Highlighting the strategy needed for exponential growth in traditional micro-credit business
While reading the seminal book The $10 Trillion opportunities, you get fascinated by possibilities in the emerging middle class from India and China. Recent evidence shows that India could have a billion active internet users by 2025 and UPI transactions hit more than 2B marks in Nov 2020 alone. India’s digital economy has transformed in the last five years, thanks to the low cost of data and government push. I see from the point that there are millions of mushrooming NextBillion & Aspires segments which are pushing this growth numbers. For instance, increasing disposable income attracts more demand for lifestyle products such as consumer durable, FMCG, banking, financial products and many more. In this similar precedent, millions of people are less educated. Mobile/internet becomes the first requirement for the rising middle-class, thanks to the dirt-cheap price of mobile handsets and data. It leads to universal internet accessibility and disrupts all the consumer segments, specifically financial services. As more than 60M informal micro-enterprises spread across India, availing formal/informal credit is instrumental for running the show. This segment requires regular finance of less than $5000. Often, conventional banks/financial institutions are not keen to serve due to 1. Geographical constraints, 2. Limited profitability 3. Lack of resources to monitor. Inversely, for micro-entrepreneurs also, getting a formal credit is not viable due to multiple visits required to sanction a loan, not having a physical asset to mortgage and limited financial understanding to transact.
Micro-finance institutions, Credit Co-op and women groups have acquired a massive borrower base. As there is no reliable data on credit co-op, other two-segments alone have more than $50B outstanding loan portfolios with more than 150M borrowers served regularly. This demand could be as high as $300B, and the next set of retail credit demand will come from this segment. Conventionally, micro-lender have a high-touch or physical model to deliver credit services, and they have a proven business model with defined unit economics. Non-performing assets (NPA) are less than 1% in the micro-credit segment against more than 6% in India’s credit market. Next wave of growth for financial services will come from the micro-borrowers part through a vertical push by bringing more poor people and providing them credit through group security and similar models. In other cases, a horizontal push by providing added financial services to the existing customer such as higher ticket loan, insurance and saving products. Currently, more than 100M borrowers are availing financial services through microfinance lenders. Providing value-added financial products would be an immense opportunity.
Undoubtedly, the micro-credit segment has a huge opportunity and can this scale be achievable through current models only in the coming years? Is there a need to have a significant digital push to reach customers? Can the digital-only model need to be adopted? But most of the transactions in these categories happen in hard cash! Customers are not tech-savvy or feel safe to transact on the digital platform. Micro-credit lenders’ key pain-point is digitizing repayment, and adoption of digital-repayment. Reasons for less adoption of digital-repayments are 1. micro-borrowers mostly transact in hard cash 2. they need not or will not maintain bank balance 3. not viable to visit the bank branch to deposit money and then repay digitally. These are some of the practical hurdles or questions that come to mind while considering a digital solution.
One aspect is visible that every household and majority of consumers will have/having an active and reliable internet connection in the next 2–3 years. Brick and mortar financial services are not viable/profitable due to sachet size requirements. Micro-lenders have a significant field presence and reach to serve millions of borrowers. In our recent rapid assessment with credit co-op, almost all members (more than 90%) interviewed mentioned that they have internet-enabled smartphones. Also, using a platform such as WhatsApp, YouTube and Facebook. But when we asked about using the digital payment for recharge and similar services, very few said yes. While further exploring to understand why they’re not transacting on the digital platform, we found that 1. not having enough balance in the account or need not maintain as most of the transaction happening offline 2. not comfortable in using the mobile/digital platform, and 3. safety, are the key concerns.
The digital presence will help in providing bundled financial services beyond micro-credit with the profitable unit economy. However, the micro-credit segment needs a digital platform developed and designed for them with features such as language, voice support, friendly user interface and on-field partners. Micro-lenders need to find the right digital partners specialized in the low-income segment. This way, existing micro-lenders can increase the horizontal and vertical expansion of financial services with increased lifetime value.
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