Future of IT in Microfinance

Arvind Murarka, Head- IT and Neeraj Kumar Lal, Head- Strategic Initiatives,  Arohan Financial ServicesEvery important development happened on April 18, 2019 when RBI issued draft guide-lines for public comments proposing Regulatory Sand-box (RS) to catalyze innovations by FinTech firms. In a way, it signified the recognition of the disruption technology is bringing in the space of financial services industry, just like any other sphere of life. The draft guideline states, `Areas that can potentially get a thrust from the RS include microfinance, innovative small savings and micro-insurance products, remittances, mobile banking and other digital payments'.

Microfinance industry has witnessed rapid evolution of technology in use, over the last few years. A decade ago, high quality operations and internal controls were riding completely on paper-based, cash-based mechanism and the use of technology was limited to a basic loan management system and MIS. It was considered only appropriate that services for poor and underprivileged were running on antiquated methods. However, subsequent years witnessed rapid change in the landscape with technology enabling almost all the functions within the domain of microfinance. Today, operations in most NBFC-MFIs are characterised by digital origination of loan applications through mobility devices like Tablets/ Smartphones, internet connectivity to run automated processes like e-KYC, Credit Bureau, internal credit rules, validity of bank accounts etc., digitally capturing important customer protection steps like house-hold verification, trainings, group approval by senior officers and loan utilisations, automated creation of loan accounts, availability of repayment schedules/ demands on mobility devices and automated accounting of repayments made by customers. In addition to operations, other functions like Internal Audit, HR, Risk Management etc. also rely heavily on the usage of technology in most of the leading NBFC-MFIs.
Going forward, some key agenda for technology emerging in this industry are ­ a) differential pricing of services basis credit-risk profile of borrowers; b) much wider product range catering to personalised requirements; c) improved client protection regime d) high customer service quality e) quality of life for the front-line staff ensuring better work-life balance. In terms of technology, NBFC-MFIs will further augment the usage of Mobility, Analytics and Cloud services. Ma- chine Learning component has been introduced into such organizations which have been able to demonstrate faster adoption to advancement in technology.

To elaborate some of it in detail, NBFC-MFIs so far have treated all borrowers in a largely uniform manner. On interest rates, what it means is that a very disciplined borrower, even with a long credit history, will get loans at the same rate as a not-so-disciplined borrower, who has been irregular ­ either wilfully or forced by circumstances. Hence, in a way, uniform pricing subsidises sub-standard so for long and creating a more enabling regime to incentivise responsible credit behaviour can be witnessed soon.

Similarly, on the products feature, uniform products are available for all the borrowers of a company, which remain very limited in range. For one, the financials products have continued to be largely credit-only with some basic insurance ones in partnerships with insurance companies. Even players in the space of Banks and Small Finance Banks (SFBs) have not been able to deep-en the product offerings on savings/ deposit/ credit side for microfinance customer base. For loans, parameters like loan amount available for a given number of years' association of a borrower with the NBFC-MFIs, loan tenure, repayment frequency etc. are same for all the borrowers. Against a largely agrarian economy with lumpy cash-flows, which affects almost all economic activities at the bottom of the pyramid to exhibit strong seasonality, microfinance credit has re- individual borrowers at granular levels which should help companies enhance the bouquet of financial ser-vices significantly.

Ensuring client protection and high quality of customer service are other important pillars of the industry, more so because of the vulnerable socio-economic profile of borrowers. It remains important that all necessary information on a product is given to a prospective customer enabling her to compare multiple service providers and making informed decisions. To this effect, robust information dissemination, diligence of field officers and adherence to processes are important. Finally, savings on time and effort to service a client should trans-late to better work-life balance of the field officers who work in highly demanding conditions, almost 12-14 hours a day, six days a week. Technology has substantial role to play in all the above.

While regulator and ecosystem players are ensuring a rapid evolution of IT regime in the industry, there are ways which may propel it further. It is important to realize that IT capability may soon emerge to be the most significant base of competitive ad-vantage in an otherwise very crowded market-place.