<p>Dr. Alok Misra has 30 years of professional experience in international development, rural finance, microfinance, inclusive finance and research at both policy and implementation level. He started his career with India&#8217;s apex rural development bank (NABARD) in 1992 wherein his work spanned financial sector supervision, institutional development, microfinance, agricultural/rural finance and rural livelihoods/MSME finance. He was also a part of the multi-institutional task force (2003-2004) responsible for setting up India&#8217;s first online demutualized commodities exchange (NCDEX).</p>
<p>In 2008, he shifted to a global microfinance rating, policy analysis and technical advisory agency. Before coming to MFIN as CEO &amp; Director, Dr. Misra was Professor and Chairperson, School of Public Policy &amp; Governance at Management Development Institute (MDI), Gurgaon. He has served as a board member of MFIN, Vaya Finserv and member of NABARD&#8217;s strategic group on microfinance.</p>
<p>He is a member of Inclusive Finance India Group of Advisors, member of Digital finance working group constituted by ITU, Geneva. Dr. Misra is closely associated with international initiatives like SPTF and Smart Campaign and has worked across 24 countries in Asia, Africa, Europe, and Pacific. He has written numerous articles and reports and authored &#8220;Inclusive Finance India report&#8221; for two years.</p>
<p>Dr. Alok Misra holds a PhD in Development Studies from Victoria University of Wellington, Master in Development Management (Gold Medallist) from Asian Institute of Management, Manila. He was awarded ADB-Government of Japan scholarship for MDM programme and NZAID scholarship for his PhD. He has been trained at Harvard Business School in &#8220;Strategic leadership for Microfinance&#8221; and was a Fellow, Fletcher Leadership Program for Financial Inclusion at Tufts University.</p>


Jennifer Isern

Alok Misra

This blog post is part of a series that highlights takeaways from a global workshop at Lehigh University, where leaders from the inclusive finance sector discussed the question of whether financial inclusion is more relevant than ever during the pandemic crisis. This blog post is extracted from a more detailed policy brief.

Blog Post

COVID-19 created extraordinary challenges for Indian households, businesses, and the economy. Lockdowns triggered economic contractions vastly surpassing the initial trade shocks, travel restrictions, and other measures. Millions of people migrated from urban to rural areas. The downturn rapidly reduced working hours and raised unemployment. The consequences and survival tactics for households and businesses varied by sector and state, exacerbating existing disparities for low-income and rural households.

These were among the challenges discussed by about two dozen leaders of microfinance organizations, impact investors, and analysts from around the world who convened recently at a workshop hosted by Lehigh University’s <a href="https://business.lehigh.edu/centers/martindale-center/about" target="_blank" rel="noopener noreferrer">Martindale Center</a> to share views on how financial inclusion interacted with the socio-economic crises of the pandemic. The event built on the success of a previous similar workshop that resulted in the publication of The Future of Microfinance by Brookings Institution Press in 2020.

This blog post is extracted from a <a href="https://business.lehigh.edu/sites/default/files/2022-11/Martindale%20Policy%20Brief%20Indian%20Financial%20Inclusion%20Sept%202022.pdf" target="_blank" rel="noopener noreferrer">more detailed Policy Brief</a>.
<h1><strong>Shock for Clients and MFIs </strong></h1>
The pandemic triggered new challenges for both clients and microfinance institutions (MFIs). <a href="https://www.dvara.com/research/wp-content/uploads/2020/06/COVID-19-Impact-on-Daily-Life-CIDL-Survey.pdf" target="_blank" rel="noopener noreferrer">Evidence</a> points to clients’ precipitous loss of income, depletion of meager savings, increasing indebtedness, and difficult coping strategies that risk pushing millions back into poverty. MFIs had to quickly adapt, which accelerated trends toward digitalization and virtual connectivity with clients. Households struggled to understand the implications of MFIs’ loan repayment moratoriums and confronted hard choices between daily needs, repaying loans, and conserving cash for an uncertain future.

Early in the outbreak, MFIs were hit hard. The microfinance model relies on frequent physical interaction with customers. Lockdowns brought operations to a standstill and repayments came under pressure, creating liquidity issues, particularly for non-bank (NBFC) MFIs.

