Digital Disruption of Microfinance

In its Bharat Microfinance Report – 2016, Sa-Dhan, the Association of Community Development Finance Institutions in India, suggests that the Indian microfinance industry is pegged at Rs. 63,853 crores (~ US$ 10 billion). Yet a majority of our population still depends largely on informal and expensive sources of credit (NSS data, 2013). But micro-financing is at a point of inflection today due to the fortunate culmination of two trends - the policy environment for financial inclusion has become more facilitating and technology is able to make everything from application to disbursements and collections easier to administer and more transparent.

Policy perspective

The incumbent government has given financial inclusion a top priority on its agenda. With a series of initiatives, including Aadhaar identification numbers, the Prime Minister's Jan Dhan Yojana (PMJDY), the introduction of e-wallets, payment banks and Business Correspondents (BC), etc., it has become far more convenient for those in the hinterlands to access the formal financial sector.

Technology drivers

The application of technology solutions to microfinance has culminated in the following benefits:

Paperless applications and approvals: Paper loan applications are finally losing their relevance in the era of mobile-enabled devices, such as laptops and computer tablets.  The lender’s executives can now complete an application with a client, in a remote village, using a handheld device.  Having an Aadhar number facilitates personal identification and the client’s data can be captured digitally and uploaded directly into the IT system of the lender, eradicating the need to manually type it into a computer back at the branch.  This translates into lower operating costs, quicker loan approvals, more transparency and increase in the productivity of loan executives.

Direct transfers: In regions that have internet and mobile connectivity, microfinance institutions are able to use e-payment networks to disburse loans and receive repayments via net banking and mobile wallets.  Once again, this means lower expenses for the lender, as it pre-empts all the costs associated with maintaining a physical branch, such as bank tellers, security guards, cash-counting machines, etc. It also saves time and money for the borrower, who does not have to wait in line at the branch.

Big data analytics: Creditworthiness has got a whole new meaning with big data analytics. The traditional method of assessing customer credit soundness is based on business cash flows, household expenditures and ‘good credit behaviour’. But sometimes, these numbers do not tell the whole story. As a result, thousands of customers, who may not be as risky as their credit scores suggest, are rejected; the lender loses an opportunity while the potential borrower is unfairly denied credit. Analysis of behavioural patterns and circumstances, which can be culled out from alternative data – like how often the client tops up a mobile phone balance or social media accounts or whether she is married and how many children she has – can be used to determine creditworthiness through algorithm-based lending models. This considerably expands the scope of lending for microfinance institutions and the chance of access to funding for small borrowers without a conventional credit history.

Inditrade Micro-finance Model

In April 2017, Inditrade became the first funding institution in the industry to completely digitize its loan disbursement and collection process…

This has resulted in ease of access and faster transaction turnaround times, which are the cornerstones for the success of any micro finance initiative.

On the horizon

The ultimate test of success for a microfinance institution is its ability to create social impact and still be commercially sustainable. Technology appears to be the key to achieving both these, as it not only results in lower costs per transaction but facilitates an increase in breadth (number of clients in un-served areas) of outreach too.