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Microfinance has reached an important inflection point in India and other Asian countries. Most large and established MFIs have transformed into Small Finance Banks and will have access to deposits and greater operational leverage. Fin-Tech is reshaping financial services and particularly the MFI sector in many ways. New age players are disrupting the micro-credit segment using digital data and technology. MFIs will need to respond to these transformative changes in the ecosystem by embracing technology, establishing enduring partnerships, diversifying product portfolio and moving beyond the traditional group lending model.
There are areas in which MFIs will see a major transformation. MFIs will need to broaden their range of loan products to include housing loans, clean energy loans, working capital loans, as well as other financial products such as microinsurance. This will necessitate diversifying the customer segments from the current group-lending segment to adjacent and more affluent segments. As the loan process gets unbundled, the MFI industry will see Fin-tech becoming an integral part of the microfinance ecosystem. New age players will use data, machine learning and artificial intelligence to help MFIs with digital onboard and more efficient credit assessment. MFIs will need to build strong partnerships to offer more products and services and enhance efficiencies. MFIs need to look at models that enable relaxation of formal group liability, although the group structure will continue to facilitate interaction and offer incentives for peer support.
With the advent of mobile-wallets and electronic-money, financial literacy has become dependent on digital literacy and MFIs will need to invest in technology and establish a strong online presence through interactive applications. We also see that though MFIs, like any other business, are prone to shocks, which can be political, environmental, economic or financial and such events affect the repayment capability of MFI customers. Although such jolts are natural to any model and are manageable through caution and provisioning, the current regulations and business models of MFIs have no such provisions. The regulators should consider allowing MFIs to accept deposits. Given the high operating cost model and future investments that MFIs will have to make in technology, it is necessary to explore models that ensure the viability of the MFI business model. Despite technological advancements, some level of human touch and intervention will remain indispensable. It will also help in spreading financial literacy and bring repayment discipline. This model is unique to the MFI industry and critical to the success of the sector. Technology, consolidation and new financial entities will redefine how microfinance is delivered in the future.
- Mr. Mahadeo Jadhav