By S.Anusuyadevii
Micro finance is providing financial services such as micro loans, collection of thrift, pension,
insurance etc. Micro loans are provided to the marginalized segment to finance new business,
paying urgent family needs etc., without any collateral and the repayment is done based on the
income generated from the business done by the borrower and periodicity of loan repayment can
be weekly, fortnightly etc. As per World Bank data, close to 1.7 billion people across multiple
countries do not have access to basic financial services1. Hence, MFIs play a major role.
In India, Micro finance activities are being carried out by scheduled commercial banks, small
finance banks, Urban co-operative banks, Regional Rural Banks, NBFC-MFIs and other MFIs (not
for profit organizations).
Microfinance has grown in size, outreach and financial growth over the past two decades.
The outstanding loan portfolio of Micro Finance sector as on March 31, 2021 is Rs. 2.59 lakh
crore excluding Self-help Group linked Bank lending. The share of the players are as follows:
scheduled commercial banks (43.67%), small finance banks (15.87%), NBFC-MFIs (31.05%),
NBFCs (8.35%) and others (1.04%) and the average loan size for the year 2020-21 is Rs. 34,641/-.
The objective of the article is to discuss sources of funding available for the NBFC-MFIs,
difficulties faced in securing these funds and exploring whether blockchain technology can
used as a facilitator for securing funding by MFIs. The scope can be extended to other
microfinancing arms such as Section 25 companies who may not have access to funding with
ease.
NBFC-MFI is a non-deposit taking NBFC with minimum net owned fund of ₹5 crore (₹2 crore for
NBFC-MFIs registered in the North Eastern Region) and having minimum 85 per cent of its net
assets (assets other than cash, bank balances and money market instruments) in the nature of
‘qualifying assets’.4 The average credit dispensed to an individual borrower NBFC-MFI is
approximately Rs.34,125/-
The role of MFIs is to lend small ticket loans to borrowers from the marginalized sections who
otherwise do not have a chance to be part of traditional banking channel. To lend money to its
borrowers, MFIs need access to funding. Since they are non-deposit taking NBFCs, they cannot
accept deposits from public which thereafter can be used for onlending. Therefore, the sources
of funding, broadly, include own capital, loans from banks, funding by big NBFCs, raising fund
through securitization of their loan portfolio, funding from bilateral or multilateral organizations,
private investors, subsidies and grants, External commercial borrowings etc.,
1. https://www.bankbazaar.com/personal-loan/microfinance-institutions.html
2. NBFC-MFI definition – Page No 9- RBI- CONSULTATIVE DOCUMENT ON REGULATION OF MICROFINANCE dated Jun 14, 2021
3. Page 7 -Micrometer data as on March 31, 2021
One of the funding avenue available for MFIs is from Banks. Banks can fund MFIs to meet their
priority sector targets. Priority sector norms are applicable to every Commercial Bank [including
Regional Rural Bank (RRB), Small Finance Bank (SFB), Local Area Bank] and Primary (Urban)
Co-operative Bank (UCB) other than Salary Earners’ Bank licensed to operate in India by the
Reserve Bank of India. As on date, Priority sector lending norms for Commercial Banks, Urban
Co-operative Banks and Foreign banks 40 per cent of ANBC or CEOBE whichever is higher as
applicable as on the corresponding date of the preceding year. For RRBs and Small Finance
Banks, it is 75 per cent of ANBC or CEOBE whichever is higher as applicable as on the
corresponding date of the preceding year.
Priority sector lending norms require scheduled commercial banks to allocate 40% of the total net
bank credit as on 31st March to priority sector advances which includes 10% of the priority sector
advances or 10% of the total net bank credit, whichever is higher going to weaker section. These
targets can be met by methods such as lending by the banks themselves to priority sectors,
extending credit to registered NBFC-MFIs and other MFIs (Societies, Trusts etc.) which are
members of RBI recognised SRO for the sector, for on-lending to individuals and also to members
of SHGs / JLGs on-lending to individuals under respective priority sector categories. Banks can also purchase Priority Sector Lending Certificates (PSLCs) from other banks to achieve the
priority sector lending target and sub-targets in the event of shortfall or by investments in
securitized assets originated by MFIs or assignment /outright purchase of eligible priority sector
loans from MFIs.
