Startups, fintechs propel MFIs with 30% CAGR
25% of the surveyed MFIs utilize RPA for their customer onboarding processes:
The internet revolution and the availability of cheaper mobile devices have propelled the growth of digitally literate communities and enabled traditional micro finance institution (MFI) borrowers to evolve into more tech savvy, social mediafriendly and experience-driven customers, says a special report titled `Rejuvenating Microfinance in India – Embracing Digital’ brought out by Micro Finance Institutions Network (MFIN), the association of 58 NBFC-MFIs and 39 associates including banks, small finance banks (SFBs) and NBFCs, and the knowledge partner KPMG.
The report finds that traditional branch-led, field officer-driven models are proving to be expensive in a pricing cap regime and MFIs have now begun to adapt to new technology trends for faster loan origination, efficient customer service and flexible loan requirements using alternate channels, the report adds.
FAST-TRACK TRANSITION
While the MFI sector has managed to grow its gross loan portfolio (GLP) to `2.31 trillion as of September 2020 from `0.34 trillion in 2014, at a CAGR of 30%, the sector has also seen a surge in the number of micro-lending startups and financial technology (fintech) entrants. The entry of these new-age players, says the report, has enabled the sector to fasttrack its transition to a more efficient digital model that has the capability to serve a larger population at lower costs. NBFC-MFIs that command the second largest share of India’s microfinance portfolio have been at the forefront of this transition.
While fintech companies have traditionally played the role of disruptors in this sector, some fintech companies have since turned into enablers for traditional MFI players.
Some of the key findings in the report: Technology is helping with early warnings for MFI l oan portfolio and designing customized financial products based on customer data.
• Currently, 1 out of 4 surveyed MFIs utilize robotic process automation (RPA) for customer onboarding processes and 9 out of 10 MFIs surveyed disburse l oans through cashless channels.
• 50% of the MFIs have implemented both CBS and CRM.
• 12% of MFIs have neither CBS or CRM implemented.
• 50% of the MFIs are leveraging emerging technologies like AI & ML for credit assessment.
• Less than 40% of MFIs are leverage emerging technologies for customer onboarding.
• Almost 9 out of 10 MFIs disburse loans through cashless channels.
• Most common cashless channels are NEFT/RTGS/IMPS followed by AePS.
• The emergence of new fintech companies is disrupting the microfinance lending value chain and improving financial access to microfinance customers.
• Identification technologies are allowing for better KYC procedures; alternate credit scoring is enabling deeper customer insights; and cashless loan disbursement is improving with mobile-banking technologies.
KEY CONSIDERATIONS
Pointing out that the high touch model followed by MFIs warrants a large employee force on the field, the report says the sector experiences nearly 25-30% annual attrition at the field level. “MFIs act as the first step to formal credit for most customers and these institutions are also the first step to formal employment for many of its employees. Significant attrition levels lead to continuous efforts
to hire, train and develop staff members. Employee expenses contribute to a large share of operating expenses for an MFI. Without hands-on experience and knowledge, it would be very difficult for these employees to promote digital channels with conviction to their customers,” it adds.
ALTERNATE DATA SCORING
By implementing alternate data scoring technology, MFIs can perform risk assessment on customers on broader parameters that were not even considered before, says the report. It also states that MFIs can minimize theft, fraud and poor TAT in the loan disbursement process with the introduction of cashless disbursements. They have implemented early warning systems and GPS tagging which are enabling them to track their field agents and ensure that the meetings are being conducted. They have also implemented payment gateways and tied up with partners to enable digital collection channels, reveals the report.
TECH VALUE CHAIN
Stating that the key elements of an MFI’s value chain are sourcing, customer onboarding, risk assessment, loan processing, product management, loan management and collections, the report points out that several fintech companies are offering solutions that use machine learning technologies for improved lead identification. Fintech companies have also been employing various technologies like geo mapping, AI, behavioural science and data analytics to create modular solutions for lead identification, tracking and management.
“Many MFIs also use geo mapping for their field/loan officers. Some MFIs, in partnership with financial technology companies, are using a judgmental scoring model wherein insights spanning the last one year are converted into weights and automated to give realtime decisions. Several MFIs, including some next-gen start-ups, undertake 100 per cent cashless disbursements,” the report says.
IMPLEMENTATION CHALLENGES
According to the report the challenges faced by MFIs are unique as they often deal with stakeholders with limited formal education and financial literacy. With technology making inroads into the sector, there are mixed responses on how the customer service equations are changing. “A key consideration is to offer customers the necessary value proposition to attend group meetings and maintaining group dynamics, post adoption of cashless collections. As the human touch decreases, it is important to ensure that the loan is utilized responsibly, which will also have a trickledown effect on the repayment rate,” states the report.
Infrastructure and affordability are also key challenges in rural India, where companies struggle with last-mile connectivity, it says.
FUTURE ROADMAP
The findings of the study also indicate that the microfinance sector is evolving with fintech partnerships and will see increased investments in digital capabilities in the years to come. Nearly 75% of the surveyed MFIs have alliances with fintech companies, while the remaining MFIs are planning to explore fintech alliances as a part of their IT roadmap.
Some key observations in the study are:
A customer-centric approach with an optimal balance between technology and human touch will be critical for MFIs. Across the transaction cycle, MFIs have opportunities to leverage innovations from fintech companies. Machine Learning and alternate data capabilities are expected to disrupt the microfinance sector by serving as major differentiators in sourcing and improving asset quality.
The connected enterprise architecture will be key for enabling efficient and scalable microfinance operations. Integration with Account Aggregator (AA) platforms to facilitate effective risk management solutions, will provide MFIs with the opportunity to streamline costs and build more reliable credit profiles.
Increased awareness and adoption of digital platforms along with wider acceptance network for digital payments shall help reduce dependence on cashbased transactions, which in turn shall pave the path for MFI customers to adopt digital repayment channels.