MFIs managing risk by turning to tech innovation to ensure loan repayment

One of the biggest worries of microfinance institutions (MFIs) is “risk management”, or managing the risks involved in disbursing loans to customers whose credit history and repayment capabilities may not be known. However, the next generation of MFIs in India are turning to technological innovation to solve this problem. 

Take Svatantra Microfin, promoted by Ananya Birla. The Mumbai- based MFI not only does all its disbursements digitally, it is also using technology to identify the location of clients, and in loan origination, collection and risk management. The company’s risk management team has access to the longitude and latitude of the places where the loan originated and is being utilised. Through independent and random checks, it assesses the borrower’s loan repayment capacity. 

Similarly, Satin Creditcare, a Delhi-based MFI, is using psychometric tests to evaluate the risk payment capability of borrowers. This is done by showing about 40 flashcards to borrowers. According to H P Singh, chairman and MD of Satin Creditcare, around 4 to 5 per cent of the borrowers fail the test. Annapurna, another microfinance firm, has partnered with Artoo, a fintech firm, for efficient loan processing and onboarding of new clients.

While MFIs in India continue to follow the Grameen Bank model set up in 1983 by Muhammad Yunus, the Nobel Prize-winning father of microfinance in Bangladesh, they are taking the business of small loans to the next level. From psychometric tests to using GPS mapping for credit utilisation, technology is now streamlining every step of a loan cycle. In fact, many MFIs have dumped traditional log books and equipped field staff with hand-held devices for disbursements and monitoring of loan utilisation and repayment schedules.

For example, Vaya, which was started in 2014 by a group of corporate professionals as a tech-enabled banking correspondent company and in 2017 became a non-banking finance, micro-finance (NBFC-MFI) firm, does real-time credit bureau checks through a cloud-based application and hand-held devices. So, the client can be told on the spot if they are eligible for a loan or not. Further, the loans are disbursed into bank accounts directly, although most repayments are done in cash. Moreover, the company helps those who do not have a bank account to get one at the nearest bank.

MFI are also steadily moving towards cashless recovery, which stands at 10 per cent of the total recovery as of now. Satin, for example, is planning to get close to 20 per cent of its recovery digitally in the next few months. As for Svatantra Microfin, 30 per cent of its loan collection is already cashless.

The technological interventions were necessitated by the increasing cases of defaults in the microfinance segment, and the frequent announcements of debt waivers by state governments. 

Efforts are also on to minimise the interface with loan officers and to monitor borrowers digitally. Datacultr, which started India operations in September this year, is providing predictive fraud management and digital collection services, enabling banks and lending companies to significantly reduce their risks in the case of new customers. 

Datacultr does this by turning the borrowers’ smartphones into a virtual collateral for the lending companies. It provides them with controlled access to the borrowers’ phones for the duration of the loans. In case of poor payment record, the lender can gradually weaken the borrower’s experience on the device and ultimately lock the device in cases of lengthy default.

For example, if there is a delay of about a week, the wallpaper changes, reminding the borrower about the repayment due. In case of further delay, some of the apps gradually stop working. If there is more delay, the smartphone is locked, with only emergency call access. 

In its pilot project, Datacultr, the brainchild of telecom sector veterans Neel Juriasingani and Sujoy Ghosh, targeted delinquent customers in the three-month plus default bucket. Almost 42 per cent defaulters paid within seven days of their device getting locked, says Juriasingani. 

Further, a pilot done by a local smartphone brand in association with Datacultr, disbursed Rs 41 lakh in loan to 827 people, 85 per cent of whom did not have any credit history. The 90-day default rate was around 2 per cent (against an industry average of 9 per cent) among the sample group. 

It’s not only the new-age MFIs that are going for technological innovation. The older ones are also waking up to the need for adopting digital technologies. Bandhan Bank, one of the pioneers of microfinance in India, is looking to embrace digitisation in a big way, says Chandra Shekhar Ghosh, founder, MD and CEO. However, Ghosh believes that human interface is crucial in micro-finance. “If we give up human interaction and replace everything with a digital interface, it will be a big risk,” he says.