The microfinance industry in India is helping to bridge the financial inclusion gap, bringing much-needed financial services to the low-income and underserved segments. What traditional financial institutions fail at, microfinance achieves by providing small loans, insurance, savings and other financial products that promote entrepreneurship and inclusion. The market comprises a mix of microfinance institutions (MFIs), NBFCs, and self-help groups, which are supported by government initiatives and a healthy regulatory environment.
Given its critical role in driving economic empowerment and poverty alleviation, the microfinance segment will be crucial to India achieving its ambition of becoming a $5 trillion economy by 2025. And despite this industry's challenges, not the least of which is high interest rates, the microfinance market is expected to expand at a CAGR of 12.58% from 2024 to 2034.
Advances in technology and the transition to a digital ecosystem are powering the segment to provide on-demand products and services while making the entire experience frictionless. Plus, technology makes it cost-effective for MFIs to make their services accessible even to remote areas.
The Role of Technology in Driving the Microfinance Sector in India
Technology is the cornerstone of making financial services more accessible for India's underserved and unserved markets. Tech innovations are expanding opportunities for MFIs while creating new engagement channels. Technological advancements are also proving invaluable in maximising operational efficiency and productivity. Forging meaningful partnerships with insurtech providers can arm microfinance institutions with future-proof technology to drive financial inclusion and business growth.
Here’s a look at how MFIs in India can make the most of existing and emerging opportunities and be a part of the nation’s growth story by adopting the latest tech solutions.
Efficiency Gains
AI-powered automation is not only leading to efficiency and productivity gains, but it is also reducing the dependence on manual intervention and the risk of manual error. From risk assessment to loan processing, automation is streamlining operations, reducing costs for MFIs and allowing them to service more customers without expanding their teams. In addition, data analytics is empowering MFIs to identify inefficiencies and bottlenecks. This, in turn, allows them to optimise resource utilisation to bring in greater efficiency and cost savings.
Enhanced Customer Experiences
Microfinance institutions in India can reach out to existing and potential customers through the channels of their choice, including social media, messaging apps, mobile apps, and more. Seamless interactions, real-time support via chatbots and intuitive tools to manage one's finances make customers feel more in control of their financial goals. This way, positive experiences begin even before the customer enters the sales funnel.
What is even better is that technology tools enable microfinance providers to ensure satisfying experiences throughout the customer’s lifecycle. This starts right from onboarding, where tech advancements allow MFIs to offer a paperless and agile application process, assess creditworthiness in minutes and even complete KYC through e-document verification.
Personalisation
AI-powered big data analytics allows MFIs to make the most of data from diverse sources to personalise customer experiences, offer recommendations and proactively address individual needs. Data analytics also powers cross-selling and upselling while helping MFIs discover new opportunities and markets. Plus, personalised notifications and alerts keep customers engaged.Â
AI-driven analytics tools offered by leading insurtech providers in India provide MFIs with insights into customer behaviour at a granular level. This provides deep insights into your target market's spending habits, transaction patterns, financial preferences and needs. This allows you to tailor products and services to their needs and project your brand as one that understands and cares about the customer.
Predictive Analytics
This is one aspect of data analytics that can help microfinance institutions proactively address market needs and build a competitive edge. By analysing historical data, they can gain valuable insights into future trends. The most significant advantage is the ability of AI/ML-powered tools to extract structured and unstructured data from diverse sources to drive informed decision-making. For instance, for an agriculture-driven economy like India, predicting rainfall levels for the next monsoon can help microfinance providers tailor loans for farmers and create awareness about their products well in advance.
Underwriting and Disbursing Loans
Creditworthiness checks have become quick and easy with the availability of tech tools. MFIs can collaborate with insurtech providers to integrate scoring models to power real-time loan decisions. Technology also helps reduce the cost of loan underwriting. When costs to the MFI are minimised, they can pass the savings on to customers.
In addition, technology has brought convenience to cashless loan disbursal through IMPS/NEFT/RTGS and Aadhar-enabled Payment Systems. In fact, technology has enabled host-to-host banking for real-time loan disbursal.
Real-Time Digital Payments
India’s Unified Payment Interface (UPI) is easing service provision for MFIs, driven by the rapid penetration of smartphones nationwide. The penetration rate of smartphones was recorded at 71% in 2023, which is expected to reach 96% by 2040. MFIs are integrating UPI to offer secure and swift transactions, a trend that aligns with the government’s push for a digital, cashless economy. It also caters to the preferences of India's young, tech-savvy population and allows MFIs to ensure financial accessibility.
Digital payments are witnessing a massive surge in the country, with transaction volumes registering 42% year-on-year growth in FY2023-24. Transaction volumes via digital means are projected to soar from 159 billion in FY2023-24 to a whopping 481 billion by FY2028-29, with the transaction value growing from â‚ą265 trillion to â‚ą593 trillion during the same period.
Buy Now Pay Later
One of the most essential services to emerge from the digital payment revolution is Buy Now Pay Later (BNPL). It is redefining purchase behaviours and giving the average Indian significantly greater financial flexibility. With the ability to process credit requests almost instantaneously without compromising creditworthiness and risk evaluations, MFIs are enhancing customers’ buying power. On the other hand, flexible, digital repayment options, including via UPI, are making loan repayment affordable and convenient for borrowers.
Fraud Detection and Prevention
The finance sector is a key target for cybercriminals. Digitalisation and an increasingly interconnected ecosystem have expanded the vulnerable attack surface manifold. This has made using advanced technologies to strengthen cybersecurity an imperative for the sector and MFIs are no different. AI/ML analyse vast datasets in real-time to identify customer behaviours and patterns. This allows the identification of anomalies as they occur. Technology tools offered by leading insurtech companies in India empower MFIs to tackle fraud proactively. Multifactor authentication, the use of biometrics and the protection of customers’ sensitive data are all powered by technology.
The Rise of RegTech
The regulatory landscape is undergoing rapid evolution as financial watchdogs, including the RBI, work to protect consumer interests across digital financial channels. With the support of regulatory technology or RegTech, microfinance institutions in India are seamlessly navigating complex regulations and ensuring compliance across the board. RegTech facilitates compliance by automating repetitive tasks, enhancing data analysis capabilities, and powering risk analysis and management. It is positioning the microfinance industry for sustainable success.
The Future of Microfinance in India
Loan portfolios of microfinance lenders rose 24.5%, year-on-year, in FY2023-24, with the outstanding Gross Loan Portfolio growing 22.03% to reach â‚ą3,48,339 crores by the end of March 2023. Compare this to the sluggish growth of traditional banks, which stood at 4.5% for FY2023. Multiple factors are expected to continue to drive the growth of microfinance in India including:
Strong growth in demand for credit
Regulatory support via government initiatives and favourable regulatory frameworks
The global focus on financial inclusion
Advances in technology supporting cost-effective service delivery to the remotest regions
Microfinance institutions that forge meaningful partnerships with insurtech solution providers will position themselves ideally to capture emerging opportunities. For instance, Zopper powers banks, NBFCs and MFIs with customisable, flexible and scalable plug-and-play tools to stay ahead of the curve. These technology tools integrate seamlessly with the financial institution’s existing digital ecosystem to help them cater to the evolving needs of today's consumers.
Bibliography (Last accessed on September 16, 2024)