The impact was stark:
<ul>
 	<li>Disbursements from April to June 2020 fell to Rs 61.9 billion (~$800 million) compared to where they had been pre-COVID at Rs 711.9 billion (~$9.2 billion).</li>
 	<li>Portfolio at risk (PAR) rose; PAR&gt;30 days peaked at 22 percent in June 2021 and has improved considerably since.</li>
 	<li>Unemployment jumped to 24 percent in 2021.</li>
 	<li><a href="https://mospi.gov.in/documents/213904/416359/3_Draft_press_note_Migration_PLFS_2020_21.docx1655189017846.pdf/c85c0fe3-6b5a-b704-7683-7db7acd9fa42" target="_blank" rel="noopener noreferrer">The Periodic Labour Force Survey from July 2020–June 2021</a> showed a migration rate of 48 percent among urban women in India and 23 percent among urban males, more than half of whom returned to their rural homes; possibly the country’s worst reverse migration.</li>
</ul>
<h1><strong>Policy Responses</strong></h1>
The public sector led crisis response, mitigating damage and helping relaunch the economy. Since 2020, both the Reserve Bank of India (RBI) and the Government of India have taken critical actions for microfinance clients and institutions.

RBI’s twin approach included liquidity injection and restructuring. RBI allowed lenders to offer moratoriums on loan repayments and directed maintaining an account’s status in credit bureau reporting while in moratorium to protect customers’ credit histories and access to credit in the future. The moratorium severely stressed NBFC-MFIs. A survey amongst Microfinance Institutions Network (MFIN) members in June 2021 found NBFC-MFIs had moratorium for approximately one-third of repayment installments—creating tremendous pressure to manage liquidity given that NBFC-MFIs rely on customer repayments to repay their own debt obligations. And with fixed salary and infrastructure costs, most MFIs have little leeway to quickly change operational costs.
<blockquote class="pullquote--right">Non-bank MFIs had moratorium for approximately 1/3 of repayment installments, creating tremendous pressure to manage liquidity.</blockquote>
Additionally, the RBI’s August 2020 "<a href="https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11941&amp;Mode=0" target="_blank" rel="noopener noreferrer">Resolution Framework for COVID-19 Related Stress</a>" was a one-time resolution for loans not in default beyond 30 days. And later, RBI allowed lenders to restructure individual and small business loans. Both resolutions provided much-needed relief to microfinance customers.

For MFIs, RBI also launched special liquidity de-stressing schemes and relaxed loan provisioning requirements. The Ministry of Finance supplemented the efforts with partial credit guarantees, an “ex-gratia” scheme to pay the difference between compound and simple interest for six months for specified loan types, and the <a href="https://www.india.gov.in/spotlight/pm-street-vendors-atmanirbhar-nidhi-pm-svanidhi" target="_blank" rel="noopener noreferrer">PM Svanidhi scheme</a> of lending and credit guarantees to assist street vendors. However, while helpful, these measures could not fully relieve lenders’ liquidity challenges.

The situation improved in September 2020 as customers’ repayments resumed. In parallel, policymakers recognized the significance of microfinance for inclusive growth, giving a strong recovery signal to the market.

But the microfinance sector entered the 2021–2022 financial year facing an uncertain and unprecedented impact of COVID-19: a second wave of infections and partial lockdowns again hurt customers’ livelihoods and limited lenders’ operational mobility. The government developed <a href="https://www.ncgtc.in/en/products-n-services/cgsmfi" target="_blank" rel="noopener noreferrer">another credit guarantee scheme</a> for a yet broader array of MFIs, building on suggestions from MFIN, which worked closely with the Ministry of Finance.

