‘Digitization is helping but has limits to what it can do’
3 min read 24 Mar 2023, 10:31 PM ISTDigitization is helping right now but there is a limit to what it could do
PremiumThe recent merger of small business lender Satin Finserv Ltd and business correspondent provider Taraashna Financial Services Ltd would allow it to better leverage capital, parent firm Satin Creditcare’s chief executive officer HP Singh said in an interview.
He believes that while digitization is an enabler in the microfinance business, it can help only up to a point. Edited excerpts:
How does the MFI industry health look like now?
If you look at the business model, what probably stands out is that the model remains resilient and fundamentally strong against all crises. If I look at the entire landscape, it is very difficult to find a business model having to go through so many crises simultaneously. First, it is predominantly rural and if you look at the larger ecosystem, whatever happens with the urban space does not affect materially the rural spaces too much. The second factor is that microfinance is predominantly gender-specific. When you talk about women, they are a far more disciplined class and that is a very big plus that we as microfinance companies have. A major part of the MFI industry book is out of the woods through writeoffs and other measures. Now everybody is trying to look at pent up demand as well as growth, specifically in the rural space. We are all looking at probably a 25-30% compound annual growth rate (CAGR) for the next four to five years.
How will the merger of subsidiaries help the company?
Once this is done, we can actually leverage the capital of Taraashna and Satin Finserv both to grow the book for small business lending as well as the business correspondent vertical. So, we will be able to leverage the capital more efficiently and enlarge our scope of credit to the segment which we serve. The infrastructure would also be better utilized.
How has digitisation helped your business?
Digitization is helping right now but there is a limit to what it could do. It is an enabler and will always remain an enabler but will not replace human interface. Today, the customer acquisition has been digitized. However, collection is where microfinance needs human interactions. If you look at the business model of microfinancing, it is based on women getting together at a meeting and that is where you make your collections. If technology takes over, that human touch with the borrower would just evaporate and it would become like any other business. About 8% of my borrowers repay using their mobile phones at present.
What has been the impact of RBI removing pricing cap on loans?
Earlier when the margin cap used to be there, technically you had to fend for yourself because of whatever crisis happened, your credit cost has to be absorbed within that space. That was probably not the right way of looking at it when you are running an institution or business. Our sense is that the new policy actually bodes well for everybody in the ecosystem, for the institution as well as for the borrower. Believe me, in some circumstances if you are not able to absorb the shock of pricing, you will not be able to serve the customer the way you want. It is still a very underpenetrated market and once it reaches saturation level, the demand and supply forces will work and then pricing will have a meaning related to that demand and supply.
Do you see banks as challengers in micro loans?
I really do not think so as this is still a very large market as compared to probably gold financing or any other asset class. Moreover, rural India has not been significantly penetrated despite microfinance being here for 20-odd years and therefore there is a lot to be done. If you look at Uttar Pradesh (UP), it still has a penetration level of 12-13% and has room for anyone looking to grow. That said, banks have some advantage in terms of pricing but when the norm is set.
