Microfinnce and Financial Inclusion

Financial Literacy and Microfinance Institutions

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“We must remember that the purpose of microcredit is to eliminate poverty in the shortest possible period of time” – Mohammed Yunus.

Union Rural Development Minister Jayram Ramesh made a statement in the recent Microfinance India Summit at New Delhi that microfinance has raised more questions that it has answered. Somehow, there is building a consensus that microfinance institutions are not being able to deliver the desired outcomes. Does the government has been able played its desired role to make the microfinance industry as an agent of social transformation or the microfinance institutions have been diverted to hardcore profit making entity? The Andra crisis has taught us that making profit out poverty is not only unethical, it is dangerous too! Hence, where is the way out? Is re-designing of microfinance intervention is need of the hour? If that is, what should be done? What should be incorporated with the present setup? Financial Literacy can be one of the most promising tools to socialize the microfinance interventions.

Last year, “Organization of Economic Cooperation and Development (OECD)” held an workshop on financial literacy in New Delhi and observed that Financial Literacy is a combination of financial awareness, knowledge, skills, attitude and behaviour necessary necessary to make sound financial decisions and ultimately achieve individual financial well being.

The significance of Financial Literacy is being gaining momentum globally. Most recently, countries like USA, UK, Czech Republic, Netherlands, New Zealand, Spain and India have come up with detailed strategy for financial literacy. Last year, Credit Card Company VISA has also conducted a survey to know the state of Financial Literacy. The “VISA Global Financial Literacy Barometer Survey” covered 28 countries and India stood at 23rd position. The survey report reveals that only 35% of Indian is financially literate and ignorance is more among the women.

Many organizations in India too have been taking Financial Literacy initiatives. RBI has their “Project Financial Literacy”. This project is being operationalized through films, comics in English as well as in other vernacular languages. They are organizing quiz programs among school student to aware them about the financial ecosystem. SEBI has also initiated the their financial literacy program as a part of the investor education plan. IRDA and PFRDA also have initiated financial literacy programs. Interestingly, private company like Money Wizard has also started an economically viable model of financial literacy.

The present state of Financial Literacy shows that the steps taken by regulatory bodies like RBI, SEBI etc or banks (Financial Literacy and Credit Counselling Programs) are not being able reach the masses. And most importantly, these initiatives are least successful to cater the most vulnerable section of the society. A few months back, RBI has organized quiz among the school students. I got the opportunity to be present in one of such program held at District Library, Guwahati. Most of the students are from the reputed private English medium schools of Guwahati. Question arises, what will be outcome? Will it reach the marginalized section of the society? No doubt same thing is being repeated in the maximum programs of SEBI, IRDA, and PFRDA etc. These programs are not being able to reach the most needy target group. To reach this target group MFI may be the most viable channel.

Microfinance institutions should take the Financial Literacy initiatives not only to benefit the customers, but for their own prosperity too. It is always less risky to lend money to a financially literate customers. The financial literacy among the microfinance clients may minimize the risk of over-lending, ghost loan and NPA. Proper loan utilization is a major challenge in this vertical. Financial Literacy may help the MFI to overcome the challenge. Another major challenge of microfinance operation is credit appraisal. It’s like the challenge faced by a vetenary doctor. If financial literacy can enable the clients to assess their own creditworthiness, it become much easier for the microfinance practioner to provide the credit remedy as like as a physician. Financial Literacy can be a game changer for the MFIs in terms of efficiency and profit maximization. If the clients can be motivated to open bank accounts and disbursement can be done in cashless mode, a number of benefits can be garnered. Cashless disbursement will not only minimize the paper work and TAT (Turn Around Time) but also it can almost zeroed the cash-in-transit risk.

Ujjivan Financial Services Pvt. Ltd. one of the best MFI of country has initiated financial literacy holistically. In the first phase they screened a video film called Sankalp on debt management, ghost loan and credit bureau to their all customers in vernacular languages across the country. In second phase they have started a five module Diksha program. They have targeted to impart financial literacy to more than 10 lakhs clients. After successful completion of the training, they are coordinating with the bank to open the savings bank accounts for the graduated customers. Now, they are using those accounts to do cashless disbursement. The result so far is inspirational.

These developments may give a change re-think on the significance of Financial Literacy to the microfinance institutions, development practioners and policy makers as well.