How Adoption of Digital Technologies and Payments Methods are Boosting Delivery of Credit in the Rural Areas
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During FY2017-18, the number of adults with bank accounts in India grew to 80per cent, marking a significant rise in the number of individuals with access to banking services. The development was primarily driven by the government’s push for greater financial inclusion through initiatives like the Pradhan Mantri Jan Dhan Yojna, Aadhaar-enabled biometrics, and mobile phone – collectively termed as JAM.
Mobile Phone Usage and Aadhar
India ranks second in the world for mobile phone usage after China with more than a billion connections, while a quarter of these comprises of smartphone users. This user base is estimated to double to over half a billion by 2020. Further, with more than 1.17 billion Indians being given a unique biometrics-based identification, Aadhaar has given a great fillip to the cause of financial inclusion, creating a much-needed bridge between financial institutions and consumers. Furthermore, nearly two-thirds of the country’s population uses mobile phones, a trend which has enabled consumers to access core banking services like payments, remittances and fund transfers, particularly in the rural areas where banks’ branch coverage is low.
Digital financial technologies, or fintech, have spurred a host of mobile applications built to solve specific problems for those segments of the population among which literacy levels and awareness regarding financial services is low. One of the most significant of these is UPI (Unified Payments Interface), an application that allows one to conduct online payments from smartphones through a unique virtual address, not unlike a phone number or email address. The transaction can be carried out as easily as sending an SMS or email, wherein no other details like bank name, account number, or branch codes are required. Moreover, this facility also does not require a smartphone. Rather, one can even transact using a feature phone, through a messaging service called USSD which can be accessed with the help of one’s Aadhaar number. One simply needs to visit the banking correspondent in their town or village. The banking correspondent provides the necessary banking service using a micro-ATM which authenticates the individual’s identity by scanning their biometrics corresponding to the Aadhaar number. Along with the general banking industry, the microfinance sector, in particular, seems to be fast catching up to these changing paradigms.
Digital Transformation in the Microfinance Sector
The demonetization drive in 2016 led to the microfinance sector facing considerable turbulence with lower liquidity levels and disruption in cash flows. As a result, several small and mid-sized microfinance institutions across the country who had to rethink their cash-driven lending methods started looking towards emerging digital payments technologies to lessen their dependence on cash. Since then, digital payment methods are bringing a much-needed technology-enabled transformation in the microfinance sector and aiding microfinance institutions (MFIs) to simplify the disbursement of loans to rural consumers.
According to Microfinance Institutions Network (MFIN), a body of NBFC-MFIs, around 87 per cent of the loans disbursed during the first quarter of FY2019 were done through cashless means. Around INR 11,404 crore was disbursed to over 42 lakh accounts. Further, MFIN also reported that out of 42 members in the body, 28 MFIs disbursed 90 per cent of total loans during FY 2018 through digital methods, while 25 MFIs disbursed all of their loans digitally.
As a result, cashless microcredit disbursements rose to 55 per cent during the second quarter of FY2018 and grew further to as much as 73 per cent during the fourth quarter of the same financial year. On the other hand, this also played a significant role in aiding the recovery of the microfinance sector in India. As on June 30 2018, MFIs in the country recorded an aggregate gross loan portfolio (GLP) of INR 51,878 crore, marking a growth of a massive 53 per cent from the previous financial year.
The adoption of digital modes of payment to deliver credit to clients enables greater operating efficiency for MFIs, both in the short term as well as the long term. But more importantly, it can also be an extremely reliable solution to overcome risks such as frauds and thefts. Further, sustained use of digital payment methods, in the long run, could be useful tools in ensuring greater convenience to consumers in accessing funds, while at the same time, allowing MFIs to leverage data analytics to better understand customer behaviour. In addition, the process of credit underwriting is a particularly complex one for MFIs, wherein determining the creditworthiness of a particular borrower requires considerable documentation and groundwork. Here, digital technologies such as analytics can play a critical role by simplifying the credit underwriting process as well as reducing the time it takes to process loans. Further, with digital records created for each borrower, be it individuals or MSMEs, these clients can build their credit histories and profiles to help them access institutional credit in the future.
The demonetization drive and the subsequent campaigns by the government to create awareness regarding cashless and digital payment methods have undeniably given a boost to financial inclusion. In India, fintech has further introduced more ways to ensure financial inclusion of the masses by taking digitization beyond simply payments to the process of underwriting and providing credit. While there are few MFIs in the country that are truly leveraging fintech and digitization, the majority of the sector still needs to seriously reconsider its existing business models and make way for technology on a larger scale. The faster that happens, the sooner will the country’s masses truly be financially included in its growth story.