November study the impact of demonetization of Indian rupee

November8th, 2016 at 8 pm was a new move to a step towards a corruption lessIndia. There were mixed reaction from various corners of India on thedemonetization of Indian rupee. All sectors have been impacted by thedemonetization of the Indian rupee and so has the microfinance institutions.This article is an attempt to study the impact of demonetization of Indianrupee on the microfinance sector and the way forward in the coming times.Thedefinition of “Demonetisation” as per Investopedia is “the act ofstripping a currency unit of its status as legal tender.

Demonetization isnecessary whenever there is a change of national currency”.  This implies that the old unit of currencymust be retired and replaced with a new currency unit. NABARD (2000) defined micro finance as the “provision ofthrift, credit and other financial services and products of very small amountsto the poor in rural semi – urban or urban areas enabling them to raise theirincome levels and improve living standards”. The reserve bank of India (RBI)uses the same definition (RBI 1999). Thus, it can be concluded thatMicrofinance and Financial inclusion go hand in hand.

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And with time MFIs havebecome one of the vehicle of the financial infrastructure catering to theunbanked population in across the globe including India. In Indian the microfinanceindustry, NBFC-MFIs hold a substantial share and are governed by RBI regulations.As on date there are 71 NBFC-MFI registered with the RBI.

 India is a country where approximately70% of the population live in rural areas and their daily transactions are madein cash, in fact this move paralysed the microfinance industry. This news likein other industries, can as a shock to the MFIs across India. In microfinanceindustry where the clients borrow and repay in cash, many MFIs experienced amajor dip in their repayments rates which from as high as 99% fell to as low as12% which lead to the increase in the portfolio at risk by 7-10% for the MFIs.As per the ICRA report, MFIs which raised close to Rs 5,500 crores in the firsthalf of FY16-17 which fell to Rs. 1,650 crore in the second half of the financialyear. Also, the MFI industry experienced a dip in the micro loan securitizationwhich can be attributed to the impact of demonetization on MFIs.

  NegativeImpact of Demonetisation on MFIsThe immediate impact that was feltby the MFIs was delay and drop in the repayments of loans as the installmentswhich were due could not be done due to non-availability of new currency to theborrowers’ post demonization. Due to non-availability of cash, the lending toowas hit as the MFIs neither received the repayments and withdrawal limits wereimposed on current accounts which led to non-availability of funds with theMFIs to disburse to the lenders. The lack of funds to the farmers and othersmall enterprises in the rural area of India led to the interruption in theeconomic activities of the rural economy. Lastly, the demonetisation led to thethreat to the small MFIs challenging their existence due to lack of funds fromall stakeholders as the small MFIs have a high financial leverage and with lowcollections, they faced decline in their credit worthiness. Positiveimpacts of Demonetisation:Most of the articles even after 15months of demonetisation highlight the negative impact of demonetisation butlike other policies, there is another side of the coin too. The one mostoutcome after the demonetisation ahs been that the top 8 MFIs in India who holdabout 40% of the market share have been permitted to operate as small financebanks.

This will lead to rural population use them for cash deposits and withdrawals.Through these banks there has been increase in the rural population openingbank accounts under Jan-Dhan Yojna and hence the financial inclusion for the unbanked.The RBI has not turned a blind eye to the MFI and in special cases allow the usageof demonetized notes, they have further stretched the deadline by 90 days beforecategorizing the loans as NPAs for payments due in November and December 2016. Therehas been seen an increase in the awareness as well as usage of e-wallets like Paytm,Mobiwik etc. Also, steps are being taken by MFIs to educate the clients to movetowards a cashless economy though the process might be slow.  ConclusionAn attempt has been made in the above article to highlight both negative aswell as positive impact of demonetisation on MFIs. Both regulatory bodies aswell as politicians need to support the MFIs, the vehicle for financialinclusion, for some period of times till the ill impact of demonetisation doesnot fade off in the poor clients else the mere existence of small MFIs will bea challenge.

It has been seen that demonetisation crippled the rural economy inmany ways due to cash transactions at many steps thus impacting the livelihoodsof almost 40 million.