The government also implemented additional fiscal measures, such as:
<h3><strong>Relief for households, including:</strong></h3>
<ul>
 	<li>In-kind (food and cooking gas) and cash transfers to senior citizens, widows, disabled, farmers, and women Jan Dhan Account holders (a national savings scheme for previously unbanked)</li>
 	<li>Insurance coverage for healthcare workers</li>
 	<li>Wage increases for those working under the <a href="https://nrega.nic.in/netnrega/mgnrega_new/NREGA_home.aspx" target="_blank" rel="noopener noreferrer">Mahatma Gandhi National Rural Employment Guarantee Act</a> and support for building and construction workers</li>
 	<li>Collateral-free loans to self-help groups</li>
 	<li>Reduced retirement fund contributions</li>
 	<li>Employment opportunities for migrant workers</li>
</ul>
<h3><strong>Relief for micro, small and medium enterprises (MSMEs), including:</strong></h3>
<ul>
 	<li>Collateral-free loans with a 100 percent guarantee</li>
 	<li>Subordinate debt for stressed MSMEs with partial guarantee</li>
 	<li>Partial guarantees for public sector banks on loans to NBFCs, housing finance companies, and MFIs</li>
 	<li>A fund of funds for equity infusion into MSMEs</li>
 	<li>Additional support to farmers via concessional credit</li>
</ul>
<h3><strong>Regulatory and compliance measures, including: </strong></h3>
<ul>
 	<li>Postponing tax-filing and other compliance deadlines</li>
 	<li>Reduced penalties for overdue goods and services tax filings</li>
 	<li>Modified government procurement rules</li>
 	<li>Faster clearing of MSME dues</li>
 	<li>Insolvency and bankruptcy code-related relaxations for MSMEs</li>
</ul>
The combination of these extraordinary fiscal and monetary measures, backed by the world’s largest vaccination program, helped the Indian economy mitigate the COVID meltdown. By March 2022, the microfinance industry showed clear signs of recovery: loan disbursements returning to pre-COVID levels; repayments above 95 percent; and no MFIs declaring default during the pandemic’s two years.
<h1><strong>Financial Institution Responses</strong></h1>
In parallel, lenders faced daunting challenges in managing ongoing connections with customers, continuing operations amidst re­strictions, ensuring employee safety, managing liquidity to cover operational costs and debt obligations, and adapting operations to accelerate the use of mobile phones and digital pay­ments. Lenders needed to balance ex­pectations among customers, employees, and investors, while continuously weighing multiple and rapidly changing variables around the unpredictable pandemic, lock­downs, and economic recovery.
<blockquote class="pullquote--right">While the RBI’s loan repayment moratorium gave immediate relief, related calculations were confusing.</blockquote>
While the RBI’s loan repayment moratorium gave immediate relief, related calculations were confusing. Customers found it difficult to understand how the moratorium would impact their repayments and costs and struggled to make informed choices. Restrictions on mobility and group meetings made explaining even harder for lenders. Customers also questioned—rightly so—the logic and ethics of accrued interest; they felt repayment delays were beyond their control, entirely attributable to the pandemic. Varied approaches amongst the lenders, for example about interest accrual, revising loan tenure, and installment amounts, and timing of interest collection during the moratorium, further confounded the issue. Lenders and MFIN made several efforts such as <a href="https://mfinindia.org/Resources/videos" target="_blank" rel="noopener noreferrer">audio-visuals</a>, direct calling to customers, awareness campaigns, and dedicated mobile apps catering to specific customer needs. Nevertheless, an found that one-fifth of respondents reported not fully understanding the moratorium. In any case, given customers’ uncertainty, lack of safety nets, and need to preserve cash for essential expenses, more than 90 percent opted for a moratorium.

Another critical challenge was ensuring fair and respectful interaction with customers. Higher delinquencies, pressure for collections on the lenders' side, customer hardships, and confusion about loan information created stressful interactions. In an MFIN survey in March 2021, 9 percent of customers reported experiencing employee misbehavior within the previous six months related to loan recovery. Handling such tensions required a balanced approach combining transparency, patience, and empathy. This meant educating customers about the moratorium and implications of their choices and using objective criteria for assessing stressed customers.
<blockquote>Handling tensions between employees and customers required a balanced approach combining transparency, patience, and empathy.</blockquote>
Maintaining microfinance’s classic close and frequent interaction with customers while following COVID protocols re­quired new approaches. Lenders ex­tensively turned to live or automated phone calls. To ensure employ­ees interacted appropriately with customers, lend­ers organized special training on customer interac­tions and phone etiquette. MFIN also developed a learning video for field-level employees focusing on best-practice interactions considering COVID. For field interactions, lenders split groups and met smaller subgroups in larger open spaces. Further, many MFIs supported customers with emergency aid for health, food, and essential supplies. In parallel, at the employee level, MFIs added controls to monitor repayments, aiming to avoid misinformation, misbehavior, forced collections, and embezzlement by field-level employees.

