The microfinance sector has evolved rapidly since Muhammad Yunus pioneered the movement around three decades ago. India, one of the fastest-growing economies in the world, banks on microfinance for sustainable growth and economic development due to the significant rise in the number of micro, small, and medium (MSMEs) seeking swift, organised, and streamlined access to credit, loans, and financial services.
The average loan size dispersed to Indian MSMEs was 9.74 million Indian Rupees in the second quarter of 2023 – the highest-ever recorded, indicating the sector’s robust growth.
The growth can be attributed to a few factors, including the entry of tech in finance and a gradual shift away from field-officer or branch-led lending. Adopting fintech tools has paved the way for swift loan origination, improved customer experiences and service, accurate fraud detection, and opened the doors to data analytics for enhanced prediction and risk assessment.
This article explores the role of tech in finance, especially in revolutionising the operational capacity of microfinance institutions and what we can expect in the future.
Current State of the Indian Microfinance Sector
The Indian microfinance sector grew by 21% in the financial year 2022-2023, with a total of Rs 3,19,948 crore dispersed against Rs 2,53, 966 crore in the financial year 2021-2022.
Microfinance institutions (MFIs) and NBFCs dispersed the lion’s share, lending Rs 1,24, 063 crore, closely followed by traditional lenders, including banks. These figures indicate the sustained demand for microfinance services in India.
The Government of India has been instrumental in driving this demand and transforming the face of the Indian microfinance sector. For example, over 500 million bank accounts have been opened thus far under The Pradhan Mantri Jan-Dhan Yojana (PMJDY), which was rolled out in 2014.
Additionally, tech adoption in finance accelerated further with the Digital India program aimed toward converting India into a digital economy.
India’s push toward a digital financial model is aided by Aadhar, enabling financial technology (Fintech) to roll out electronic ‘Know Your Customer’ (eKYC) authentication services.
Tech’s Impact on Microfinance Institutions
The onset of tech in finance has opened up many opportunities for MFIs, allowing them to improve client outreach, operations, and decision-making. It will continue to transform how financial services are delivered.
Let’s explore how MFIs leverage technology to improve efficiency across the value chain.
1. Promote Awareness
The role of tech in finance is pivotal in boosting product awareness among Indian microfinance users by joining hands with incumbent MFIs. One way Fintech companies add value is by building chatbots to help customers determine whether they are eligible for a loan.
Many companies also leverage augmented reality (AR) to assist customers with low literacy in interpreting complex written material.
2. Efficient Customer Onboarding
Tech in finance is also revolutionizing customer onboarding, making it easier for lenders to verify customer information, evaluate creditworthiness, and streamline the application process.
The advent of new-age Fintech solutions has enabled Aadhar-linked KYC, e-documents verification via the DigiLocker application, and video identification. Furthermore, MFIs are also leveraging artificial intelligence (AI) and machine learning (ML) to automate customer onboarding, fraud detection, and customer authentication.
3. Judgemental Scoring Models to Underwrite Loans
Many MFIs collaborating with fintech firms rely on judgemental scoring models, wherein critical insights over the past year are converted and evaluated to facilitate real-time decision-making.
Additionally, tech in finance is also enabling the use of ML to assess unstructured data points covering social and behavioral attributes and financial data.
4. Loan Disbursement
Cashless disbursements through RTGS/NEFT/IMPS and Aadhar-enabled Payment Systems (AePS) are becoming increasingly popular as more and more MFIs are undertaking 100 per cent cashless disbursements. This microfinance technology offers host-to-host banking to enable real-time loan disbursements.
5. UPI and Aadhar Pay
Unified Payment Interface (UPI) and Aadhar Pay are becoming increasingly popular among MFIs as smartphone penetration is at a record high in India. Many buy-now-pay-later (BNPL) companies primarily catering to the GenZ and millennials allow their customers to repay loan amounts through UPI.
Alternatively, borrowers can also use Aadhar Pay to repay loans at kiosks equipped with the BHIM Aadhar App and biometric devices.
6. Leveraging AI for Fraud Detection
Around 58% of AI applications in the finance sector are used to curb fraudulent activities. The technology primarily leverages data analytics and advanced algorithms to spot anomalies, track patterns, and, most importantly, fraudulent activities.
ML algorithms allow AI systems to learn from past data, respond to evolving fraud techniques, and detect suspicious activity accurately.
Tech in finance is crucial in transforming India’s microfinance sector. While the demand for microfinance services continues to march upward, the average loan size dispersed by MFIs is also rising, indicating its crucial role in aiding India’s economic growth.
Government initiatives coupled with the entry of a host of Fintech startups have laid a solid foundation for turning India’s aspirations of becoming a digital economy into reality. The increasing partnership between Fintech startups and MFIs will redefine how microfinance services are delivered.
Finezza offers a wide range of products, including bank statement analyser, credit bureau data analysis, and loan origination systems that enable MFIs and financial institutions to make informed decisions. Our document identification framework facilitates swift and automated document verification.
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