Digitising microfinance (NPCI does it again!)

Thu, 2017-02-23 11:53 -- SCC India Staff

Aadhar Pay

Microfinance institution (MFI) is an organisation that provides credit facilities to low-income group. The sector has been thriving in India with more than 268 MFIs operating under various models with over 40 million customer base and an outstanding portfolio of over Rs 53,500 crore. However, it should be noted that about 99 per cent of the disbursements and repayments are dependent on cash. In numbers, over 80 million disbursements and 1,000 million repayment transactions take place every year in cash mode. This is why the sector was at the receiving end during the demonetisation period and faced a sudden slump in growth.

While digitisation has been implemented in the back-end process, the products are still been delivered in operational models, which are high on human touch and there is use of cash-based disbursal and repayments. The National Payment Corporation of India (NPCI) is actively involved in digitising the payment landscape in India. Numerous microfinance players approached NPCI seeking an intervention to digitise the sector. The challenge of MFI digitisation was hence an extension of NPCI’s mission to touch every Indian by 2020. To address this challenge and to test NPCI’s products in the low-income sector, a pilot was carried out on disbursement and repayment of MFI transactions using the Aadhaar Payment Bridge System (APBS) and Unified Payment Interface (UPI).

NPCI has begun a pilot project to digitise the transactions initiating payments to the last mile by digitising transactions of Svatantra Microfinance wherein R BL Bank will be disbursing loans and HDFC Bank will be receiving the loan repayments.

A simple innovative use of APBS and USSD-based mobile banking (by dialing *99# on your mobile phone) infrastructure has made this possible. The customer’s Aadhaar numbers are collected and sent to the disbursing bank for onward direct credit to account using APBS. For repayment, a string of numbers (*99*1*4*1#) is being saved as a contact number in the MFI customer’s phone during MFI group meetings. The customer has to dial the contact, enter the amount and UPI pin on the phone and the repayment gets done successfully.

“Potential of such a system in MFI sector itself for digitisation of payments is as high as 80 million annual disbursements and over 900 million repayment transactions,” says AP Hota, MD & CEO, NPCI.

Digitising cash-based operations has the potential to bring a host of benefits to MFIs as it mitigates cash carrying risks and improves operational efficiency by saving time for frontline staff. It can aid in the diversification of products offered to consumers and enable the innovation of customer-centric offerings based on critical insights sourced from digital data collected over time on customer behaviour.