Lenders also expanded mechanisms for informing customers and addressing queries and grievances, including <a href="https://mfinindia.org/ourwork/clientprotection" target="_blank" rel="noopener noreferrer">MFIN's Customer Grievance Redressal Mechanism (CGRM)</a>, which supports customers in resolving complaints. Both MFIN and member NBFC-MFIs leveraged the CGRM to take customer feedback, understand specific risks, and do topical surveys. The major reasons for complaints included insurance claims settlements, disputes with credit reports, and loan repayments or disbursements. MFIN then used these customer voices to design awareness videos to address common queries and concerns. Customers also have access to regulatory mechanisms and the RBI’s newly expanded <a href="https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11546&amp;Mode=0" target="_blank" rel="noopener noreferrer">Ombudsman program</a> for grievance escalation.
<h1><strong>Addressing Over-indebtedness</strong></h1>
Over the years, customer over-indebtedness has been a paramount challenge for the industry. Regulatory and industry standards set explicit norms to address indebtedness through caps on multiple lending and total level of customer indebtedness. However, the scale and prognosis of the problem are complex and imprecise. Guestimates of over-indebtedness in India vary from 2 to 25 percent. Measurement challenges include lack of evidence on income (due to assessment challenges), unknown actual indebtedness levels given informal and formal credit reporting that silos different types of lending, and high levels of loan repayments. <a href="https://www.dvara.com/research/wp-content/uploads/2017/01/When-is-Microcredit-Unsuitable-Guidelines-for-Lending.pdf" target="_blank" rel="noopener noreferrer">Research</a> and anecdotal evidence suggest low-income households take loans and adjust expenses to repay existing loans. Group liability can also mask customer repayment stress. As such, over-indebtedness remains a core issue, and brings reputational, political, regulatory, and credit risks to the industry, undermining trust in microcredit providers and increasing risks for customers.

Despite these challenges, in recent years, the industry in India has maintained satisfactory performance in meeting regulatory standards on indebtedness. Equifax data for March 2021, on over 60 million customers with active microcredit loans, showed that 70 percent had a relationship with only a single lender, and 74 percent had loans outstanding of Rs 50,000 or less (~$650).
<h1><strong>Conclusions</strong></h1>
Five overarching lessons can be taken from the COVID crisis in the Indian microfinance sector:
<ol>
 	<li><strong>Severe shock cannot be met by institutions on their own and requires both monetary and fiscal support to avoid systemic instability.</strong> Support was provided swiftly and decisively by the RBI and Government of India, working closely with self-regulatory organizations and microfinance lenders.</li>
 	<li><strong>Capacity</strong> <strong>building for MFI customers and employees is critical. </strong>Customers demonstrated tremendous adaptability to new conditions, including lockdowns, digital payments, and lenders’ new customer service approaches. However, lenders needed sustained efforts in capacity building for customers and employees to help them adjust.</li>
 	<li><strong>Customers maintained resilience to economic shocks.</strong> Microfinance clients’ activities are typically integral to community life, like selling vegetables, groceries, or other core consumption items, so they are less affected by macroeconomic shocks.</li>
 	<li><strong>Customers value MFIs that are dependable, support clients, and provide responsible financial services.</strong> During the crisis, customers worked carefully with microfinance providers to avoid triggering adverse repayment records that would jeopardize future access to financial services.</li>
 	<li><strong>MFIs and their investors need to set realistic expectations for institutional performance amid unprecedented crises</strong>. During the pandemic, institutions that were responsive to individual client situations balanced institutional needs with client realities through repayment delays, extending loan tenures, and providing new loans. Institutions in India that responded with empathy during the crisis have been rewarded with higher client retention, loyalty, and overall improved recovery post-pandemic.</li>
</ol>

Indian Financial Inclusion during COVID and Recovery: Public Policy to the Rescue

Enjiang Cheng

Iwan Nazirwan

Hang Nguyen

This blog post is part of a series that highlights takeaways from a global workshop at Lehigh University, where leaders from the inclusive finance sector discussed the question of whether financial inclusion is more relevant than ever during the pandemic crisis. This blog post is excerpted from a more detailed policy brief.

