With over 90% of the Indian workforce employed in unorganised sectors, a significant population is excluded from basic financial services. Microfinance institutions in India provide this “missing middle” access to micro-credit, micro-insurance, micro-investment, and micro-savings. The sector is key to driving financial inclusion. Yet, MFIs face several inherent challenges. Here’s a look at these challenges and how MFIs can overcome them.
6 Challenges Faced by MFIs in India
In India, microfinance has penetrated less than 30% of households in the 65% of districts where MFIs are present. The figures indicate the need to identify and address the reasons for the under-penetration of MFIs despite them being critical to the Indian economy. This threatens the country’s progress to achieving the UN’s Sustainable Development Goals.Â
#1 - High Vulnerability to Credit Risk
The microfinance sector, by design, gives out unsecured loans and insurance at low premiums. This makes MFIs vulnerable to credit risk and adds to the cost of monitoring to stay profitable. Further, it reduces their competency as preferred financial partners for micro and small enterprises.Â
What to focus on: Improve the speed and accuracy of risk assessment with the help of cutting-edge technologies now offered by insurtech solution providers.
#2 - Lack of Adequate Investment ValidationÂ
MFIs operate in underdeveloped markets which are not sufficiently organised and have limited activity. The absence of consistent and reliable market data and insights prevents stakeholders from making informed investment decisions. The lack of proper investment valuation is a significant barrier to the smooth functioning of microfinance institutions in India.Â
What to focus on: Leverage machine learning and predictive analytics to gain better insights for making informed investment decisions.
#3 - Difficulty in Lowering Interest Rates
Micro-loans tend to come with elevated interest rates. MFIs are forced to charge higher interest rates because of their manual, time-consuming processes, high cost of risk assessment, low-risk mitigation capacity and smaller serviceable markets. High operational costs and poor risk management translate into higher interest rates, which may deter borrowers from approaching microfinance institutions in the underserved areas of India.Â
What to focus on: Optimise operational costs with efficient and effective digital products innovated by insurtech service providers in India.
#4 - A Missing Marketing Vertical
Lack of awareness is the main culprit for India’s rampant financial exclusion. Due to low literacy rates, a large population in tier 2 and 3 cities and rural areas has almost no understanding of financial concepts. A wide section does not even know what an MFI is, let alone its benefits. These people have little information about government policies and the breadth of services offered by microfinance in India.Â
What to focus on: Identify the channels to disseminate information about microfinance facilities and the ease of access to financial services.
#5 – Weak Collaboration Models
There is no denying that MFIs depend on mainstream banks and government programmes for liquidity. Although India’s Self-Help Group – Bank Linkage Programme (SHG-BLP) is the world’s largest microfinance programme, it might not suit your target group. Selecting business models without scientific backing and alignment with regional needs is a huge challenge. It may affect the microfinance institution’s sustainability in the long run. The absence of data and insights related to microfinance needs and the best modes of access for the target group can eventually strain service providers.Â
Weak collaboration models expose MFIs to external shocks. Comparing SHG-BLP with alternate programmes, such as the Joint Liability Group model (JLG model), especially for lending and insurance, can help reduce risk and optimise customer acquisition.
What to focus on: Thoroughly assess the addressable cohort and choose the collaboration programme accordingly.
#6 - Sustainability and Impact Assessment
Business viability is as critical as the social responsibility of driving financial inclusion. Assessing the true social impact of the MFI in a region also remains a key challenge. Microfinance institutions in India need comprehensive and clean methods to reveal true impact metrics and discover areas for improvement.
What to focus on: Leverage unbiased impact assessment tools to get a true picture of your impact.
How to Overcome the Challenges and Drive Growth
Microfinance is a game-changer in promoting financial empowerment among the underserved and unserved population. Enhancing microservices operations and services is critical to India's economic prosperity, as the country has a huge unorganised sector and a large population with no access to finance.Â
The esteemed panel at the ETBFSI Zopper NXT10 Insurtech Summit highlighted that the Indian NBFC/MFI network of over 8,000 participants can drive growth with the help of technology. Innovation is key for MFIs to unlock the industry's full potential to drive credit, investment, savings, and insurance inclusion. Credit-linked insurance (CLI) can be instrumental in protecting borrowers and their families from defaulting on loans. Risk distribution via collaboration with insurers can make the microfinance sector in India more resilient to unforeseen events. Robust risk management and meaningful collaborations enable MFIs to focus on growth and financial inclusion.Â
Since most MFIs lack access to technical talent and the resources to orchestrate digital transformation, a strategic partnership with insurtech companies can be the solution. Recognising the need for MFIs to leverage technology to serve the rural and semi-urban cohorts better, insurtech leaders have developed innovative digital platforms, especially for microfinance institutions. These platforms support seamless integrations among different types of financial institutions as well as with other sectors to improve MFI operations and decision-making. Here’s all that they enable MFIs to do:
Group Insurance
Offering group insurance in the areas of low insurance penetration can significantly enhance the impact space of MFIs. Cross-selling insurance with credit and investment instruments helps reduce risk. A cross-sell engine with integrated data from diverse sources helps MFIs improve price discovery to tailor premiums for the target group.Â
Improve Reconciliation
Comprehensive insurance platforms for MFIs can expedite reconciliation, automate reporting, and enable better cash-deposit (CD) balance monitoring. Improved CD management drives investment validation and the sustainability of MFIs.
Digitise CLI Journeys
Insurtech platforms integrate microfinance with insurance for seamless cross-selling. Insurtech provides access to cross-industry data, which helps improve both lending and insurance underwriting. Better credit risk assessment and mitigation with adequate insurance products further bolster the decisions' accuracy. These streamline customer journeys and offer better customer experiences.
Make Processes More EfficientÂ
Streamlined digital onboarding reduces exposure to manual errors, while cloud-based data management boosts operational efficiency. API-enabled endorsement and claims journeys drive automation at scale while prepopulating features speed up underwriting and reduce operational costs. The corresponding cost reductions translate into lower interest rates for the end customers and higher financial stability for microfinance companies.
Agility and Personalisation
Insurtech enables cross-sectoral collaborations to offer deeper data insights that empower MFIs to deliver innovative offerings. The needs of the rural and semi-urban cohorts may change due to any unprecedented event. Data-powered insights bring agility to MFI functions, enabling them to offer dynamically tailored credit products backed by insurance.Â
MFI-Insurtech Partnerships for the Win
Insurtech solution providers empower MFIs to connect with insurance providers in India to unlock growth opportunities. This helps MFIs to discover more cross-selling opportunities and optimally use their distribution channels. They can use the opportunities to educate customers about the various financial solutions MFIs bring to the underserved. Data-powered MFI-insurtech platforms facilitate demand prediction, product innovation, and financial inclusion while responding to emerging needs. Improved risk management and enhanced customer satisfaction strengthen the position of MFIs in areas where word-of-mouth is the primary marketing channel. Partnering with insurtech companies can support the microfinance industry in India and help establish the last-mile connection for greater financial inclusion.
Bibliography: (Last Accessed on September 13, 2024)
