Every morning, poor women across India attend microfinance group meetings to repay their small loans. Piles of cash are sorted by the microfinance institution (MFI) for the loan officer who comes to register and collect the repayments. Demonetization of ₹500 and ₹1000 notes in 2016 significantly affected the cash-based microfinance sector. The inadequate supply of cash meant that borrowers—many working in the informal economy—were unable to repay their loans. Simultaneously, MFIs struggled to keep up with new loan disbursals. Demonetization, however, was not the first crisis to hit the microfinance sector; rather, it reflected the ways in which the poor have been entangled into networks and crises of formal finance.

To lend to the poor, commercial MFIs raise capital from a range of sources, including loans from commercial banks as well as public and private equity. Additionally, MFIs securitize their debts: that is, they pool loans and sell them as debt products. Without these sources of capital, MFIs lack the liquidity necessary to operate. In recent years, financial crises have repeatedly hit the microfinance sector, causing periodic upheavals in everyday debts. Beginning in 2010, the Indian microfinance sector was hit by what was dubbed the “Indian subprime crisis.” Triggered by internal wrangling at the publicly listed SKS Microfinance (since renamed Bharat Financial Inclusion) and political fallout over debt-related suicides in Andhra Pradesh, the crisis dried out capital in the sector as banks became unwilling to lend to MFIs.

Conducting fieldwork at that time in the city of Kolkata, I had accompanied the branch manager of an MFI on his round of group meetings for collecting repayments. As we waited for the remaining group members to arrive, one borrower asked if she could get a new loan. Her son worked for a construction company that supplied bricks and sand, and each of the men involved in the business put in lump sums in turn to pay for the materials. Her son’s turn was approaching, and so she needed a new ₹20,000 loan. “I very much need it now,” she pleaded. “We can’t give loans now. We are not allowed to by the Reserve Bank,” the branch manager responded, declining a new loan for the time being.

Microfinance has become one more source of credit available to poor households to make ends meet. But financial crises could upend planned expenses and cycles of debt. Just as they paid down their loans, borrowers counted the weeks until they could access a new loan to meet financial obligations; yet, even good repayment records could not withstand the impact of financial crisis. It was not so much that the Reserve Bank of India—the country’s central bank—stopped MFIs from lending, as the branch manager had suggested, but rather that regulatory uncertainty made lenders and investors wary of the sector. The ensuing liquidity shock made the MFI instruct their branches to stop disbursals for a while. These formal financial entanglements meant that borrowers could not access the loans they had counted on and desperately needed for making do in the informal economy.

Two weeks after demonetization, the ratings firm ICRA issued a risk alert, noting that collection rates at most MFIs had fallen 30 to 60 percent, while disbursements were at “a virtual standstill.” ICRA provides ratings for MFIs, and these ratings (including those for securitized debts) shape the ability of MFIs to access the funds needed to maintain their lending practices. Given the short-term effects of demonetization, ICRA recommended that lenders and investors “wait-and-watch.” The firm warned that unless the “ground-level situation on currency availability and borrower cashflows improves, MFIs could face pressures on liquidity and asset quality front over the next three to six months.” Beyond its immediate ramifications—the material lack of cash—demonetization has thus triggered longer-term uncertainty for the microfinance sector. The downstream effects of these financial risks create new forms of anxiety for borrowers who have come to rely on the regularity of borrowing.

Care Ratings, another ratings agency, similarly observed the impact of demonetization on lower rates of repayments. It also noted that the crisis offered an opportunity to transition to cashless transactions. As the microfinance sector continues to adapt to demonetization, there are now attempts to digitize repayments. The National Payments Corporation of India, the umbrella organization for retail payments in India, launched a pilot program in February 2017 to digitize microfinance transactions. This means that both disbursals and repayments of loans will be mediated electronically through bank accounts linked to a biometric ID—even microfinance is now being ushered into an era of cashless transactions. As microfinance borrowers are asked to digitize their payments, they must also trust their money to be held in bank accounts. While such moves may promote financial inclusion of the poor, they simultaneously expose them to the vagaries of financial crises as money is held in bank accounts and circulated as finance capital.

Demonetization created an immediate effect on the microfinance sector: an inability to repay and receive loans. However, it also triggered longer-term consequences including the exposure to sectoral risk and the transition toward digitized repayments. Both of these latter effects demonstrate how the poor have been increasingly incorporated into and exposed to the effects of finance. For poor borrowers who rely on microfinance to make ends meet, the celebratory narratives of inclusion mask the increasing exposures to financial crises when capital—not just money—dries up.