Shivam Singla is a lawyer who never made it to enrolment due to the paperwork involved. Frustrated with the clear costs physical paper-based documentation processes incur on businesses and individuals – Shivam decided to start Leegality with the stated goal of making all businesses completely paperless. Shivam is the Founder and CEO of Leegality – and has a bird’s eye view of all departments. However his primary focus is with the product team – thinking of ways in which Leegality can help businesses better. Shivam is a 2016 graduate of the National Law School of India University.
Micro-finance has the potential to be a key driver of financial inclusion and development in rural and Tier 3/4 urban areas in India. However, because of their nature, maintaining microfinance operations poses a significant logistical and operational challenge. Technology can play a critical role in reducing these challenges – and making microfinance easier to operate.
What is microfinance?
Microfinance is any form of financial service (usually credit/loans) provided to low-income individuals who are ordinarily excluded from the mainstream financial system. The primary vehicles of microfinance in India are either Self Help Group (SHG) loans and Joint Liability Group (JLG) loans.
While we won’t get into the nitty-gritties of each loan product here, it would be helpful to summarize some broad characteristics:
- Unsecured by collateral: Both types of loans are not secured against any property or asset of the borrower. This makes sense because the target market for microfinance is those who don’t possess many assets.
- Small ticket: The average ticket size for a microfinance loan is exponentially smaller than an ordinary business loan.
- Liability is diffused over a group: Both types of loans involve “group lending” – where the loan is availed by a “group” of individuals who give mutual guarantees for repayment.
The logistics and operational problems that stem from microfinance
The core nature of microfinance loans creates inherent issues that make microfinance hard to operate:
- High Cost of Disbursal: Microfinance loans have low ticket sizes but extremely high disbursal costs (reaching multiple borrowers in remote areas is expensive!)
- Collection challenges: Given the geographical location of most microfinance borrowers – making collections is an intensive exercise involving a lot of travel and accompanying costs. COVID lockdown made collections exponentially harder.
- Lack of enforcement ability: Given the low ticket size of microfinance loans – enforcement of defaults in a Court of law can become more expensive than actually writing off the loan itself. This means collections are the only option
- Tonnes of paperwork: Microfinance loans cannot be disbursed without appropriate documentation and paperwork. Each microfinance loan involves multiple borrowers in remote locations. This leads to a tonne of paperwork being involved for a single loan. This adds costs and delays.
- Time consuming for borrowers: Most borrowers are daily wage earners. If the loan disbursal process itself takes a day/half a day – they lose valuable income JUST to take the loan.
Despite the above challenges, microfinance continues to grow in India. So, if the above challenges were eliminated – or significantly reduced – then microfinance can grow even faster and reach more geographies in India. This is extremely critical to drive and expand financial inclusion. Technology can play a critical role in mitigating these challenges.
The digital transformation of microfinance – key pieces of the puzzle
Contrary to popular belief, most microfinance institutions in India are at varying stages of digital transformation journeys for their key processes. Let’s take at the key pieces of any microfinance tech stack:
- Loan Origination/Management Systems (LOS/LMS): The first step in any loan operation is loan origination and management. A microfinance institution needs an easy to keep track of customers, creditworthiness and loan status. To operate at scale – a digital LOS/LMS system is critical. An LOS/LMS system can act as the “operating system” – which stores KYC verification details, loan data, loan documentation etc. It is the first piece of the puzzle for digital loan journeys. While several third-party LOS/LMS players exist, several FIs also build their own in-house infrastructure.
- Analytics: An MFI business operates on the strength of numbers. The small ticket size of a single loan means that an MFI needs to disburse many loans to gain significant returns. However, while it does this – an MFI also needs to protect its loan book from NPAs. Balancing these twin needs is impossible without data analysis. An MFI needs tools that can help it perform data analysis on a large scale – to better inform its lending decisions.
- Agent/Field Officer Application: Almost all microfinance operations happen through a field-led model. That is – an agent or field officer – actually visits the borrowers to take them through the loan product and perform the operational steps that lead to disbursal. In order to maintain field operations at scale – an MFI needs an application interface for field agents that they can easily use when meeting borrowers. For this to be successful, each agent/field officer needs to also be given hardware in the form of a powerful tablet or smartphone.
- Biometric Devices: For any KYC process – an MFI usually needs biometric details of borrowers. For this, field agents/officers need to be given a biometric device to collect these digitally.
- Digital Paperwork Platform: No loan transaction is complete without the required paperwork being executed. However, getting paperwork done physically is a massive logistics drag. It adds time to the entire process (imagine an agent collecting signatures from multiple borrowers on a 50–60-page booklet), adds vulnerabilities (physical documentation can lead to mistakes, errors and fraud) and adds costs (printing, transport, storage). Most importantly – physical paperwork is usually the biggest contributor in wasting the time of the borrower. Often borrowers need to travel 20+ kilometres just to get paperwork signed – eating into their own income. A digital paperwork platform can provide a one-stop platform for an MFI to setup, configure, create, sign, stamp, store and track all the paperwork involved in a microfinance transaction completely electronically. Eliminating paper is the final piece of the puzzle in the road to 100% digital microfinance.
It will be exciting to see the various ways different MFIs leverage technology like the ones mentioned above to deliver microfinance in a more innovative yet accessible way.