Throughout the COVID-19 pandemic, people, businesses, and governments across Asia were able to access a wide array of financial services, which proved to be a critical resource. Lockdowns accelerated the shift towards digital payments. Households relied on financial services to stay resilient, access their savings, pay bills, conduct their business, receive social payments, and pay government fees. Many financial institutions across Asia responded quickly to the socio-economic challenges facing their clients and their own institutional survival.

Perspectives and lessons learned from Asia, by far the largest regional market for inclusive financial services, were of central interest for about two dozen leaders of microfinance organizations, impact investors, and analysts from around the world who convened recently at a workshop hosted by Lehigh University’s <a href="https://business.lehigh.edu/centers/martindale-center/about" target="_blank" rel="noopener noreferrer">Martindale Center</a> to share views on how financial inclusion interacted with the socio-economic crises of the pandemic. The event built on the success of a previous similar workshop that resulted in the publication of <a href="https://www.brookings.edu/book/the-future-of-microfinance/" target="_blank" rel="noopener noreferrer">The Future of Microfinance</a> by Brookings Institution Press in 2020.

This blog post is excerpted from a more <a href="https://business.lehigh.edu/sites/default/files/2022-11/Martindale%20Policy%20Brief%20Perspectives%20from%20Asia%20Aug%202022_0.pdf" target="_blank" rel="noopener noreferrer">detailed policy brief</a>.
<h1><strong>Cross-regional Commonalities</strong></h1>
Clients demonstrated agility and resiliency. However, recovery is uneven across Asia and globally. Many households face greater vulnerability, with the World Bank estimating 50 million to 200 million people falling back into poverty of less than $2 per day. <a href="https://cdn.finca.org/wp-content/uploads/20220804185511/Profiling-the-Most-Vulnerable_Data-Summary.pdf" target="_blank" rel="noopener noreferrer">Research by FINCA International</a> shows that 50 percent of their clients skipped meals to cope.

Discussion among workshop participants identified several cross-cutting takeaways from the Asian financial institutions that successfully helped their clients weather the pandemic.

<strong>Product offerings that support consumers:</strong>
<ul>
 	<li>Financial service providers (FSPs) that focused on their clients and tailored solutions rebounded faster. This required dynamic leadership, team cohesion, quick decisions, and clear communications to adapt to fast-changing realities.</li>
 	<li>FSPs offering diverse ranges of services—especially payments, deposits, loans, and in some cases insurance—fared better.</li>
 	<li>Lockdowns accelerated digital financial services. Digital payments provided lifelines for buying and selling essential goods and services. In parallel, combining physical and digital outreach enabled FSPs to engage with clients, monitor lending and liquidity, and manage costs.</li>
 	<li>Despite predictions that households would deplete savings, in some countries deposit levels stabilized and even increased while remittances and government-to-person payments increased.</li>
 	<li>Embedded finance—e.g., lending for agricultural value chains, wholesale-retail businesses, consumer purchases, and elsewhere throughout the supply chain—is resilient and growing.</li>
</ul>
<strong>Managing funding:</strong>
<ul>
 	<li>Managing liquidity and avoiding over lending were critical for FSPs to stay solvent. Deposit-taking institutions proved more resilient, with deeper liquidity. Recognizing the threat, multiple central banks and governments provided liquidity measures across Asia and the Pacific.</li>
 	<li>International investors and lenders restructured funding and provided new lines of credit or equity infusions to their FSP partners in the region, easing liquidity constraints.</li>
</ul>
<strong>Role of government:</strong>
<ul>
 	<li>Across the region, central banks and governments played key roles. Successful interventions include liquidity programs for banks and clients, expanded government-to-person payments, consumer protection and data privacy measures, loan restructuring, and fraud prevention especially for the growing online lending sector.</li>
</ul>
<h1><strong>Perspectives from China</strong></h1>
Micro, small, and medium-sized enterprises (MSMEs), especially in services, were hit hardest by lockdowns in China, resulting in bankruptcies and job losses. The government supported MSMEs mainly via tax reduction and financial regulators directing Chinese banks to increase lending to MSMEs. According to the People’s Bank of China, as of May 2022, MSME lending grew <a href="https://www.tellerreport.com/business/2022-05-26-central-bank--promote-the-establishment-of-a-long-term-mechanism-for-financial-services-for-small-and-micro-enterprises-who-dare-to-lend--willing-to-lend--and-will-lend.BkxyEO2Dc.html" target="_blank" rel="noopener noreferrer">20 percent</a> year-on-year for 24 consecutive months from April 2020.