4. NBFC-MFI definition – Page No 9- RBI- CONSULTATIVE DOCUMENT ON REGULATION OF MICROFINANCE dated Jun 14, 2021
5. Page 29 -Micrometer data as on March 31, 2021
6. 40 per cent of ANBC or CEOBE, whichever is higher (as on March 31, 2020), which shall stand increased to 75 per cent of ANBC or CEOBE,
whichever is higher, with effect from March 31, 2024
7. Master Directions- Reserve Bank of India (Priority Sector Lending – Targets and Classification) Directions, 2020
As per Micrometer data as on March 31, 2021, among the funding instruments used by NBFC
MFIs, term loans contributed 70.80% of the debt outstanding, followed by debentures at 20.7%,
sub-debt at 4.1%, commercial papers at 0.4% and other instruments 4.0% and smaller entities
appear to rely on term loan for smaller entities. As the size of institution increases, diverse option
of funding become available to these institutions.
Micrometer data for the year FY 20-21 states that during FY20-21, NBFC- MFIs (based on a
sample of 52 NBFC MFIs) received a total of Rs 40,797 Cr in debt funding from Banks and other
Financial Institutions. 67% of debt funding for Large MFIs was from Banks. Medium MFIs were
able to source 32% of their funding from banks and remaining (68%) from other FIs. Small MFIs
received 24% of their debt funding from Banks.
As per Micrometer data for the year FY 20-21, out of the borrowings received during FY20-21 by
54 NBFC MFIs, Other Banks contributed to 46.9% of the borrowings followed by 20.4% from non-Bank entities, 18.5% from top 5 banks, and 13% from AIFIs , 0.9% from ECB and 0.4% from
Others. However, for Small MFIs no borrowing was received from AIFIs and top 5 banks.
To access the capital market such as debt funds, Small and mid-sized NBFCs need to get desired
level of credit rating. FIDC in its letter stated the following with respect to accessibility of capital
marker by NBFC MFIs : Given the size of these NBFCs, their credit rating makes them ineligible
for funding. “All the credit rating agencies use the same scale to rate both large and small NBFCs.
In such a scenario, it is practically impossible for a small sized NBFC to get the desired level of
credit rating despite a sound balance sheet and excellent track record. Sometime banks have
been risk averse in lending to NBFCs, except for the large NBFCs which have a good parentage
and are of a certain size…Further, banks may not lend once their sectoral exposure caps is met.
Though mutual fund and insurance companies can lend to NBFC sector, due to risk aversion they
may also not lend when needed.
One of the reasons for inability to access funds by small and medium NBFC MFIs is risk aversion
on the part of lenders such as banks, mutual funds and insurance companies etc., The reason
could be lack of access to loan portfolio data that can be verified so as to make proper credit
assessment by the lenders. In this article, we will explore whether this issue can be addressed
using blockchain. Before we dwell onto how block chain can be utilized for the extant problem, an
introduction of block chain may be of order.
8. Business Standard July 17, 2020
Block chain: Blockchain is a system of recording information in a way that makes it difficult or
impossible to change, hack, or cheat the system. A blockchain is essentially a digital ledger of
transactions that is duplicated and distributed across the entire network of computer systems on
the blockchain. Each block in the chain contains a number of transactions, and every time a new
transaction occurs on the blockchain, a record of that transaction is added to every participant’s
ledger. The decentralised database managed by multiple participants is known as Distributed
Ledger Technology (DLT).
The cryptographic protocols along with consensus algorithm makes sure that the network is safe
and all the data is good. Blockchain’s immutability feature ensures that no data is changeable
once it is written. Other key features of blockchain technology include transparency and trust.
