Unlocking Financial Inclusion with Microloan Management Software

Historically, poor credit penetration results in the marginalised sections of society like low-income households, women and Micro, Small, and Medium Enterprises (MSMEs) being excluded from the formal lending channels. However,

the MSME sector plays a critical role in the economic development of India. The share of MSME Gross Value Added (GVA) in India’s Gross Domestic Product (GDP) was 29.2% in 2021-22.

Also, the contribution of the MSME sector to the GDP and the fact that MSMEs have shielded the Indian economy from global economic shocks emphasises their importance for the economy.

The absence of easy availability of credit facilities for the MSMEs forces them to turn to the informal sector, riddled with unfair practices, and they get loans at exorbitant rates. However, with RBI and the government pushing for financial inclusion, microfinance has become mainstream, ensuring the underserved sections have access to formal lending channels.

Lenders face unique challenges when extending credit to MSMEs as they are generally perceived to be high risk, and the small loan size makes the lending cost unfavourable for the lenders. Microloan management software can help lenders overcome these challenges and can aid lenders in promoting financial inclusion.

Microloans and Their Importance

Microloans are short-term loans, generally of small ticket size, offered without collateral. These loans can be availed by startups, micro-enterprises, self-employed individuals and small business owners with low capital requirements.

The ultimate goal of offering microfinance is that the recipient should outgrow the need for smaller loans and be ready to be a part of the traditional banking channels.

Small-scale entrepreneurs or low-income group families with almost no access to financial or lending institutions are the chief beneficiaries of these loans. Microfinance enables credit availability to those who need it the most but rarely get it; microloans bridge this gap.

Microloans fulfil the following objectives:

• Help Reduce Poverty 

By providing credit to the economically challenged sections of society, microloans help them generate income and break the cycle of poverty.

• Women Empowerment 

A large chunk of microloans is offered to women, helping them become financially independent and become active participants in their homes and communities.

• Employment Generation

Funds injected into small enterprises, marginalised sections, and businesses operating in remote areas lead to local job creation and economic development.

• Financial Inclusion

Microloans have been pivotal in bringing the unbanked and underbanked segment of the population into the formal financial channels and have enabled financial inclusion.

The government of India and the Reserve Bank of India have been instrumental in devising policies to encourage financial inclusion, and the growth of fintech has contributed immensely in forwarding this objective.

Role of Microloan Management Software In Promoting Financial Inclusion

Adopting fintech and emerging technology by microfinance lenders is helping them improve their efficiency and promote financial inclusion.

Microloan management software helps automate and streamline the loan process and makes it simpler and more efficient for institutions to reach and serve borrowers in the following four ways.

• Expanded Reach 

The limited reach of the lender network can be a significant challenge for small businesses operating in remote or rural areas. Microloan management software can be seamlessly integrated with mobile banking systems, making it possible for loan officers to process and manage loans, even without a physical setup or computers.

Borrowers also find it convenient to interact with lenders and manage their loans through their mobile phones.

The loan management software, which can easily be deployed on a mobile device, enables lenders to expand their reach and penetration and allows easy interaction between the borrower and the lenders. Lenders can offer cash flow-based loans and sustain the momentum of microfinance and financial inclusion.

• Enhanced Risk Assessment 

Automated microloan management software enables better risk assessment by integrating advanced analytics and data-driven algorithms. Lenders often hesitate to offer loans to those unable to provide requisite documents and collateral or do not have a credit history.

Lending automation tools help lenders get a more comprehensive view with the help of customised Machine Learning Models, which can provide better insights into repayment patterns and predict defaults.

Microfinancing software also includes external data sources like utility payment history and demographic aspects for risk assessment, allowing those excluded from traditional lending to access credit.

• Tackle The Issue of Small Loan Value

Another challenge microfinance lenders face is the small ticket size of loans, which makes these loans financially unviable for them. The software enables the automation of tasks like data entry, loan processing, and loan servicing and helps reduce manpower costs to a great extent.

Employing the microloan management software helps reduce expenses associated with microfinance lending and helps lenders offer smaller loans at lower rates without compromising their cost viability.

• Improved Debt Management and Collections

Microloan management software helps lenders simplify and smoothen the complex and time-consuming process of debt management and collection. The software helps in better debt collection and tracking of loans by automating tasks like payment processing, interest calculations, and loan account updates.

Most loans are mapped to e-payment channels like direct debit mandates or wallets that make it easier for the borrower to make timely repayments. Improved customer engagement encourages timely repayments; borrowers can track loan repayment schedules, receive timely reminders and track payments in real time.

Lenders gain from automation due to reduced errors, better loan portfolio management and lower defaults. Borrowers, on the other hand, benefit from real-time tracking of loans, a more transparent and user-friendly collection process which reinforces their faith.

To Sum It up

Evolving fintech and its quick adoption by financial institutions is paving the way for overall economic prosperity. Loan automation helps lenders enhance their reach and reduce risk and costs. For borrowers, it comes with advantages like the availability of more customer-friendly systems and helps underserved communities access credit.

Adopting technologies and customising services also helps lenders adapt to changing preferences and market conditions.

Finezza offers a suite of products for lending lifecycle management that can support the entire lifecycle management for microloans.

Get in touch to learn how the solutions offered by Finezza can assist you in your lending business