Next-gen microfinance, the Role of digital technology

Microfinance was introduced in the 1970s from the Grameena Bank Model, since its inception it has changed the lives of many rural people by providing them with microloans. This in turn has enabled them to afford a basic livelihood that aids in income generation and community integration. The industry mainly focuses on marginalized groups of rural women, and as of 2018, more than 80% of the client base is accounted for women accounting for approximately 140 million borrowers. This analytics shows how microfinance has helped rural Indian women and enabled them to live a better life.

Microfinance then

All microfinance companies in the past used traditional approaches to perform operations such as customer onboarding, loan processing, disbursement, and repayment. This was a tedious process for both companies or NGOs and also the customers to have to go to the bank for every approval. 

Microfinance Now

Through the years, digital microfinance has used advancements in technology to its advantage and reduced loan processing times, ease of access to the lenders’ profiles, etc. This transformation in technology has enabled the microfinance industry in India to grow rapidly. This has allowed NBFCs and microfinance companies to match the loans given by banks. Today, the microfinance industry contributes 35% of loans while traditional banks contribute just over 38%.

The role of digital technology

According to research conducted by the National Payments Corporation of India that assessed all the digital payments in India concluded that 25% of the people from the lower income groups of India whose income is below 1 lakh have preferred digital modes of transactions over the traditional ones. 

Integration of Aadhar into digital finance in microfinance institution services has enabled MFI to assess the liability of the borrower through digital payment tools. As of 2022, this Aadhar-enabled integration has over 1277.9 million active users. This has helped the MFIs to pace up the process speeds, reduce operational costs, and most importantly detect fraud. 

Benefits of digital Micro Finance 

• The benefit of integrating technology into MFI for approving and disbursing loans, among many other things, is this can help the companies to monitor transactions in real-time, and also assess the borrower’s credit history. 
• This also resolves issues like bookkeeping every transaction record of the customer and also reduces the need to store all the physical documents. 
• This can also help MFIs customize the loan offerings based on the credit history of the borrower the system can assist in decision-making. 
• Technology integration can also aid the borrowers in digital literacy by adding support for the local languages. This helps them understand the latest trends and the latest chatbots can provide 24-hour support to the various queries of the users.  
• This can also help in addressing long-faced challenges associated with repayment, reducing MFIs then the need for going for collections. Borrowers can now repay the loans through UPI.
• Fraud detection, one of the biggest challenges of MFI can be mitigated by integrating technology. Several technologies today can use AI/ML to detect fraud documentation and fake identities. 
• Microfinance digital technology with advanced analytics can be used to study a wide range of transactions and other data points to detect fraud in real-time. 
• MFIs can effectively communicate information regarding frauds or any updates in the interest rates of repayment time immediately and effectively with the users. This reduces the time of spreading the information. 

Impact of technology on MFIs

Significant growth in the digitization in microfinance and the affordability of the internet in India combined have allowed MFIs to develop customer-centric approaches. It has enabled paperless onboarding, disbursement, and repayment of the loans. Increased adaptability of the technology can also help MFIs to offer customized products and services based on their consumer base, by intelligently learning the necessities of the customers. Advancements in technology such as big data, AI/MI, and predictive analytics can be used by MFIs to acquire information and provide more relevant services. For instance, MFIs can customize the repayment period for a farmer by aligning it with the crop cycle, for efficient repayment solutions. This can add value and meaning to the MFIs’ goals. 

All in all, integrating technology into MFI can be beneficial for both banks and the people. It enables so many things and bridges the gap that previously existed because of traditional banking methods. This advancement can effectively improve the efficiency of MFI by allowing it to reach more people, and also in simplifying the loan process. This can support even more rural families in India by providing them with micro-loans they deserve.