Village Financial Services

Nov 22, 2019

Demystifying Digitalisation in the Micro Finance Sector

By CS Shreya Routh
Senior Executive - Company Secretary
Village Financial Services Limited

“But we have created a society that does not allow opportunities for the poor people to take care of themselves because we have denied them those opportunities”—A phrase rightly coined by Professor Muhammad Yunus, the “Banker to the poor”. Prof. Muhammed Yunus is the man behind the concept of “micro credit”. The idea of “micro credit” was conceptualised by him and under his patronage the micro finance industry reached great heights. Achieving economic development through financial inclusion, is the main mantra behind micro finance. The availability of financial services to the unbanked automatically leads to increased economic activity throughout a region. Over the last two decades, the micro-credit sector has successfully mainstreamed itself as a key delivery channel to provide credit to low-income households. Currently, a wide range of Providers like NBFC-MFIs, Banks, Small Finance Banks , NBFCs and Section 8 MFIs, under different regulatory framework, provide micro-credit to over 4 crore customers from low-income household. As of 31 March 2019, 82 NBFC-MFIs hold largest share of portfolio in micro-credit with total loan outstanding of Rs 68,868 Cr, which is 36.8% of total micro-credit universe.

At present, micro finance industry promises a lucrative growth in the near future which will benefit the entire economy in which it is operating. However, in today’s world of exponential change, organisations that get too comfortable with status quo are at major risk of disruption. Under such circumstances, digital transformation is the next big leap in the microfinance sector.

Need for digitalisation

Digitizing services is no longer an option for MFIs. It is now a compulsory path to remain competitive and reach the last mile. Digitization is an opportunity for microfinance providers to leverage customer base and outreach to rural areas and low-income clients. Digital solutions help financial institutions deepen customer engagement and product usage, and in turn promote and increase financial inclusion. The basic crux of micro finance is the benefit of having a personal touch with its customers. To educate the low income households, the providers give adequate training and assistance to the borrowers before a loan is sanctioned and disbursed. With the help of digitalisation, devices and softwares will take care of the process oriented systematic work whereas, employees can concentrate on financial inclusion through personal interaction and communication.

Digitalisation of the micro finance sector

Most of the Providers operating in the micro finance sector have taken necessary actions for digitalisation of their operations. Areas in which digitalisation has been observed are as follows:

  1. Sanctioning Process- Once, a prospective borrower intends to obtain micro-credit, the Provider checks the credit history of the borrower and determines the eligibility of the borrower for obtaining micro-credit, upon fulfilment of the various conditions. Digitalisation of the sanctioning process creates a platform which consolidates all the check points and helps in generation of the requisite reports required for the ascertainment of the repayment capacity of the individual. Without a system in place, the entire process will be nothing but a process of checking a bulk of papers.
  2. KYC Process– The process of conducting customer KYC becomes much easier with digitalisation in place. It saves time and eradicates manual error. QR code scanning helps in automatic data entry of KYC details of customers. The process of KYC and filling of loan application forms can always be linked to simplify the process of loan sanctioning.
  3. Disbursement- Disbursement via electronic means wherein the money is automatically transferred to the borrower’s bank account is perhaps, the biggest advantage of digitalisation. No risk of physical cash is involved and safe & prompt transfer of money is assured.
  4. Repayment- Although it is difficult to take a step towards digitalising the process of repayment wherein the customers instead of giving physical cash will opt for digital payment methods, what seems feasible is sending acknowledgment texts to the customers whenever money is received from them. Once cash is received against an instalment, payment acknowledgment texts can be provided to the customers. This will allow customers to keep a digital track of its repayment schedule. At the same time, it will eradicate the risk of fraud by the staff of the Provider.

The Road Ahead:

he following measures can be taken for appropriate usage of digitalisation in the growth of the micro finance sector:

  1. Using mobile devices to digitize services and processes: A microfinance provider can use mobile or digital devices (phones, tablets) to offer existing services (e.g. customer registration, loan application) at a lower cost and digitize processes to increase efficiency. The use of mobile devices allows MFI field staff to perform daily operations, replacing paper forms with digital ones and use mobile agencies (mobile branches, tablets) instead of physical branches.
  2. Partnering with a digital financial service provider to digitize existing products, services and operations: Digitizing existing services can be a rough process for MFIs, especially when they lack the financial or technical capacity to move ahead. However, partnering with a digital financial provider can provide an easy solution.
  3. Deliver training via mobile phones so clients can receive training in financial literacy.
  4. Using voice-based messaging, which enables the staff to serve clients who are unable to read.
  5. Equipping all trainers with tablets, ensuring all staff can share information more efficiently when working remotely with rural clients.

Concluding Remarks:

The road is less taken but at the end it will reap great rewards. The main customers of a micro finance sector are not technologically advanced, but digitalisation will only help MFIs to provide the products and services in a more efficient manner. The faster the process of digitalisation is undertaken, the better will be the prospects for the micro finance industry in specific and the economy at large.