The Reserve Bank of India (RBI) has given microfinance lenders the ability to set interest rates on loans with the condition that they are not usurious for borrowers. According to the RBI circular, any collateral-free loan given to a household with an annual income of up to Rs. 3 lakh is an MFI loan.
“The revision of the income cap to Rs.3 lakh will expand the market opportunity and interest rate cap removal will promote risk based underwriting. This reflects the confidence shown by the central bank in the ability of MFIs to responsibly cater to the bottom of the pyramid,” mentions Udaya Kumar Hebbar, CEO, CreditAccess Grameen.
A study by Nabard states that the
microfinance sector in India has the potential to grow at a CAGR of 40% by 2025.Moreover, different studies show that the microfinance network can empower entrepreneurs and communities that generally find it difficult to access formal credit from the banking sector. Microfinance can be the lifeblood for micro-entrepreneurial ventures and play a critical role in the quest for financial stability and growth of MSMEs.
There is no doubt that in the coming days, the microfinance segment of India will be playing a dominant role in the Indian economy. Having said that, in this article let's understand how the Microfinance industry of India is shaping to meet the growing expectations of the nation.
Growing innovation
The introduction of numerous technologies is expected to improve operational procedures and the entire customer journey, according to a KPMG analysis. RPA is being used by several technological companies for KYC, disbursements, repayments, and regulatory reporting. Customers may self-serve and manage their accounts 24 hours a day, seven days a week via chatbots.
MFIs and technology firms might benefit from a number of important advancements in the field of credit information and registration. Understanding the methodology used will assist MFIs reduce the inherent biases associated with present AI technologies, as they increasingly use AI for decision-making.
Due to our country's diversity and size, many financial products that are acceptable in one region of the country may not be good in another. To produce tailored financial solutions, MFIs may use big data, predictive analytics, and AI to understand local value chains, agricultural circumstances, and demographic and sociological variances.
These technologies provide MFIs with a significant chance to improve client experience, raise underwriting robustness, analyze market potential for global development, and manage risks proactively.
Account aggregators model
The microfinance industry will be able to analyze consumers across many data points, including non-financial data, on a single platform thanks to integration and access to account aggregator systems. It is vital for the AA ecosystem to grow and more actors from other industries to embrace this architecture so that data that is presently stored in silos can be accessed through a single platform.
The key benefit of connecting with such a platform is that it is sector neutral and enables access to a variety of data points, including health, skills, and education records, in addition to financial data. Such access will also spur the development of tools that take a comprehensive approach to analyzing client risks.
Implementation of Bharat Bill Pay system (BBPS)
BBPS is an integrated bill payment system that provides clients with a convenient and interoperable bill payment service via a network of agents that accept cash or electronic payments while allowing the utility to collect payment all at once. BBPS is currently a utility payment platform. It can, however, be extended to financial institutions who use the platform to accept consumer repayments.
MFIs can also encourage their microbusiness customers to use BBPS to manage their cash flow. This will assist MFIs increase their cashless collections by reducing cash-based transactions by these consumers.
Co-originating loans
As both types of financial institutions have separate underwriting requirements, systems, and procedures, the Co-origination market is mainly underutilized by MFIs owing to a lack of requisite technical infrastructure to efficiently interact with banks.
Last-mile financial inclusion, on the other hand, will be enabled through collaboration with fintech businesses to build products, processes, and technological infrastructure that are compatible with the ethos of both banks and MFIs.
The Future Path
MFIs have been able to increase their percentage of digital disbursements as the number of bank account holders has increased, but the collection method is still predominantly cash-based. Customers get their loans straight into their bank accounts, however they are often withdrawn from the bank accounts and spent in cash because their ecology is still based on cash.
In January 2021, it was reported that currency notes in circulation were INR 27.1 lakh crores, up 22% from the previous year. If banks servicing rural consumers can push the use of financial technology and digital payment channels, it would encourage people to keep cash in bank accounts and spend/transact digitally, converting the ecosystem into a more digitised one.
