As we step into the second quarter of FY 2024, the trending buzzwords in fintech domain are AI, Cryptocurrencies, Big Data etc and how they are transforming the Digital Banking. Despite its relatively modest footprint in the financial world, Microfinance has experienced substantial growth in recent years and remains a significant force, especially in developing countries.
Microfinance has emerged as a potent tool in addressing financial inclusion and poverty alleviation worldwide. This article aims to elucidate the functionality of microfinance, its mechanisms, and its impact on individuals and communities.
One classic example is of Anganwadi workers, where women belonging to low-income group collaborate & create an activity group and generate income for the lower-income group that can use the Microfinance as an effective tool in fueling their working capital needs.
Microfinance groups operate on a flexible repayment schedule, allowing members to choose from weekly, biweekly, fortnightly, or monthly intervals. This adaptability caters to the diverse financial needs of the group members. It is a group funding, where the group head is responsible for all the group activities.
With 4 to 10 members per group, a designated leader oversees activities and ensures accountability, even in the event of defaults. The Microfinance Center’s activation and deactivation capability enable efficient management, while regular visits from the Center Manager provide support and helps to audit the end use of the funds. NBFCs (Non-Banking Financial Company) and Banks offer small-ticket loans based on group activity, fostering financial inclusivity.
To ensure effective oversight, a feature called the “Day of the week of the month” is incorporated. On this designated day, the Center Manager conducts visits, providing valuable insights and support to facilitate smoother operations.
Microfinance groups form an integral part of the financial landscape, with NBFCs and Banks actively engaging in supporting their endeavors. These financial institutions primarily offer small-ticket loans based on the group’s activity and repayment status, fostering financial inclusivity.
1. Higher interest rates
The Interest rates are quite higher as compared to the banks making it difficult for loan seekers to avoid MFI loans.
2. Dependence on banking system
There is substantial dependence on the Indian banking system, presenting challenges that fintech solutions, like Pennant, aim to address.
3. Risk of bad debts increases
As these are collateral free loans, there is no security involved and at times the risk of having bad debt increases.
4. Accessibility issues
Rural borrowers may not be aware of MFIs and their benefits, leading to a lack of support. Accessibility remains a challenge. End user reports can be digitised and discussed while onboarding any repeat customers.
5. Lack of information
Information of rural borrowers changing centers or Groups while defaulting payments in one group.
The MFIs can cater to customers by offering solutions driven by technology like AI, Machine Learning etc. Engage these technologies to study patterns by industry and also alert with any early warnings to banks to guide customers who are probable delinquencies.
Leveraging technology is paramount in overcoming the challenges MFIs face. It empowers the sector to extend loans to rural communities with heightened efficiency and effectiveness, showcasing a commitment to innovation in financial inclusion.
1. Implementing technology
Technologies like Machine Learning & AI can help to have on cloud data that helps in integration of data. This makes it easy for centres to access data from anywhere anytime, reducing the manual workload. Thus, smoothening the entire transaction journey for all the groups.
2. Embracing digitalisation is the need of the hour!
Streamlining backend operations through automation empowers MFIs to monitor transactions effectively, cutting operational expenses. Online disbursals replace cash, boosting efficiency.
3. Implement mobile solutions
The MFI centres should focus more on implementing mobile solutions, will help reduce paperwork and reduce the complexity of the lending process.
4. Utilizing data analytics
Allows MFIs to assess risk better, identify trends, and tailor financial products to meet the specific needs of clients.
At Pennant Technologies, our highly configurable, scalable and resileint lending platform has built-in core powerful capabilities to equip Microfinance Institutions to effectively meet the demands of its customers and drive agility in its operations based on the market demands. Our future-ready lending platform helped a leading NBFC better serve their customers and accelerate growth of their microfinance loans portfolio.
In the next blog, I will cover the powerful functionalities of a future-ready lending platform like PLF (Pennant’s Lending Factory Application).
Reach out to us at marketing@pennanttech.com for any queries related to Microfinance lending.
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