A diagram of block chain is given below:
9. Euromoney learning
Evolution of blockchain technology enabled Block chain technology to be leveraged by the
enterprises leading to permissioned block chain. Multichain, Ripple, R3 Corda , Hyperledger etc.,
are the permissioned blockchain solutions to meet the needs of enterprises where privacy of data
is important whereas in public blockchain, the data is not private.
The permissionless or public blockchains require no permission to join or interact with it. Bitcoin,
Ethereum etc. are public chain. Users can create a personal address and then interact with the
network by either helping the network to validate transactions or simply send transactions to
another user on the network. The trust is that the state of transaction is immutable and this is
maintained through mining native currency to reward the miners who add the block or to pay by
those who want their transactions to be added to the network. The characteristics of the block
chain are pseudo anonymity, time-stamped, immutable, distributed, secure and unanimous as it
is based on consensus protocol incorporated in the blockchain.
Permissionless blockchains may not be of a solution for enterprise use cases where data privacy
is an important factor. Hence, the need for permissioned block chain arises where though the
underlying technology of blockchain is used, access to the network is based on the permission
given.
Permissioned blockchains, on the other hand, operate a blockchain amongst a set of known,
identified and often vetted participants operating under a governance model that yields a
certain degree of trust. A permissioned blockchain provides a way to secure the interactions
among a group of entities that have a common goal but which may not fully trust each other.
The problem of small and medium NBFC -MFIs is difficulty in accessing funds from mutual funds
or insurance companies and also from banks who have enabling regulatory provision to lend it
to them either in the form of loans or for onlending to priority sector or through purchase of
securitized assets of underlying good priority sector loans. Lenders are wary of lending to small
and medium MFIs as they do not have full visibility to the quality of these MFIS portfolio. Small
and Medium MFIs are unable to tap the capital market as they are not in a position to get
investment grade rating from the rating agencies.
In this context, it may be mentioned that as per para 100 of Master Directions of Non Financial
companies issued by RBI10, NBFCs having customer interface have to become member of all four
Credit information companies who maintain a separate MFI bureau to capture credit history of
borrowers of NBFC-MFIs.
Since the MFIS need to maintain and update the credit information of all its customers on monthly
basis, we may explore whether this data can be leveraged to seek fund from banks or other
lenders using Permissioned block chain. It may be mentioned that RBI has accorded SRO status
to two entities, namely,, MFIN and Sa-DHan. Though role of Self-Regulated organization is to
support member NBFC-MFIs in adhering to regulatory and industry standards, with focus on
customer welfare and protection, we may explore whether role can be leveraged to onboard the
MFI data in the permissioned block chain concept.
To address the lack of data for potential lenders to make informed decision about funding to a
small or medium MFI, it is proposed to use the credit information data made available to CICs
and to leverage the concept of permissioned block chain such as Hyper Ledger fabric. Though
there are other permissioned block chain networks such as R3 Corda etc., are available, the
features of Hyperledger fabric are used to highlight the use case for MFI funding.
Hyperledger fabric is designed for enterprise purpose blockchain network, wherein every
participant has their own replicated copy of the ledger. In addition to ledger information being
shared, the processes which update the ledger are also shared. Unlike today’s systems, where a
participant’s private programs are used to update their private ledgers, a blockchain system
has shared programs to update shared ledgers.
10. https://m.rbi.org.in/scripts/BS_ViewMasDirections.aspx?id=10425
11. https://hyperledger-fabric.readthedocs.io/en/release-2.2/whatis.html
On the one hand, we have listed out some of the enabling regulations for MFIs to share data
with CRCs. We have SROs who have MFIs can onboard with them. We have banks who
need visibility to loan portfolio of MFIs to decide on lending to MFIs so as to meet PSL targets/
expand their business and we have MFIs who welcome fund to run their business.
On the other hand, we have listed out features of permissioned blockchain such as distributed
ledger across nodes, append-only nature, establishing immutability with cryptographic
techniques, smart contract to update information and provide access to information ,
consensus mechanism to ensure that ledgers are updated only after transactions are
approved and also the order in which the transactions are to be updated, security and
membership services, chaincode(smart contract) and asset (Asset definitions enable the
exchange of almost anything with monetary value over the network).
