NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Tuesday, February 28, 2017

Bharat Financial Inclusion, India’s second-largest microfinance company, has linked its credit systems to the national database to speed up cheaper financing to those at the margins.

Formerly SKS Microfinance, Bharat Financial chose Deogaon, a village 70 km from Rajasthan’s capital Jaipur, to harness the benefits of Aadhaar for rural citizens. The initiative will likely reduce transaction costs by about 70 basis points in two years for Bharat Financial that lends at 19.75% a year, the lowest rate in the microfinance industry.

India’s micro-loan borrowers need access to inexpensive credit as funding costs in the $2-trillion South Asian nation is among the highest in economies of comparable size. Credit costs for prime category borrowers start at about 8.5% a year for low-risk collateralised loans, such as home mortgages.

The company expects the cost to income ratio to fall to 40% in two years from 47% at present. The technology rollout will involve a three-step process – Aadhar-based and online customer documentation, credit bureau authentication and e-signing. The system will cut down the time taken for loan approval from seven days to seven minutes.