Impact of Demonetization on the Financial Inclusion and Microfinance Sector
Microfinance is a set of financial products including micro-savings, credit, remittances, pensions, insurance and other products which are primarily used by the poorest sections of the society who do not have access to formal financial institutions. Financial inclusion is the availability of banking services at low costs especially to the low-income groups. It includes access to credit, insurance, investment opportunities and other financial instruments.
The positive impacts of demonetisation on micro finance and financial inclusion are:
- More focus on opening accounts under PMJDY which would promote financial inclusion
- Due to demonetisation and the push for a cashless economy, awareness has been created regarding use of technology like e-wallets, PAytm, USSD, AEPS, etc which would drive the people towards financial inclusion.
But demonetisation has also negatively affected this sector:
- Repayment of loans to MFIs has dropped as it is unable to accept cash in older denominations from the poor people which has affected its ability to repay the banks. Banks would block the process of financial support to MFIs, which would lead to shutting down of many NBFC MFIs. This would also have an adverse impact on SMEs.
- Without MFIs, the poor people would not have any means to the many financial instruments offered by MFIs which would affect the financial inclusion. Devoid of any other options, poor would have to go to the loan sharks who charge very high rates.
There is need for the RBI to come out with provisions that would allow the MFI sector to rebound before it is too late so that millions of poor Indians remain connected to formal methods of banking.