As we head into 2020, we will witness a massive transformation in the bank models and adoption of microfinance loan management software. A glimpse of that is already seen as disruptive technologies are facilitating the banking sector with new bank models making banking more manageable and accessible for all.
‘Financial Technology‘ has become the buzzword and industry heads are talking about the challenging status quo of financial services and its fresh take on problems that were faced by banking customers, especially in a developing country like India.
Along with this, the focus radar is on Bitcoin as a cryptocurrency. Stakeholders are also concentrating on the power of Blockchain technology enabled by a distributed ledgers.
What is Blockchain?
The origin of Blockchain can be dated back to 2008. Founder Satoshi Nakamoto showed how Blockchain technology could address the issue of double-spending. Blockchain, also known as Decentralized Ledger Technology (DLT), is a data structure that enables the creation of tamper-proof digital ledgers along with sharing options. The cryptographic component allows anyone to securely access and adds to the ledger. No third party is involved in the process.
This decentralized digital ledger is distributed across a network of computers known as nodes. These nodes maintain the transaction list between participants. The record is in sync with the auto-update feature. Data cannot be modified, but only a few records can be added.
This promised an enhanced level of security and better control over data. It also reduced transaction time and costs.
Indian banks have adopted blockchain solutions by implementing KYC integration. This also helps in the evaluation of corporate lending risk and vendor management.
Critical issues faced by the microfinance industry
Microfinance is a new chain of finance that helps the underprivileged with financial aid by promoting the option of easy and secure loans. In most cases, there are no stringent rules regarding the need for the documents, and this makes it a preferable option among the targeted group. So, where lies the problems? Let’s put some light into it.
- High Rate of Interest
- Lack of knowledge of products
- Trust on financial institutions
The industry is therefore structured in a way that will help the impoverished section without being a pain in the pocket. Most of the time, the reason for the problem remains the burden of previous loans. As the microfinance industry is operating on the grassroots level, there remains a constraint in the repayment of the loan. Providing excessive loans from lenders leads to over-indebtedness leading to paying massive amounts of interest for previous loans availed.
As these microfinance establishments are working with the help of various private banks, the costs of the transaction go high. As such, associations are gigantic and process dependent, it leads to reducing the number of individuals getting direct benefits from their offices. KYC process for such MFIs likewise turns into a test when attempting to work productively, one reason being restricted reach and considerably lesser authority recognizable proof that adds to the sufferings of MFIs just as the individuals.
How is the microfinance industry getting benefitted with Blockchain?
Industry heads consider Blockchain as a ground-breaking technology. There are several possibilities of the microfinance industry to get upgraded with technology. One of the most crucial features of Blockchain is the transparency that is promised by the technology. This makes it so crucial in microfinance. It increases transparency and therefore regains the trust that increases the chances of taking a loan from microfinance companies.
The decentralization feature of Blockchain can reduce the rate of interest borne by the loan seekers. The ability to decentralize the system removes the need for mediators, which was one of the main reasons for the high cost. This helps microfinance institutions to have a better customer base with a better reach over areas that need their service.
As blockchain technology got aided by microfinance, small businesses and farmers requiring loans can avail the same by having a digital identity. Smart contracts are available that ensure efficient repayment of loans.
With Blockchain’s smart agreement accessibility, the financial companies can make a security bond on the terms and conditions indicated for reimbursing the debt.
Many microfinance loan management software is using blockchain innovation ought to set themselves up to welcome the wave of change that will bring a huge transformation in the finance industry.
Enterprises additionally need to train their representatives on the most proficient method to work with such an innovation. Businesses heads are hoping to use blockchain innovation that can counsel vendors for blockchain portals and know about the benefits of Blockchain as a Service (BaaS).
VolkSoft is a FinTech company that has developed intelligent loan management solutions for various microfinance institutions, private banks, and business correspondents. It has helped countless microlenders in bringing down the duration of a loan cycle using mobility solutions while allowing deeper penetration into wider markets by integrating regional languages and offline mode. Find out more about their solutions here.