By Amit Kumar Bardhan Research Scholar, Vinod Gupta School of Management, IIT Kharagpur.*
Microfinance Institutions (MFI’s) are non-banking financial institutions involved mainly in service of granting micro-loans which are repaid on a daily, weekly, fortnightly or monthly basis. It is a ₹ 60,000 crore industry and almost all the transactions carried out in the microfinance sector are done in cash. In view of Government of India’s decision to scrap Old High Denomination (OHD) currency on 8th November 2016, the sector is grappling with a huge drop in collections.
Overnight, more than 80 percent of currency in circulation has been transformed into mere pieces of colored paper. RBI guidelines on deposit and exchange of cash is only for individuals, but on financial institutions it is silent. Microfinance Institutions Network (MFIN) a self-regulatory organisation for microfinance sector had asked for clarification to RBI, on acceptance of OHD currency by MFIs. Recent advisory issued by MFIN states that “Members are advised to cease collection of loan repayments in ₹500 and ₹1000 notes.”
On the other hand, MFIs face repayment default or delayed payment in view of limited supply of tenderable currency in our economy. Microfinance clients are mainly small business men, traders, shopkeepers etc. Out of whom, the majority of them are women. They may suffer from temporary liquidity crisis as a result of sudden fall in demand. This problem may persist in short run but in long run it should correct itself with the flow of newly printed currency into the economy.
MFI’s are registered financial institutions, thus, they may not be affected much by Demonetisation. Mr. Artabandhu Das, B.M, G. U. Financial Services Pvt. Ltd said that “We have stopped accepting OHD currencies. As there is a scarcity of hard currency and we are allowing extra time for repayment and postponing two\three EMIs.” When he was asked about impact of Demonetisation on their business, he said, “It has a short-term impact on repayment and credit disbursal, as the new currencies hits the market over the next few weeks, the situation will be better off.”
This crisis may persist for up to next 15 to 20 days, he added. He is very optimistic about the long-term impact of this historic decision of Demonetisation. GU Financial is a Business Correspondence (BC) of YES Bank. Thus, credit disbursed through YES Bank channel has no repayment related problem so far as they are still accepting OHD currency from YES Bank customers. In order to facilitate smooth repayment many MFI’s are providing card and POS payments for repayment of loans.
Another successful microfinance intervention initiated by NABARD is the Self Help Group Bank Linkage Program (SHG-BLP). More than 55 million households are part of the SHG movement. Are SHGs affected by Demonetisation? According to Ms. Sumita Chanda, founder of M.M. Nagar Craft Centre, a SHPI of Medinipur, West Bengal, impact of Demonetisation on SHGs is minimal, as they do not hold much cash with them. However, they face trouble in getting payment from other parties.
SHGs are facing problem in getting new loans and opening of account as banks are not providing these services for the time-being. “During this period, a huge line can be observed at all the banks and banks have set up dedicated counters to deal with demonetisation related work, this has affected the functioning of other financial services offered by banks” she said.
While speaking to SHG’s of Nayagram in Paschim Medinipur, the clients claimed that banks usually grant fresh loans to SHGs during the months of March and September. Thus, in the month of November there is a little demand for new loans. Ms. Alpona Maity, President of Badchara Progressive Cultural Forum, said that people in the village do not need much money for their domestic requirements, most of them grow their own crops and vegetables and with ₹ 200 in pocket they can manage for two weeks. “Some well-off families might have problem but not us,” she added.
Nevertheless, we cannot ignore the fact that Demonetisation scheme is putting aam aadmi in trouble, like standing in long queue for their hard earned money, unavailability of other banking services apart from deposit, withdrawal and exchange difficulties. Citizens have so far given a mixed reaction. They are worried that a lot of time is being wasted while standing in queue. At the same time they are happy that the people who earned money unethically i.e. hoarders, corrupt officials, unethical business houses are being penalized.
*The author can be contacted by email at sriamit.bardhan(at the rate)gmail(dot)com