From an article by the CEO and Project Manager at Grameen Foundation India:
The Indian government’s surprise decision in November to demonetize two key currency notes – the Rs. 500 (about US$7.4) and Rs 1000 (about US$15) – pulled 85 percent of the currency used out of circulation. While it will likely put a check on black money in the medium term, it has caused a short-term crunch as 90 percent of transactions across India depend on cold, hard cash. Especially hard-hit are the poor, who purchase, save and borrow in small denominations.
Equally affected are microfinance institutions (MFIs), which rely heavily on cash to serve their poor clientele. As loan repayments in the Rs. 1000 and Rs. 500 denominations were discontinued, MFIs were forced to halt loan disbursements. Some MFIs have also considered rescheduling loans if the currency flow does not improve sufficiently.
India’s MFIs have been central to expanding financial inclusion, creating an opportunity for women to enter the financial sector and enabling many poor clients to manage emergencies, raise their incomes and improve living standards. In addition, several recent initiatives launched by the government of India have made financial products and services more accessible to the less privileged.
But there is still far to go. Financial inclusion remains a dream for more than 506 million people, and a large portion of the rural segment still remains unbanked.
To date, only a few MFIs have experimented (sporadically) with integrating digital financial services into their core operations. The high cost of digital payments, poor digital literacy among their target clientele and an inadequate digital payments infrastructure are among several barriers facing MFIs.
MFIs need to get ready for the change as phones become increasingly accessible in once-remote communities. Today, roughly 38 percent of the rural population, including children and senior citizens, are rural mobile phone users – an increase from 22 percent in 2010. As the number keeps rising, so too do the possibilities of digital financial services that benefit the poor.