Microfinance in India : Surviving the challenges and sailing through the DigiTech tide!
Microfinance sector has its watershed moment now, and the competition from other financial entities has forced the Microfinance Institutions (MFIs) to adopt digital technologies quickly. This adoption of technology might permanently affect the fundamental characteristics and structure of the microfinance sector. Let us ponder on the issues faced by the sector and how can technology address them.
Challenges faced by the microfinance sector in India
Unequal gains: MFIs larger in size are better placed to reap the benefits of digital technology adoption than their smaller counterparts. The scale of operations and resources available with a larger MFI help them to perform better than the small ones. Consolidation will reduce the variety of services necessary to address the local needs of borrowers; hence, there is a need for cost-effective technological innovations to maintain parity in this competitive space.
Adherence to cash and digital talent gap: MFIs often deal with employees and Banking Correspondents with limited financial literacy and formal education. The staff is usually recruited from the locally available pool of rural and semi-urban regions. Their limited knowledge of digital technology leads to lesser adoption in the actual services. As a significant part of the ecosystem still runs on cash transactions, the end customers, despite getting loans disbursed in their savings accounts, withdraw it to spend in cash. The perceived value to deal in the digital transaction is less compared to that in cash. MFIs are often not able to address the training cost for educating the employees, customers and other promotional activities. Hence, talent is scarce in the MFIs workforce who can quickly adapt to digital practices.
Waning human touch: As the sector is increasingly getting digitised, the human touch is getting reduced in the operations. The MFIs always dealt with low-income groups from the informal economy to offer small and un-collateralized loans; the human touch was always there. This working method was participatory and bottom-up in nature which determined the success of MFIs and how well they understand their customers’ needs and regional trends. The network and trust built over time helped in overcoming the reluctance of the potential customers to participate. The increased adoption of digital technology in operations threatens the very fundamentals of the industry. Hence, MFIs must use technology to ensure that customer interaction is maintained through skill programs, their loan is utilised responsibly, and the repayment rate is healthy.
Infrastructure gaps: Many parts of the country still lack the adequate infrastructure, hence road connectivity, electricity, internet connectivity is an issue. During monsoons, MFIs operating in these parts of the country face operational problems.
Increasing Competition: The collaboration between technologically-driven fintech firms and commercial banks have intensified the competition for MFIs as there is an overlap of markets.
Overleveraged customers: There is a significant overlap in the loan portfolio of commercial banks, NBFC-MFIs, SFBs and other MSME lending institutions. The MFIs can’t assess loans carried by customers availing loans from multiple entities due to the lack of an integrated platform. Hence, there is higher delinquency in MFI loans.
Operating model transformation in microfinance lending value chain
The above figure shows the various processes involved in the lending value chain — (Blue fields represent advanced stage of maturity).
MFIs are leveraging digital technology and retaining the human element of the microfinance model to shift the focus from operations to customer -
Going forward
An integrated platform to assess the exposures of potential customers with NBFC-MFIs, SFBs, RRBs and commercial banks providing a realistic picture of their repayment capabilities will be beneficial for the sector. The sector will be witnessing increased collaboration with FinTech firms for digitising microfinance value chain elements such as underwriting and disbursement. Interventions like geotagging of assets, predictive analytics, automation and alternative credit scoring mechanisms, among many others, will become an operating norm for MFIs.
The under-penetrated market of North, East and Central India provides an opportunity for sector growth. Along with the usual microfinance products, the sector may witness bundling with other products like LED bulbs, solar lamps, and sanitation products to create that outreach and social impact in the poor regions.
There is also a possibility of a digital divide among the MFIs owing to the size advantage enjoyed by bigger players. Therefore, the perceived gains from digital adoption may not be realised in a true sense due to qualms in technology access and impediments in its productive use. Such problems may be more visible for technologies whose gains result from network effects that arise when many people use them. However, how this scenario enfolds is yet to be seen in the near future.
Conclusion
Thus, the future seems promising wrt the perceived gains of DigiTech for Microfinance sector. But, RBI should deeply introspect to ensure that the regulations evolve in a manner providing parity for the MFI players vis-à-vis SFBs, RRBs and commercial banks. Finally, the State should be mindful of preserving the unique status of MFIs in the financial system for furthering financial inclusion.
References
- Sa-Dhan, Q3 2020–21, Quarterly Microfinance Report,
Q-MF-Report_Q3_2020–21.pdf (sa-dhan.net) - Bharat Microfinance Report 2020,
Bharat Microfinance Report (BMR) — Sa-Dhan - Ray, Saon; Paul, Sandeep and Miglani, Smita, ‘Innovation, efficiency and inclusion: Integration of digital technologies in the Indian microfinance sector’, Working Paper, №366, October 2018.
4. https://vikaspedia.in/e-governance/digital-india/indiastack
5. NABARD, ‘Status of Microfinance in India (2018)’,
https://www.nabard.org/auth/writereaddata/tender/1907183104SMFI%202017-18.pdf
6. KPMG, ‘Microfinance Report (2018)’
Microfinance — Embracing Digital while — KPMG India (home.kpmg)
