Microfinance institutions have traditionally adopted a high touch no-tech business model, where field agents are crucial touchpoints as they interact with customers on the ground.

Post demonetisation, while the MFI industry has made tremendous strides in cashless disbursals, cashless collections have taken a backseat. While around 90 per cent of total disbursals have become cashless, cashless collections still constitute less than 5 per cent of the total collections.

A silver lining of the pandemic has been an opportunity to re-think and reflect on the systemic risks posed by a cash-intensive model and the strategic importance of integrating digital channels in collection infrastructure for MFIs.

Twin blows

To contain the spread of the Covid-19 pandemic, nationwide lockdowns were imposed which affected the cash flows of MFIs. The twin blows that catapulted MFIs into a liquidity crisis were: first, the economic hardship faced by the clients in repaying the loan amounts and, second, an absolute disruption in collection infrastructure leading to low levels of collection efficiency.

The high-touch cash-intensive business model, with agents either engaging in regular collection exercises or borrowers walking to the physical branch to make payments, was deemed unsafe overnight, resulting in the collection efficiency for MFIs falling steeply to a low of 3 per cent in April 2020.

MFI loan portfolio is largely unsecured and relies mainly on client repayments to make fresh loan disbursals. Both the first and second waves of the pandemic led to either lowering of fresh disbursals or the lending coming to a complete standstill.

The pandemic accelerated the transition to digital methods well before the originally anticipated timelines.

The pandemic has pushed MFIs to adopt newer financial technologies such as Aadhaar Enabled Payment Systems (AePS), Bharat Bridge Payment Systems (BBPSs), mobile wallets, prepaid cards, and UPI AutoPay, to make their collections cashless. While digitisation has benefited MFIs in scaling up their businesses and reaching more customers, substantial efforts to incentivise collection through digital platforms may also enable MFIs to improve operational efficiency by minimising the vulnerabilities faced by them due to event-based disruptions.

An MFI may reduce its operating expenses as well as turnaround time for its key processes which can be utilised for conducting more productive activities. Further, in addition to the attached convenience, the time spent by consumers in centre meetings will be saved and the safety of the field staff that carries cash every day with them shall be ensured.

However, with technology making inroads, certain key considerations will be required to be kept in mind. First, it will be important for financial service providers to ensure meaningful digital intervention by putting in place adequate digital infrastructure, with no additional transaction costs for their last-mile customers who may not have the ability to afford them. MFIs may compensate for additional costs incurred by them with gains received from increased productivity.

Second, continued efforts will be required to maintain social cohesion and group dynamics, a feature intrinsic to MFIs as it helps in inculcating discipline among the borrowers.

The way forward

A seamless transition to digital collection modes will require MFIs to handhold their customers, most of whom have limited financial and digital literacy and manifold inherent fears.

MFIs will be required to select appropriate third-party service providers with like-minded business objectives for possible tech collaborations keeping in consideration the critical aspects of capacities of the staff, current infrastructure and cost of the technology.

Successful experiences of MFIs that have already piloted cashless repayment methods in their operations can prove to be an impetus for other MFIs planning to incorporate newer technologies in their repayment methods.

The writer is Research Fellow at Vidhi Centre for Legal Policy, New Delhi