Microfinance: Moving towards a Digital Future
What is Microfinance?
Microfinance is defined as the provision of thrift, credit and other financial services and products to the poor to enable them to raise their income levels and improve their standard of living. It is primarily an economic development tool whose objective is to:
· Assist the poor to work out of poverty
· Provide the poor with access to basic financial services like — Credit, Savings, Insurance, Money Transfers, etc.
Microfinance in India
The segment that the Microfinance institutions targets often are the poorest of the poor who need small loans to use in their businesses or at their homes. They often have little to no assets to put up as collateral for getting loans. This is where the idea of joint liability and self help comes in.
Those in need of credit, but not having enough collateral to put up for it, come together to form a group. This group can facilitate the line of credit in one of two ways — have a common fund from which the members of the group can draw funds and repay with interest or go to Microfinance Institutions (MFI) or banks for a loan together as a group. The idea of social security is key to the idea of this joint liability. Every member of the group is liable to repay whatever amount they borrow. This also reduces the risks for MFIs and banks, since every member of the group is liable for the money owed, the risk of delinquency goes down.
Microfinance has developed leaps and bounds in the past few years in India. The graph below shows the amount of outstanding loans with MFIs across the Indian States.
Opening of Bank accounts — Jan Dhan Yojana
The Jan Dhan Yojana has been one of the driving forces of microfinance in India and one of the best examples of how digital technologies have helped financial services reach the population below the poverty line. As of 2020, the scheme has helped open close to 41 Cr new bank accounts. Of these 41 Cr accounts, close to 64% were from the Rural Areas of India. This has helped many Indians get a basic bank account, which is the basic foundation for availing financial services and products — like insurance, loans, etc.
Digitally Enhancing MFIs
MFIs lag when compared to the advances that happen in Banking. This is primarily because Banks have a much wider mix of revenue streams compared to MFIs. Banks lend to corporates and have a deep penetration into the urban market. MFIs on the other hand have their loan book filled with small ticket loans that primarily are disbursed to clients in the Rural parts of India. So here are some ways that MFIs can bring themselves to the digital age.
Investing in a Flexible IT solution
Even though branches help banks increase their reach geographically, expanding digitally is making the services of the bank available to many more people. This is primarily because of the sheer convenience of having access to banking products and services without actually going to a branch. Most MFIs currently have archaic digital systems which are not interlinked to each other. Investing in an IT system which can offer room to grow in the future through APIs or collaborations with FinTechs can boost the reach for the MFI.
Digitise going Forward, not Backward
Its a known fact that Indian banks and financial institutions have heaps of paperwork, often related to the terms that clients sign, or documents they give for verification. Digitising all the ancient documentation could take a long time. The focus, therefore, should be on first digitising the loan processes going forward. The process of digitising the retrospective data can be continuous one that can take place once the plan is in place to digitise going forward.
Another important aspect to consider here is how to use this data. The data can be used for credit underwriting, assessing the credit score of applicants, and understanding the impact taking credit could have on customers. Thus, data will be a powerful driver of change and growth for financial institutions, including MFIs, in the future.
Be Customer Centric
Products and services should be focussed on improving the lives of the customers. This is especially important for MFIs, considering the fact that a large portion of their clients come from the segment that is still below the poverty line. Additionally, designing products and services around the customer also means having the user experience and the channel of providing the services revolving around the customers.
Thinking about this in the context of the target customers of MFIs in India, they primarily comprise of people who have a low level of literacy. Hence a certain level of handholding is required to help them navigate through the products and which would be beneficial for them. Hence the role of agents becomes especially crucial.
Microfinance aims to uplift the poorest of the poor in the society, both socially and financially. Digital technologies and initiatives thus become extremely crucial for them to come to the modern age of banking, and MFIs hence must augment themselves digitally to uplift their customers. This fact is being recognised by MFIs in India as well, with large players like Bandhan Bank showing a commitment towards investing in uplifting themselves digitally.
References
Benami, E., & Carter, M. R. (2021). Can digital technologies reshape rural microfinance? Implications for savings, credit, & insurance. Appl Econ Perspect Policy, 1–25.
