While few MFIs have integrated digital financial services, majority continue to deal in cash
The overnight demonetisation of R500 and R1,000 currency notes shook the entire Indian economy, for good or bad is yet uncertain. An estimated 85% of the value of currency has ceased to be a legal tender and the release of the new currency has been rationed for the next few months. Such a move from the government will most likely put a check on black money circulation in medium- to long-term, however, it will also impact businesses in the short-run given the fact that more than 90% of the consumer payments in India still happen in cash. The move is also expected to be a boon for digital financial services ecosystem in India. While the penetration of digital payments infrastructure has rapidly increased in the last two years, the value of consumer payments that happen through cards or other digital means in India is still far behind some of the other comparable economies. The point-of-sale terminals per 100,000 debits cards are lower in India compared to other BRIC nations (India-2; Russia-6.1; China-12.5; Brazil-14.8).
Till the time the government is able to remonetise the economy completely, many industries will see subdued transaction levels, most particularly the microfinance industry, which still relies heavily on cash for disbursements and repayments. The MFI industry has grown substantially since the slump in 2010. As per the latest data released by MFIN (September 2016), the total credit portfolio of NBFC-MFIs was little over R50,000 crore, while the total loan disbursements in Q1 of FY16-17 alone were over R18,000 crore.
In the wake of the currency crisis situation, many MFIs have been forced to put disbursements on hold. Also, the repayments in R500 and R1,000 denominations is being discouraged and shall eventually be discontinued. Many MFIs are also considering the option of rescheduling loans if the currency flows do not improve, significantly, in next few weeks.
Grameen Foundation India believes that the current situation is ripe for MFIs to transition to cash-lite operations by adopting digital financial services. While few MFIs have sporadically experimented with integrating digital financial services into their core operations, majority continue to deal in cash. High cost of digital payments, lack of digital literacy amongst target clientele and inadequacy of digital channels have been some of the reasons that the MFIs have cited for not adopting DFS so far. However, given the recent demonetisation move, it is believed that more and more small/medium businesses will integrate into the formal economy, and hence accept digital payments more readily. Such a situation will eventually lead to an increase in the volume of digital payments. Also, it will lower the transaction costs for MFIs to adopt DFS (including the newly formed payments bank), as the service providers penetrate deeper into the rural hinterlands with increased merchant and agent base.
Grameen Foundation is implementing multiple projects which are aimed at assisting MFIs to make the transition to digital financial services platform. In one such project, a large MFI has been enabled to implement an outsourced digital repayments channel. The project is aimed at enabling rural communities, especially women, to adopt the use of mobile phones as a channel for their loan repayments, with an eventual aim of expanding its use to a more extensive suite of products including airtime top-up, remittances, financial education and savings, among others. We are also helping MFIs implement and streamline the business correspondent (BC) model for the mainstream banks. The BC model offers tremendous opportunities for MFIs to go digital in their credit operations, on both disbursements and repayments.
There is a need for MFIs to go digital in their routine operations. The DFS landscape in India has rapidly evolved in the last few years. MFIs need to re-think about the inhibitions that had earlier restricted them to adopt digital channels.
While the move for using digital channels is welcome (and almost inevitable), based on our experiences, there are a few key lessons that MFIs should keep in mind for a successful digital channel adoption. To start with, MFIs need to do a careful analysis of their business requirements and find compatible DFS provider. We have often seen that pilots fail because of unrealistic expectations between partners. Also, the success of such implementations relies heavily on effectiveness of change management drive that MFIs need to cautiously think through and implement. Change management plays an important role in aligning the staff to the larger organisational strategy. Most important, it alleviates the job security fear that staff perceive in such a move. Lastly, MFIs also need to focus on client education for such digital transformation. Given the scale at which this transition needs to be adopted at the client level, they need to adopt user-centric approaches to design the communication content and adopt effective channels to deliver such communication.
Chandni Ohri is CEO and Raunak Kapoor, project manager, digital financial services, Grameen Foundation India. Views are personal