However, expansion by Chinese banks might have a devastating effect on traditional non-banking lenders to MSMEs, including microfinance institutions (MFIs). With non-bank lenders’ costs of funding (around <a href="http://www.pbc.gov.cn/en/3688006/index.html" target="_blank" rel="noopener noreferrer">6–7 percent annually</a>) higher than banks (averaging 5.24 percent in April 2022) they will struggle to compete and become more vulnerable to shocks. Already, many non-bank lenders are confronting governance issues and rising non-performing loans. As government policies on MSME lending ease with pandemic recovery, banks are expected to slash MSME lending.

Banks withdrawing and non-bank lenders being more vulnerable portends a looming credit crunch. Institutional reforms for struggling FSPs, including upgrading fintech capacity, will be crucial to maintain a competitive MSME financing market. In parallel, support could include subsidies directed towards MSMEs and their employees, and extending low cost on-lending from China's central bank for agricultural and MSME financing to non-banking financial institutions.

Recovering from the pandemic, China is well placed to continue impressive financial inclusion growth given rapid development of internet infrastructure, expanding use of big data, and widespread adoption of new credit risk models incorporating broader sets of factors in lending decisions. Combining online and offline client interaction can be a potent strategy to reach MSME clients, especially in remote or rural areas. Further, insurance could be expanded, as could value chain financing, given the growth of the agriculture sector and consumer food value chains.
<h1><strong>Perspectives from India</strong></h1>
In India, evidence points to precipitous loss of income, depletion of savings, increasing indebtedness, and difficult coping strategies that may bring millions back to poverty. The public sector led the crisis response; both the Reserve Bank of India (RBI) and the government undertook critical actions, mitigating damage to MFIs, their clients, and the economy. Examples include RBI’s swift injection of new liquidity, rules to restructure loans and ease provisioning requirements, and a moratorium on loan repayments and interest payments.

Even so, loan repayments faltered, creating liquidity issues, particularly for non-bank MFIs (NBFC-MFIs) that did not receive moratorium on their own loans from lenders. A survey of Microfinance Institutions Network (MFIN) members in June 2021 found that just over a third of NBFC-MFIs received moratoriums. In response, the RBI and other government entities issued new lines of credit, guarantee programs, and other financial support, often designed in close collaboration with finance sector organizations like MFIN.

Nonetheless, MFIs faced daunting, even existential, challenges: operating amidst lockdowns and sustaining connections with customers; ensuring employee safety; managing liquidity to cover operational costs and debt obligations; and accelerating use of mobile phones and digital payments. MFIs also combatted misinformation on social media and scaled-up mechanisms to respond to client queries and grievances. Many supported customers with emergency aid for health, food, and essential supplies.

By March 2022, as the crisis eased, the RBI opened a new chapter and revised regulations. Now, all entities doing microfinance lending­—whether bank or NBFC-MFI—will operate under similar regulation, a welcome shift from micro-rules to principles-based policy. Key pillars include a debt repayment threshold at 50 percent of client income, pricing deregulation, and enhanced client protection. Building on resilience demonstrated during the pandemic and efficiency from expanded digital processing, the sector is well positioned. MFIs currently serve approximately 60 million people; the estimated inclusive finance market across India is <a href="https://mfinindia.org/Resources/studyreport" target="_blank" rel="noopener noreferrer">221 million people</a>. The sector needs to expand responsibly in areas hitherto underserved due to earlier rigid price controls, launch innovative products, and demonstrate clear impact.
<h1><strong>Perspectives from Indonesia</strong></h1>
The range of inclusive FSPs in Indonesia is diverse and includes banks, rural banks, non-bank financial institutions (NBFI), cooperatives, and other community-based lenders; each segment operates under specialized laws and regulations. The sector is distinguished by following both conventional and Islamic-based principles (sharia).

Pandemic-induced increases in non-performing loans and in costs of loan reserves, exacerbated by depositors withdrawing funds for household needs and emergency spending, fueled dire shortages of cashflow and liquidity—particularly for smaller and rural institutions. Management and staff were deeply affected and risked their own safety in working and providing services to clients.

