Demonetisation: How to Get Cash-Stuck Microfinance Institutions Digitally Ready in India
The overnight demonetisation of R500 and R1,000 currency notes shook the entire Indian economy, for good or bad is yet uncertain. An estimated 85% of the value of currency has ceased to be a legal tender and the release of the new currency has been rationed for the next few months. Such a move from the government will most likely put a check on black money circulation in medium- to long-term, however, it will also impact businesses in the short-run given the fact that more than 90% of the consumer payments in India still happen in cash. The move is also expected to be a boon for digital financial services ecosystem in India. While the penetration of digital payments infrastructure has rapidly increased in the last two years, the value of consumer payments that happen through cards or other digital means in India is still far behind some of the other comparable economies. The point-of-sale terminals per 100,000 debits cards are lower in India compared to other BRIC nations (India-2; Russia-6.1; China-12.5; Brazil-14.8).
Till the time the government is able to remonetise the economy completely, many industries will see subdued transaction levels, most particularly the microfinance industry, which still relies heavily on cash for disbursements and repayments. The MFI industry has grown substantially since the slump in 2010. As per the latest data released by MFIN (September 2016), the total credit portfolio of NBFC-MFIs was little over R50,000 crore, while the total loan disbursements in Q1 of FY16-17 alone were over R18,000 crore.
In the wake of the currency crisis situation, many MFIs have been forced to put disbursements on hold. Also, the repayments in R500 and R1,000 denominations is being discouraged and shall eventually be discontinued. Many MFIs are also considering the option of rescheduling loans if the currency flows do not improve, significantly, in next few weeks.