March 23

Elliot Rosenberg

The Demonetization Crisis May Be Over, but the Time for Tech Upgrades in Indian Microfinance Is Now

The unexpected withdrawal of currency by the Indian government in November 2016 – in an apparently unsuccessful attempt to tackle black money – had a cascading effect on the cash-dependent microfinance sector. Immediately after the banknote demonetisation, acute cash shortages led some Indians to withhold loan repayments, whereas others refused to pay their installments because of loan waiver rumours stoked by politicians.

But now, with the impact of demonetisation fading away, the sector has recovered. India’s for-profit Non-Banking Financial Company – Microfinance Institutions (NBFC-MFIs) portfolios grew 43 percent in the 2017 calendar year, according to MFIN. Although this brings a sense of relief to many MFIs, demonetisation has made it clear that MFIs need to invest in technology that can manage, monitor and track electronic transactions, and also help them understand customer behaviour in order to make better credit decisions. As of now, 82 NBFC-MFIs are servicing more than 24 million non-unique customers (due to cases of multiple loans from different MFIs per borrower) in India, and only the right mix of technology can help these MFIs win customers and maintain operational efficiency.


Reactive, not proactive

Yet for most MFIs, post-demonetisation technology upgrades have been a reaction to the situation rather than a strategic technology migration for long-term success. After cash shortage and loan waiver rumours led the microfinance sector to write off approximately INR 7,000 CRs (US $1.1 billion) in bad loans after demonetisation, most MFIs took the quick measure of adopting Core Banking Solutions (CBS). These allow financial services providers to collect digital payments via the National Automated Clearing House (NACH), preventing customers from missing payments because the amount gets directly debited from their accounts. CBS has long formed the core part of retail banking, but of late, the MFI sector has also found value in it: It helps in achieving operational efficiency, facilitates the speedy processing of transactions using a centralised server and easily integrates collection payments using NACH.


Complications – and opportunities – in technology

However, MFIs have faced a number of complications in adopting CBS. A lack of tech talent that can quickly identify the right solution for their need has caused some to delay rollout, or to spend more time than required on implementation. Others have failed to deeply consider the consequences and tradeoffs of different CBS solutions – such as a failure to integrate advanced solutions with legacy systems – leading to upgrades quickly becoming obsolete.

Although moving to a CBS helps MFIs accelerate loan disbursement and collection processes, rural India’s cash-based economy creates complexities for standardized solutions. For instance, not all MFI customers have access to points of service where they can deposit money in their bank accounts in order to be debited via NACH.

To address this challenge, MFIs are exploring solutions capable of mitigating credit risks by using rich data collected by field officers. Technology providers like Artoo and Dvara Solutions help MFIs use this data to understand customer behaviour, which lets them assess credit risk before a loan is disbursed. Field officers simply complete an electronic form on a smartphone or tablet. The data is securely submitted and aggregated for later analysis. The technology providers also offer training and certifications to quickly get financial services staff up and running.


‘High touch’ interactions – enhanced by tech

Most MFI professionals agree that while CBS technology can improve the efficiency and streamline the operations of field officers, physical meetings and interactions between them and their customers should remain at the heart of microfinance operations. While field officers understand customers’ culture and can engage in direct, rich interactions in local languages, a technology solution that augments this “high-touch” model can help MFIs save costs while increasing customer trust and loyalty.

Field officers typically visit customers once or twice per month for cash payment collections, but between these visits, there is little or no communication between the MFI and customer. To address this, some MFIs have begun using mobile voice messages to stay in touch with customers. MFIs can broadcast audio podcasts on financial literacy, collect data on customer perceptions of service quality and new product offerings, or win the trust of a customer by sending local language voice payment receipts to the customer’s mobile phone.

Post-demonetisation, there has been a growing dialogue within the microfinance sector on increasing MFIs’ annual expenditure on technology, and also in investing in technology talent to accelerate implementation and save costs. Since MFIs in India have started regaining their growth trajectory, there is now an opportunity to invest thoughtfully in technology solutions to implement cashless disbursement, understand customer behaviour, control transactions and increase customer connect. Though the sector’s recovery from demonetisation’s impact may make these measures seem less urgent, MFIs should resist complacency. They should be proactive in seeking ways to upgrade and utilise technology solutions for the long-term benefit of their businesses – and their customers.

Download Awaaz.De’s report on “Challenges & Opportunities in Microfinance Technology” here.


Elliot Rosenberg is vice president of business development at Awaaz.De.


Above: A woman interacts with a field officer (right) from Rashtriya Gramin Vikas Nidhi in Assam. Photo by Awaaz.De

Homepage photo credit: Adam Cohn, via Flickr.




Finance, Investing, Technology
Base of the Pyramid, digital payments, financial inclusion, fintech, microfinance, mobile finance, poverty alleviation