profitability for the micro lenders.
MFIs’ partnership with fintech companies to be key success enabler

MFIs play a crucial role in providing financial access to underserved segments in the country. There is significant
opportunity for providing products and services to consumers at the bottom of the pyramid. Considering the challenges
and also the latent growth opportunities in meeting consumer needs, MFIs benefit from partnering with fintech companies
to tap the digital medium for financial inclusion.

The collaboration of MFIs with fintech companies enables improving operational efficiencies and reducing costs. Some
of the leading MFI-NBFCs and SFBs have collaborated with fintech.

Managing local stakeholders

Considering the sensitivity around MFI operations, entities must ensure that their activities do not offend local leaders
and government authorities. Apart from adherence to legal and regulatory guidelines, maintaining amicable relations with
key stakeholders in their respective geographies is also critical for MFIs.

Gradual Development in Other Support Systems

Role of MFIN

In June 2014, the MFIN was officially recognized as a SRO for NBFC-MFIs in India. The MFIN is authorized by the
RBI to exercise control and regulation on its behalf, to ensure compliance with regulatory instructions and the industry
code of conduct. The MFIN is the first network to attain such recognition in India and Asia and also maybe internationally.
In September 2017, MFIN released a MACC. Under the MACC, an institution will not lend to a borrower that has already
availed of loans from three microcredit lenders. While the existing RBI regulations are applicable only to NBFC-MFIs,
MACC will cover all entities excluding SHGs. In addition, MFIN’s responsibilities includes research and training and
submission of MFI financials to the RBI. More than 50 NBFC-MFIs in India are members of the MFIN.

Credit bureaus

Credit bureaus collect complete MFI information in their databases that captures the credit history of borrowers. The
presence of a number of credit bureaus ensures that MFIs have access to more data on their borrowers, helping them make
informed lending decisions in the long run. As per current norms, a borrower cannot avail of a loan from an MFI if there
are already two NBFC-MFI loans existing. This is where the role of a credit bureau becomes critical, as it provides
information on two levels- the number of credit lines that a borrower has already availed of, and the borrower’s credit
history in terms of, amongst others, repayment track record and defaults.

Micro Units Development & Refinance Agency (“MUDRA”)

 

In Union Budget 2015-2016, the Government proposed the formation of MUDRA to facilitate the financial inclusion of
the non-corporate small business sector through refinance and development support. A majority of this sector does not
have access to formal sources of finance. MUDRA will be responsible for refinancing and developing the micro-
enterprises sector by providing support to financial institutions that lend to small and micro business entities. It will also
help reduce interest rates of the aggregate funds given to MFIs. In Fiscal 2020, 3,161 billion was disbursed under the
Pradhan Mantri Mudra Yojana to 58.4 million accounts. The loan disbursal has been on the rise over the past few years
but the pace of growth did slowdown reflecting caution among lenders.

NABARD refinancing MFIs to encourage lending in rural areas

 

NABARD is the main facilitator and mentor of microfinance initiatives in India, with a focus on rural areas. It assists
eligible NBFC-MFls and SFBs by providing them with long-term refinance support. NBFC-MFIs having continuous
profit during the last three years and grading up to MFR2 (MFR3 in northeastern states and hilly areas) by CRISIL or
equivalent, are eligible for refinance, subject to the fulfilling of other conditions. In April 2020, the RBI allocated 2250
billion to NABARD for refinancing to cooperative banks, RRBs and MFIs to support financial institutions in the current
challenging situation because of the pandemic.

Digitalization to bring down costs, improve efficiency and profitability for MFIs

 

Digitalization is critical to the MFI industry since lower operating costs can result in higher financial inclusion and
increased benefits for customers. The use of technology has helped MFIs grow at a fast pace, improve efficiency, lower

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