IMPACT OF FINTECH ON MICROFINANCE IN INDIA

By Nakul Arora | 4 min read

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Microfinance

Microfinance is an economic tool designed specifically to promote financial inclusion in the country. The Indian microfinance sector has witnessed phenomenal growth over the past two decades in terms of an increase in both, the number of institutions providing Microfinance as well as the quantum of credit made available to the microfinance customers. The emergence of digital technologies in the Microfinance sector has been fuelled by mobile penetration across rural markets and the internet revolution. It enables the poor and low-income households to come out of poverty, increase their income levels and improve overall living standards.

Roadmap of Microfinance in India

Roadmap of Microfinance Sector in India

Microfinance Ecosystem in India

The ecosystem of Microfinance Institutions in India is a little complex with the interactions among numerous actors – who are core product or service providers, facilitators, clients, beneficiaries, resource providers, competitors, etc. The ecosystem is also dynamic and prone to change with the environmental conditions and entry of new entrants into the ecosystem.

Microfinance Institutions can use the ecosystem to determine their strategy with respect to their positioning in it.

Ecosystem of Microfinance Sector in India

Fintech in Microfinance

Technology adoption has played an unparalleled role in the development of Microfinance in India. However, over the past two decades, there has also been a genuine push by the government in recognizing, promoting, and regulating Microfinance Institutions.

Microfinance players are leveraging technology at various levels in order to increase client reach and improve decision-making.

Process of Acquiring Customers and Its Lifecycle in Microfinance

Sourcing:

For any institution, business expansion and lead generation are considered to be fundamental activities. Many fintech companies are offering solutions by leveraging ML algorithms to improve lead identification and reduce the overall cost of acquisition.

With technologies like geo-mapping & tablet monitoring, fin-tech companies are trying to increase the efficiency of field officers. Chatbots are used to assist customers in loan suggestions, using their eligibility portfolios. This not only drives the acquisition cost to a receding value but also increases the chances of acquisition.

On-boarding:

 Companies are using technology such as Aadhar Card KYC, Video ID Verification, and Digi-Locker for document certification and storage to prevent frauds and automate customer on-boarding processes. Fin-tech companies have also been partnering with banks and credit card companies to integrate and provide solutions for document verification such as Facial and Fingerprint Recognitions and ID verifications.

Risk Assessment:

MFIs are partnering with financial services companies to assess risk using ML algorithms. These platforms provide risk management solutions by integrating their data with credit bureaus to provide reports of analysis.

Hybrid models of traditional and alternative data, sourced through various channels such as point of sales transactions, e-commerce data, tax return filings, etc. are used to assess working capital management in many fin-tech organizations.

Loan Disbursements:

Cashless disbursements through NEFT/RTGS/IMPS and Aadhar enabled payment system is done to enable customers to use UIDAI to access their Aadhar linked bank accounts and disbursed loans. Microfinance Institution is witnessing significant improvement in the Turn-Around time of Loan disbursements and increase the productivity of loan officers

Product Management:

Microfinance Institutions are using ML algorithms to offer services to customers which can take them closer to their financial goals. ML codes can be remodeled in real-time with data to predict ensures the institutions market the right product at the right time.

Loan Management:

Fin-tech companies are disrupting traditional ways by providing support through chatbots. With the development of multilingual chatbots services, Microfinance Institutions are able to provide round-the-clock support to resolve common queries of customers.

Automation is being used to increase customer financial knowledge and also once the chat-bot learns enough about the customer it can tailor its services according to the consumers’ needs.

Collection:

With the penetration of mobile technology in India, the mix of cashless payment options is also increasing. Services like UPI and NACH are being used to promote this in the Microfinance space. National Automated Clearing House allows the repayment amount directly debited from the customers’ accounts as per the mandate provided by the customer.

Hindrances in Implementation of Technology

The stakeholders of Microfinance institutions are often not technology literate. This provides a major hindrance in the expansion of fin-tech in this sector bringing mistrust among customers.

Companies should offer customers the necessary value propositions to attend group meetings to enhance their knowledge and further the cause.

With an increase in technology penetration in the sector along with a decrease in the human touch, there are mixed responses on how the customers’ perspectives are changing. It is more important than ever to assess risk accurately and validate how loans are utilized to ensure and increase the repayment rate.

Key challenges to digitization can also prove fatal to Microfinance, especially in rural India. With low affordability and poor infrastructure, it’s still early to predict the future of Microfinance in India.

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