April 19, 2024

Introduction

Financial independence allows households to survive and run their families in this modern world. As of the fiscal year 2023, India’s financial inclusion index stood at 60.1, according to the Reserve Bank of India (RBI). This ratio has significantly improved from 43.7 in 2017, however, despite the successful activities of the government and private microfinance institutions, India still lags when it comes to financial inclusion.  Financial inclusion is promising for the country’s economy and its citizens, as it increases the accessibility, trust, and active usage of financial services. Traditional banking systems often lack the resources or investment required to reach underserved populations. Today, microfinance institutions are working closely with the IT sector on the latest trends and technologies to cover this gap and serve the underserved.

Blockchain technologies are one of these latest technological trends in the market and are considered to be safe, effective, and fool-proof. It records all the transactions of a financial organization or any business, across a series of computers so that the transactions cannot be modified or deleted retroactively. Microfinance is one of those industries that can utilize this technology to reach families from diverse rural backgrounds and help them lead a better life through various customized policies or schemes. In this blog, let us discuss how blockchain microlending technology can transform microfinance and enhance its operations to serve financial inclusion purposes.

Challenges faced by traditional financial systems

  • Microfinance incurs high operational costs, manual processes, and other intermediaries often reducing the overall profitability and efficiency.
  • Data verification for providing loans or authorizing loans for SLGs’ or JLGs becomes complex without the interference of blockchain technology.
  • Assessing the investment or loan lending risks is complex without blockchain solutions.
  • MFI often experience delays in the payments, these can make the borrowers vulnerable as loan repayment rates can be high.

Reasons why developing microfinance institutions should invest in microfinance blockchain?

Blockchain spending in India increased by 103.4% in 2018, reaching US$ 154.8 million. Over the forecast period (2019-2025), blockchain spending is expected to record a CAGR of 47.3%, reaching US$ 4,348.3 million by 2025.

  1. Convenience of Blockchain Payments in India

In a survey conducted by CryptoTrends, over 60% of Indians found it convenient to use blockchain payments. Despite not being legally recognized, there was a surge in the use of cryptocurrencies in India.

     2. Microfinance and Digital Adoption

The Reserve Bank of India (RBI) reported that 92% of total disbursements by NBFC-MFIs (Non-Banking Financial Companies – Microfinance companies in India) were through cashless modes during the fourth quarter of 2019-20. This signals greater adoption of digital means of payment by MFIs.

How to integrate blockchain technology into microfinance?

Steps to integrate blockchain in microfinance.

  • Understand the challenges of your business needs and try to figure out how blockchain technology can make a difference. Some of the important reasons include effectively controlling fraud and lowering overall costs.
  • Choose a blockchain platform that suits your needs and experience the seamless flow of data within the organization.
  • Develop customized services or adapt whatever is in the market to make the process efficient.
  • Secure transaction history and records by automating the lending process using blockchain.
  • Identify records and streamline the KYC process by implementing blockchain solutions.
  • Create specific digital identities for clients based on transaction and purchase history to streamline the process.
  • Secure your data using blockchain for decentralized data storage and sharing.

Benefits of integrating blockchain into microfinance

  • By eliminating all the physical operational costs and resources, blockchain can lower the overall transactional charges for microfinance organizations and clients.
  • All of the institutions’ processes can be centralized and secured as the computers store them digitally.
  • It can help an institution to earn the trust of the investors and also establish a great relationship within the community.
  • Blockchain is proven to significantly reduce the verification and transaction settlement times.

Conclusion

All in all, it is now more evident than ever that blockchain technology is transforming the fintech landscape in India. This technological advancement enables Microfinance Institutions (MFIs) to offer instant short-term credit, small loans, and customized pay-later options. These factors are significantly contributing to the improvement of the financial inclusion rate in the country. As a result, many underserved families now have access to financial services from these MFIs, leading to a better quality of life.

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