Using the above factors, a solution is proposed in which we consider two organizations,
namely, Sa-DHan and MFIN as consortium members of block chain. They in turn act as an
aggregator for MFIs who are their members.
The SROs maintain peer node wherein the data relating to each MFI is maintained. Each SRO
will have an identity in the block chain. Using client API, the MFIs who are members of these
SROs will upload credit information details of their borrowers on monthly basis as hitherto. (since
data needs to be uploaded to Credit information companies on monthly basis, a copy of the same
can be uploaded to the SRO in which it is a member through the web portal to blockchain). To
address the concerns of privacy and security of the borrowers’ information, customer related
information related field can be blocked out by the MFI before uploading data to SROs. These
fields can be hashed as Hyperledger permits hashing of data so that data can be kept private.
The SRO in turn updates its ledger data of that MFI. Since there is no transaction between the
peer nodes (i.e Sa-DHan and MFIN), endorsement by the updating peer is enough to update the
data in the ledger which gets synchronized with other SRO which has a peer node in the
blockchain. The ledger data will be having name of the MFI, loan outstanding, default or regular
status and filtering can be done to remove any stale data of assets. Smart contract to filter such
details may be built and deployed. If a MFI who is a member of one SRO does not want its data
to be visible in another SRO node, the identity related to MFI can be hashed and the ledger state
can be updated accordingly in the non member SRO node.
A front-end utility (APP) can be provided by the blockchain consortium with a viewing rights to
banks or different types of lenders or venture capitalists who seek access to such information.
The lenders can browse the credit portfolio of a MFI by browsing the credit history of its borrowers
and generate reports by fetching data from block chain. Details of customer such as name, Aadhar
ID, etc would not be revealed as these would be blocked out in the blockchain. This will enable
small and Medium MFIs to show their asset quality and access funds from various categories of
lenders such as Mutual funds, banks, foreign lenders etc., and they will be in a position to price
their lending to MFIs based on the asset quality reflected from the data maintained in the
blockchain. Any additional fields that may be of value can be incorporated in the ledger state. As
per RBI regulations, MFIs can access foreign funds. Having a web interface or APP for the banks
and overseas investors will help the fund providers to browse the asset quality of the MFIs. These
data would not be made available to competitors. This would be on need to know basis with proper
credential access to the various categories of lenders who register for such access in the portal.
This facility can be used to onboard SHGs and other MFIs such as Societies and Trusts who are
not regulated by RBI ,and therefore, do not have to report credit information details to MFI bureau
of CICs and they can upload their data also to SROs with whom they are registered and their
portfolio also can be viewed by the various lenders and NBFCs who lend to MFIs and informed
decision can be taken regarding lending and pricing and this opens up avenues for micro finance
groups that have no access or limited access to formal funding channel to access fund from the
banks and NBFCs.
As regards cost of implementation, currently, a MFI needs to make aggregate data available to
the prospective lenders/investors. Also, prospective lender/investor may expect the data to be
audited before arriving at a decision regarding investment. This involves manpower cost for data
collection and presentation and auditing fee on the part of MFI. However, the Hyperledger fabric
is an open source and it has community edition which can be used free of cost by the SROs.
Though there may be one-time cost of implementation with respect to hardware, cost can be
offset as data would be verified one on block chain which inspires confidence for the prospective
investors/lenders. Further, recurring cost of collation of data and audit can be eliminated.
The MFIs in various categories play a major role in reaching out the unbanked segment of the
society through micro lending. In order to serve the segment well at a cost affordable to them,
raising funds at an affordable cost and with ease is important for them. Using block chain
technology, both lender and borrowing institutions can be brought on board on a single platform
with ease and the data of microfinance institutions can be leveraged to enable objective analysis
of the data and make funding available with ease at an affordable rate to MFIs. This will enable
MFIs to lend at an affordable rate to their borrowers thereby creating a win-win situation for all
stake holders concerned.
i. The author works for Reserve Bank of India and the views expressed in the article are her own and not the views of the Reserve Bank of India.
