The ABC of Microlending – Powering credit access in Rural India.

The ABC of Microlending – Powering credit access in Rural India.

Ever needed a small, quick loan to start a business, pay rent, or a hospital bill? Getting a loan from conventional banks may prove to be a nightmare for borrowers who lack a formal credit history. This is because banks rely on credit bureaus to validate and underwrite their loans. Conventional banks also require heavy documentation from their borrowers such as rental receipts, Form 16, Salary slips and so on to process a loan.

These prerequisites make formal credit inaccessible to almost 80% of India or 525 Million borrowers who lack a credit score. This leads to a predatory cycle where borrowers resort to taking short term loans at high interest rates from the informal credit sector (Loan sharks and Moneylenders) and are unable to repay them due to unfair terms that seek to force borrowers into a debt trap.

To bridge the credit gap and to serve customers in rural areas where access to banks is sparse, Microfinance institutions have come to the fore. Microfinance organizations generally grant loans to entrepreneurs, farmers, and SHGs who need extra cash to expand or reinvest into their business.

How are MFIs powering credit access?

Alternate lending model:

Traditional financial institutions such as Banks and NBFCs are unwilling to serve rural markets as the ticket size of the loan is too small to make it financially feasible. However, Microfinance institutions have found the sweet spot by serving these loans to larger groups such as SHGs where peer pressure and scrutiny is applied by the borrowers themselves to ensure that defaults are kept to a minimum. MFI loans are a savior to millions in rural areas who would otherwise be deprived of the opportunity to follow their entrepreneurial ambitions.

Business correspondents:

The Microfinance model relies heavily on Business correspondents who play the role of a traveling branch to reach out to areas that are inaccessible to conventional banks. As the borrowers in case of MFIs may be uneducated and computer illiterate they will need a lot of handholding and support from business correspondents to get their loans processed.

Once the loans are disbursed, Business Correspondents act as advisors to the customer by helping them with their business model, government clearances, finances and so on to help them operate their business profitably. However, the active role of the business correspondent in the lending process makes MFIs prone to human error and in some cases organizational chaos.

Changing technology:

The government is driving financial inclusion to bridge the existing credit gap through the introduction of schemes such as such Aadhar based biometric identification, Pradhan Mantri Jan Dhan Yojana (Opening of free bank accounts for poor) and India stack (Ability to roll out instant loans in minutes). These innovations are helping MFIs to digitize their process and drive profitability in an increasingly challenging sector.

Although MFIs may lack the technical expertise to digitize processes, Fintech innovation such as Microlending platforms are helping banks to effortlessly and efficiently move their processes to digital without interrupting business continuity.

MFIs are adopting digital platforms to improve their geographical outreach, lead management, conduct credit checks, identity checks as well as generate customer insights on the go.  The reduced reliance on paper-based systems and business correspondents is helping them achieve long term sustainability

Looking to digitize your lending model?

Volksoft’s Microsure platform is the digitization partner of choice for leading MFIs such as Bharat, Fincare, Indicare, Peerlend and more. We process more than 12,00,000+ financial transactions every day through our paperless, digitize and efficient lending model.

Reach out to us for a free consultation –

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