural women who have sporadic incomes. They prefer paying installments on time, rather than bundling-up the payments,” said Vishwanathan of MFIN.

“All those who are part of the informal cash economy will now get a hard push for getting to integrate with the formal banking system. This move from informal to formal will help small finance banks, and provide a strong opportunity for them,” said Alok Prasad, former CEO of MFIN.

READ OUR FULL COVERAGE ON THE MODI GOVT'S DEMONETISATION MOVE