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Microfinance and Digitaliztion: a Change in the Aspect

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Digitalization is rapidly changing how individuals access financial services and interact with financial service providers. The spread of mobile technology has paved the way for a new era of financial services in many countries. Technology enabled businesses allow people to perform many basic transactions, such as bill payments, deposits, person to peson payments etc. to take place without even stepping inside a bank or any other microfinance companies/institutons.

Technology plays an important role in microfinance institutions and is also an important element of innovation to promote financial inclusion.

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The use of technology by microfinance service providers can increase organizational efficiency. Digitized portfolio management and record keeping systems improve the ability of a provider to measure and understand its organization’s state accurately.It also helps regulators and fund providers report.Greater access to mobile devices and better communication technology enable microfinance staff working in the field to capture and transmit real  time data to the headquarters and provide their customers with up to date information on balances to be paid and the status of pending loan applications.With rapid changing in the technology, providers should continuously assess their systems and processes and identify different ways to improve the technological advances in order to improve the business efficiancy.

Innovation is additionally quickly evolving. The spread of portable innovation has made ready for another period of money related administrations in numerous nations. Innovation empowered organizations enable individuals to perform numerous fundamental exchanges, for example, charge installments, stores, person to person installments and so forth to occur without venturing inside a bank or some other microfinance organizations/institutons.

MFIs emerged in India in the late 1980s. Their business rapidly grew in the 1990s under the open economy regime. In India, microfinance operates through two main channels:-

· Microfinance Institutions (MFIs)

· Self-help groups (SHGs) {SHGs are also considered to be a part of Microfinance}

Microfinance in India has evolved into a various segments of the financial sector, introducing a variety of business models. Irresponsible actions and non cohesion of rules of some MFIs had brought a setback to the sector, temporarily. The microfinance sector regained traction from 2012 or 2013 onwards and is showing consistent growth. The policy actions that helps in strengthening the regulation of the microfinance sector which includes RBI guidelines on NBFC-MFIs and inclusion of loans to MFIs by banks has benefitted the microfinance sector in a broader way.

Objectives of the study:

· To find out the necessicity of the microfinance becoming digital.

· To find out the benefits of digitalization in microfinance to customers and the microfinance companies.

· To find out the different channels of digitalization that a microfinance company can opt for.

· To find out the challenges faced by the microfinance while going digital.

 Should Microfinance go Digital?

Technology and innovation have become key drivers of economic growth. In recent past, technology has triggered economic growth, impacting the microfinance sector too. According to the World Bank, two billion people in the world today lack access to financial service. Digitization is profoundly changing the way financial services are being delivered by MFIs in India. Convergence of digital platform in financial inclusion benefits MFIs and clients alike. Automation of transactions due to digitization enables MFIs enhance capital inflow as well as outflow, flow of information and makes it convenient to organize and scrutinize data. It has opened various opportunities by reducing use of cash in operations which has resulted in significant cost savings and has lead to increase in outreach in cost effective manner. Database is easily searchable through internet by maintaining digitized information on web. Moreover, loan applications with a client in remote village are now processed using handheld device, eliminating need for paper loan application. Simultaneously clients are also benefitted by faster loan processing & approval, safe and secure way of repayment of loans through mobile wallets.

“Nothing is as powerful as an idea whose time has come”- Victor Hugo

Recently, a new partnership has emerged between digital financial service providers and microfinance institutions to address the challenges of financial access among the unbanked populations globally. The partnership can offer benefits to not only the two partners but also other stakeholders including customers, MFI staff and mobile money agents.

· Benefits for Micro finance due to digitalisation:

· With the use of digital finance, MFIs can reduce the cash risk as well as increase operational efficiency. The group lending microfinance model is highly cash intensive where both loan disbursement and repayment is made in cash, generally at customers’ doorsteps. The MFIs and their customers are therefore exposed to cash risk in storage and transit and incur cost to manage cash and related risks. This also increases the MFI’s staff time. They could have used this time more gainfully by sourcing new clients or perhaps providing more quality service to their existing customers.  Carrying of cash to and from group meetings to the MFI’s branch and for deposit at the bank branch poses a threat to the lives of MFI’s staff. As a result of all of these factors, the operational efficiency of MFIs is affected. With digital finance, customers can deposit cash into the MFI’s accounts at the nearest agent outlet. However, in such cases, the agent bears the cash handling risk.  

· The MFIs can offer multiple products efficiently using digital finance. Traditionally MFIs have been providing a single credit product to their customers. Numerous research studies have shown that the clients require other financial products including, varied credit products, savings and other deposit products, insurance, pension and many more. The need to diversify product offering for MFIs is more pronounced in India, especially after the Andhra crisis. Partnership with digital financial service providers gives MFIs the access to their partner network. Thus, the MFIs can offer complementary financial and non-financial products and services which they might not have been able to offer otherwise. In India, where MFIs are not allowed to accept savings, such partnerships have provided MFIs the opportunity to offer ‘saving deposit accounts’ serviced at the doorstep of the clients. The product diversification helps the MFI to further strengthen their relationship with clients and at the same time gain insights on their financial behavior. Since the customer transaction information is available in digital form, customer-centric products can be designed and deliveredin an analytical manner. 

· Digital finance as an alternate delivery channel can help the MFI increase outreach in a cost-effective manner. The MFIs can leverage the digital distribution channel of finance to design and deliver micro-credit products to non-MFI customers who regularly transact at such agent outlets. The micro finance models are resource intensive and sometime serving customers in remote areas and difficult terrains becomes difficult. The large network of agents really provide helpful outreach to such remote locations.  

