Microfinance in the Digital World: Seven Questions for the Future

Poverty is a crucial impediment to development in most emerging countries. The significant difference in income distribution is the critical factor driving widespread poverty in India. More than half of India’s population relies on agriculture and related activities because it is predominantly an agrarian economy.

The manufacturing and tertiary sectors have been steadily improving over the previous two decades, but it has still a long way to go until outgrows the latter. Due to the inadequate functioning of the tertiary economy, the major rural component of the Indian population appears to be without formal financial services. It’s one of the main reasons why the agriculture industry has experienced such rapid expansion in the past.

Microfinance banking software lags not only in terms of structure and operations but also in terms of general financial procedures.

What are some of the risk factors?

Financial services supply is not without danger and controversy. Predatory lending practices and a lack of risk management by a small number of MFIs have raised critical and fundamental criticisms of lending practices as the sector of microfinance mobile banking app developed and evolved.

Although relative movements have taken place in other nations, it is an excellent example of microfinance’s perils. The protests became violent, and the movement’s leaders asked that Congress adopt a 10-year amortization period with an APR of no more than 8% for all loans.

There have been incidents of suicide in India due to unpaid microcredit loans. A debt cycle can lead to personal financial devastation when interest rates soar and borrowers cannot repay their obligations.

Micro Finance Institutions (MFIs) match your low-interest rate and robust social performance criteria. While microfinance is a crucial instrument that helps millions of people, we realize the necessity of promoting best practices that help OneSeed and our partners achieve their poverty-reduction goals.

Is traditional MFIs capable of digital transformation?

MFIs must be willing to undergo digital transformation to turn the obstacles highlighted here into possibilities. Many MFIs, such as those who are members of the Microfinance solutions, are already on their way to becoming digital, but only a few have finished the process. Many companies have developed digital tools for their loan officers, incorporated credit scoring technologies into their procedures, and converted them to digital payment process.

Can MFIs engage in SME (small and medium enterprise) credit innovation?

SME lending is ablaze with innovation after decades of stasis. Three economic structure changes enable this innovation by bringing formerly informal enterprises toward greater formality.

Supply chain financing is gaining traction, led by giant firms that supply items to local merchants or buy agricultural output.

Thanks to eCommerce, millions of SMEs have connected to digital payment solutions, undoubtedly the most powerful driver.

Because they currently service SME clients and are adept at underwriting at least the lower end of this segment, many MFIs have an immediate advantage in engaging with these market opportunities. They can build lending systems that leverage electronic data trails in the future.

They can also develop partnerships with large distributors, agricultural buyers, or eCommerce companies, taking advantage of the fact that these platforms do not view lending as a primary business and generally accept lenders as partners.

In a digital world, will customers be adequately protected?

We must continue to ask this question since digital payment solutions expose customers to new hazards. Digital loans might be straightforward to obtain, but they can also be highly costly. We get a fair understanding of the hazards involved in any country, where few digital loans are available by phone:

• Many clients are in default
• Many digital loans are utilize for sports betting
• Costs are substantially higher than microloans
• A large number of people have been added to credit bureau blocklists

Another significant risk is data protection: customers seek confidence that their personal information will remain private, both as a fundamental right and because they are concerned about hackers, fraud, and mistakes. MFIs’ vulnerability to cybersecurity risk grows as they go digital.

In a digital microfinance world, will customers be adequately protected?

Clients must continue to ask this question since digital financial services expose customers to new hazards. Digital loans might be straightforward to obtain, but they can also be highly costly. You will get an idea of the hazards involved in the country, where few digital loans are available by phone:

• Many clients are in default
• Many digital loans are utilized for sports betting
• Costs are substantially higher than microloans
• A large number of people have been added to credit bureau blocklists

Will MFIs join the digital lending revolution?

Whether it’s group guarantees or individual repayment ability assessments, MFIs swear by their traditional underwriting processes. These high-touch approaches frequently provide repayment rates that other lenders can only wish for. The system not only anticipates a customer’s ability to repay but also improves incentive to repay through peer pressure, personal contact, and the promise of continuous credit availability.

The algorithms create using Big Data and Machine Learning, on the other hand, lack most of the motivational factors and are primarily gear to anticipate payback. As a result, many of today’s algorithm-based lending have high default rates, requiring high-interest rates.

Can MFIs engage in SME (small and medium enterprise) credit innovation?

SME lending is ablaze with innovation after decades of stasis. Three economic structure changes are enabling this innovation by bringing formerly informal enterprises toward greater formality:

• Governments in Latin America and other regions are forcing SMEs to issue electronic invoices, primarily for tax purposes. The generated data trail is use for digital lending by lenders.
• Supply chain finance is gaining traction, led by giant firms that supply items to small merchants or buy agricultural output.
• Perhaps the most potent factor in eCommerce, which connects millions of SMEs to technological platforms.

Because they currently service SME clients and are adept at underwriting at least the lower end of this segment, many MFIs have an immediate advantage in engaging with these market opportunities. They can build lending systems that leverage electronic data trails in the future.

They can also develop partnerships with large distributors, agricultural buyers, or eCommerce companies, taking advantage of the fact that these platforms do not view lending as a primary business and generally accept lenders as partners.

Conclusion

Although it has come a long way, the microfinance sector can use technological advancements to advance loans to India’s rural population. This shift necessitates challenging retraining and employment decisions, which should be handle more openly in the industry. Investments in data analytic capabilities are require and competence at the board level to drive the change.