Feet on the street: The golden rule of Microfinance

By Manoj Kumar Nambiar & Shirish Chandra Panda

The very purpose of existence of the microfinance industry is to enable financial inclusion for the excluded households representing the bottom of the pyramid. “Microfinance" has steadily evolved from 1970s when organisations such as “Grameen Bank” of Bangladesh pioneered by Prof. Muhammad Yunus gave it a formal institutional form. In India it started big way in mid 90s with a suitable adaptation of Grameen model where the core continued to thrive on the reliance of creditworthiness of poor people by leveraging their social collateral. The success of the model, industry or institution per se has always been around customer centricity.

This means the ability to service the customer at her door step, with microloans, low turnaround time and more frequent repayments.


Starting in a humble way by extending tiny loans to economically underprivileged households, the industry has earned the recognition of being instrumental in inclusive financing and fuelling the growth at bottom of the pyramid. Today, the channels are as diversified as universal banks, small finance banks, micro finance institutions and banking correspondents. In its journey to its current form, microfinance institutions have seen the worst in 2010 when the AP crisis pushed it to near extinction.

Demonetization in 2016 again rattled the industry confidence and shook the group discipline of payment. While every crisis poised serious challenge to the fundamentals of the business model, it also came out with its own set of positive fallouts. RBI recognition to microfinance as a separate category of NBFCs promoting financial inclusion, specialised guidelines for NBFC-MFIs, accredited credit bureaus with discipline on data submission, universally adopted fair practice code and MFIN and Sa-Dhan evolving as the industry self-regulatory bodies were the positive outcomes of the AP crisis. Similarly, the demonetization drove the need of cashless transactions and higher level of IT automation in the industry. In good and bad times, the industry has shown resilience and nimble-footedness.

In its next phase of growth and quest for excellence, debates are emerging whether technology shall replace most of the human interventions. Will machine learning and artificial intelligence play a pivotal role in creating a magical impact which would challenge the way microfinance institutions functioned and flourished over the years! Well, even though the sector has come a long way and technology has a much bigger role to play, “Feet on Street” still holds the foundation of the microfinance model.

While it is admirable to think ahead of time and start preparing for a next-generation sustainable microfinance distribution model where technology is the key driver, one should not forget the fundamental and proven principles which are led by more of ‘high touch’ and less of ‘high tech’ approach. While technology will surely improve the transactional processes, provide analytical tools for decision support systems for achieving desired scale and optimising the operating expenses, the concept of social collateral, customer engagement through frequent centre meetings, assisted IT enablement and promoting financial literacy would continue to be the golden rule of microfinance for the foreseeable future.

Manoj Kumar Nambiar is MD and Shirish Chandra Panda is Business Head Microfinance, at Arohan Financial Services Limited