FSPs struggled to manage loan collections. In some cases, clients faced surprise late payment penalties, coercive collections, improper collateral seizure, and other behavior that put clients at risk. Women experienced greater challenges. Rising domestic and homeschooling responsibilities during the lockdowns meant less time for their businesses. Some MSMEs adopted new business models such online marketing and transactions and/or adding health-related products in high demand during the pandemic. However, many businesses failed and people migrated from cities back to home villages, seeking lower costs of living and job alternatives in the (less-affected) agricultural sector.

Of note, during the pandemic, cross-border online lending platforms increased activity in Indonesia, despite being illegal and unregulated. These platforms provide quick cash but charge very high prices, and many of the more serious consumer harassment cases have been tied to them. Belatedly, the national police started taking action to curb illegal online lenders.

In response to these challenges, the Indonesian government introduced low-income household safety nets including direct cash transfers, non-monetary grants and subsidies, new regulations on FSP loan rescheduling, and liquidity support for businesses via new or expanded credit programs. Helpful too, private lenders offered FSPs to reschedule loans and assistance in digitalizing loan origination and disbursement.

MFIs that are further advanced in digitalizing operations have been able to survive and grow and are well positioned to shift millions of MSMEs to online financial services, supply chains, and other services. The Ministry of Cooperatives and SMEs reports that <a href="https://www.g20.org/digitization-encourages-msmes-to-be-higher-quality/" target="_blank" rel="noopener noreferrer">19.5 million MSEMs are already active online</a>; the government aims to have 30 million MSMEs <a href="https://www.g20.org/digitization-encourages-msmes-to-be-higher-quality/" target="_blank" rel="noopener noreferrer">online by 2024</a>. Deepening digital operations would improve operational efficiency, client satisfaction, credit risk mitigation, and business profitability.
<h1><strong>Perspectives from the Pacific Island Countries</strong></h1>
Many Pacific Island countries were spared severe health effects of COVID-19. However, socio-economic effects were dramatic given plummeting tourism and other commerce. The region’s reliance on overseas migrant workers makes remittances and digital payments critical, and they became even more so during the pandemic. Tonga, Fiji, and Samoa lead the region in receiving remittances. In fact, <a href="https://pressroom.ifc.org/all/pages/PressDetail.aspx?ID=26060" target="_blank" rel="noopener noreferrer">Tonga is the top recipient in the region</a>, with remittances close to 40 percent of GDP.

Yet, estimates suggest that only about 30 percent of adults across the region (excluding Fiji) have access to financial services. Hence, governments and private sector institutions have launched several initiatives to boost financial inclusion.

Core regional challenges include bank de-risking and the high cost of remittances. Even before the pandemic, many banks sought to lower risks by ceasing services to money transfer operators (MTOs) due to concerns about anti-money laundering and know-your-customer regulatory compliance. Multiple MTOs were forced to close. Service availability fell and costs to send money home rose. Across the Pacific region, <a href="https://blogs.worldbank.org/peoplemove/global-remittance-flows-2021-year-recovery-and-surprises" target="_blank" rel="noopener noreferrer">average fees exceed 10 percent</a> compared to 6.38 percent globally, a gap widened during the pandemic by further reduction in providers.

For several years, the World Bank and IFC have supported Pacific countries to strengthen regulatory frameworks and payment system infrastructures. For example, the <a href="https://pressroom.ifc.org/all/pages/PressDetail.aspx?ID=26060" target="_blank" rel="noopener noreferrer">IFC supported Tonga Development Bank</a> to establish new digital remittances corridors with New Zealand and Australia, enabling Tongans to send money at a much lower cost of about 5 percent. The program now covers 95 percent of Tongan seasonal workers in New Zealand. The corridor between Australia and Tonga launched at a crucial time, in November 2020. As people under lockdown sought online solutions, usage surged, seeing a significant increase in financial inclusion.

Digital financial services will continue to grow in the Pacific countries, with central banks progressing in operationalizing the national electronic payment systems in Fiji, Samoa, Solomon Islands, and Vanuatu. In parallel and building on these efforts, commercial banks and telecom companies are offering new digital payment and remittance products. Households and small businesses in Pacific countries stand to benefit from national payment system reforms that will help modernize national and regional financial architecture, in turn driving inclusive economic development and making every day financial transactions easier.

Alok Misra

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