· Benefits for customers

· The partnership of MFIs and digital financial service providers have also benefitted the customers. Micro finance clients get the flexibility to repay loans through their mobile phones without even going to MFI branches and avoid cash in transit risk.

· Additionally, they get access to other financial products and services, including saving, insurance, pension and remittance – all serviced through their mobile phone.

Several MFIs have already started to get into partnerships with digital financial service providers to leverage these benefits. Kenya are now using mobile banking services to allow clients to make loan repayments and deposits using their mobile phones.Though many MFIs have started using digital finance, there are obvious challenges that need to be overcome. Some of the challenges such as being reluctant of clients to pay mobile money charges, low penetration of mobile money agents and bringing change in customer’s existing behavior to adopt mobile money still needs to be carefully addressed.

· Digital Channels used by Microfinance Institutions:

· Mobile Device: India’s mobile banking subscriber base crossed one billion landmark in January 2016. Several MFIs have made a successful entry into mobile technology for their operations through better tracking of transactions on real-time basis, digitization of huge physical records, bringing higher levels of transparency in operations, time-saving & process efficiency and greater scalability.

· Biometrics: Biometric micro ATMs integrated with biometric modality for authentication are contributing towards development of micro finance. Launch of biometric micro ATM device “Aadhaar Enabled Payment System” (AEPS) in 2012 by Unique Identification Authority of India (UIDAI) has enabled beneficiaries with Aadhaar to withdraw money near their doors through core banking system. Micro ATM is connected to banks across country. Biometric identity authentication is must before performing transactions like withdrawing or putting money into their bank accounts. It enables MFIs to conduct secure transactions remotely.

· Personal Digital Assistant (PDAs): PDA as used by SKS microfinance for their operations is a portable computer like platform running software programs to standardize lending methodologies and assist in collection of information. Software leads to reduction in the time by conducting loan scrutinization and disbursement of funds.

· Management Information System (MIS): Automation due to development of computers and software applications like MIS has transformed the way MFIs operate. Information is readily accessible through MIS. It facilitates loan officers track clients’ repayment schedules and balances and monitors progress toward attainment of operational objectives.

· Digitalization of SHGs through eshakti:

Digitization of SHGs has given access of members to wide range of financial services. It concentrates on integrating SHG members with national financial inclusion and bringing persons under the facility of Aadhar. Moreover, it facilitates banks in extending financial facility to SHGs by assessing their financial health. Keeping in view Government of India’s mission for creating digital India, NABARD launched a pilot project “EShakti” for digitization of SHGs on 13 November 2014. EShakti enables maintenance of records of SHGs in electronic form and creation of MIS. Information about SHG and its members is uploaded on website. This can be done by SHG members themselves also through an application using tablet or mobile. EShakti ensures complete transparency of operations and updates the members regarding financial information through SMS alerts.

 Challenges in digitalization for Microfinance:

Though all of this sounds exciting, Is it affordable? Is it reliable, feasible and viable? These are obvious questions which force the MFIs to hold back their steps towards digitization. Such digital innovations incur huge costs and therefore lowers profits and burning holes in the pockets of investors. This is where affordable digital solutions are desirable in order to move cashless. And the main issue is low internet connectivity which is the premise for most digital solutions. These hold good for niche segments, but while dealing with poor, illiterate masses, we need to be absolutely aware and mindful of the fact that they are not just low on the financial situation and financial literacy, but also lack technology know how. The poor refrain from such transactions as they just don’t gain confidence and are in habit of using cash which is convenient. The MFI needs to take extra efforts to educate the poor and make them ‘Digitable’ or technology able. And what about data security and restriction of personal information from flowing out? This again is a huge risk and needs due attention. With so much data flowing, it is not an easy task to keep data and personal information confidential. In the MFI space it also at times is required to share data, especially the credit behavior of members which also includes sensitive personal and family data, which needs some decent protocols. These are some factors that need special attention and care.

The path to the digitization of microfinance institutions is not hurdle free. Digitization brings with it certain challenges These are:

· Education: Customers of MFI are often illiterate or educationally deficient, usually lack even basic understanding of how to interact with technology that is vital to the success of microfinance.

· Infrastructure: Lack of transportation, communication, electric wiring in remote and rural areas act as a hurdle in implementation of a digital mode by MFIs. Even if there is proper infrastructure, there are additional transaction costs associated as clients are spread out in rural areas.

· Affordability and Sustainability: Small microfinance institutions are either not able to afford software packages or they are unsuitable for them. Lack of skilled staff to support MIS, lack of budget to upgrade technology and high need of localization of software act as a hurdle to small MFIs in adopting digital channels

Conclusion

Honestly, there is no question about the paradigm shift that this digital revolution will bring about in the MFI industry, there are still doubts on the viability of such digitization for MFI sector. In other sectors no doubt the digitalization has brought tremendous changes which are more of positive, it definitely calls for a few years of successful demonstration of cases and continuous improvement to make digitization common phenomena in this industry. While everyone wishes for an easy cashless economy to flow, one also anticipates the issues, risks and resistance which comes with it. Some of the ways to prevent data sharing risks are to create lenders’ code of conduct, finalize responsible data sharing protocols, exploring data security systems, etc. It will take some time for the sector to become resilient to digitization but there surely is light at the end of the tunnel. It goes without saying that digitization is the way ahead and with its popularity and success, the availability of options will be plenty. Some of the MFIs have gone a step ahead and passed on a part of the benefits to the members by lowering the interest rates. Technology undoubtedly will play a crucial role in bringing about financial Inclusion and it is a great time to watch out for some really interesting and intriguing interventions.

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