Poverty, a raging economic issue, exists in most of the developing countries. The actual reason for severe poverty lies in the inequality in income distribution, which is chronic in developing countries, especially in India. Agricultural sector still plays a major role in Indian economy, despite the remarkable progress made in the service and manufacturing sector in last two decades. According to Census 2011, still 50% of the Indian population depend on agriculture and allied activities and approximately 69% of India’s population is in rural areas. This population has been largely deprived of formal financial services leading to lackluster performance of the agricultural sector (Karthik, 2017). For this reason the concept of microfinance was introduced. The main aim of introducing Indian microfinance industry was financial inclusion of poorer and backward section of the society.
Microfinance organisation is not new to the financial market in India. Due to the overwhelming poverty in India, government gave special attention to the development of rural credit. Taking All India Rural Credit Survey report (1950) into account, it reconstructed the cooperative structure which included the partnership of state in cooperatives, establishment of Regional Rural Banks (RRB) and National Bank for Agriculture and Rural Development (NABARD). In India, Non Government Organisations (NGOs) played a pivotal role in the development of micro financial service. Furthermore, microfinance industry in India has witnessed a fast-paced growth in last two decades. In 2009, the total number of microfinance institutions in India was around 150 (Tripathi, 2014).
Microfinance institutions (MFIs’) serve two major needs of the rural poor population in India. These twin needs are the financial and social support to fulfill their needs. One of the most critical salient features of the Indian microfinance industry is that most players operate on the lines of the Non-Government Organization (NGO) system (Mimo Finance, 2011). Therefore, they are still struggling with profit making. Also, these institutions do not give much importance to risk management in their operations. Due to this, they face problems such as default and delinquencies in their business.
Operational risk management in microfinance institutions are important in day to day operations to mitigate risks such as:
- workforce turnover,
- change in interest rates,
- regulatory among a host of others.
For a long time now, microfinance institutions (MFI) in India have followed the traditional operational model of procurement and distribution of money among rural people. However, during the past 10 years the industry changed radically with a new business model. An increasing number of large commercial companies have entered the fray, making the industry more formal. They have started to include more commercial and semi-commercial banks in the operational process. This has not only increased their clientele but also intensified their commitment towards customers. Read more »
The contemporary digitized era has welcomed the innovative ways of transactions in the market. Today’s market boasts of speed, safety and convenience. Consumers are flooded with vast array of digital payment platforms, online shopping and cashless transactions. In addition sellers too are offered the equal opportunities of handling and managing their sales (Reserve Bank of India 2016). One such unique feature of conducting digital transactions is through payment terminals.
Being in business for about more than 30 years, microfinance institutions still have to face risks. There is a need to build strategies to mitigate risks. Some of the major reasons include:
- high dependency on the rural population on agriculture which itself is dependent on monsoon,
- lower income of people,
- fewer employment opportunities in the rural sector
In the previous article, the need for credit risk management in small scale microfinance institutions was reviewed. Small scale micro finance constitute a sizeable chunk of the entire microfinance industry in India. Microfinance institutions face large amount of credit risk today. Keeping that in mind these institutions are using different approaches and techniques. This has been done to mitigate the risk pertaining to the failure of repayment by the customers.