Cognizant 20-20 Insights | May 2017

Executive Summary

Efforts to expand financial inclusion have been

remarkably successful in recent years, fueled

by innovative communications technologies.

Financial services participants at the base of the

pyramid have especially benefited. Encouraged

by central banks and regulators around the world,

financial institutions have driven this revolution

by leveraging channels such as digital payments

and e-money solutions to reach unbanked and

under-banked population segments.

Microfinance institutions (MFIs), which have

been hamstrung by regulatory pressures and

operational costs, could benefit significantly

from recent technological innovations and

market developments. They have an opportunity

to explore a segment of the market previously

inaccessible to them.

In this paper, we discuss the operating model,

revenue growth and product development

opportunities that MFIs can consider to serve

this segment. While the paper focuses on the

India market, the concepts are applicable to simi-

lar markets in Asia Pacific and Africa with similar

customer profiles.

Expanding Microfinance Offerings in Emerging Markets

Digital solutions can enable microfinance providers to cost-effectively serve untapped customer segments through peer-to-peer lending.

COGNIZANT 20-20 INSIGHTS

Cognizant 20-20 Insights

AN UNTAPPED MARKET Large segments of the Indian population still do

not have access to banking services. Banks have

intensified their efforts to reach the unbanked,

in an effort to tap the estimated market potential

of $24.4 billion.1 Figure 1 details the estimated

rise in incomes of low-income groups across the

world.

Historically, banks have faced various chal-

lenges in their attempts to provide loan

services in rural markets and economically

weak geographic areas. Obstacles include high

operating costs and lack of collateral. MFIs grad-

ually stepped in to fill this gap, as they are able

to provide loans without collateral. As a result,

borrowers throughout India, particularly in rural

areas, have formed self-help groups to obtain

loans from MFIs to gain working capital to start

a business or engage in other entrepreneurial

activities.

Microfinance is a crucial source of financial ser-

vices for entrepreneurs and small businesses

that do not have access to banking and related

services. MFIs have realized relative success;

however, large segments of the world remain

unbanked.

The Rise of Fintechs

In recent years, several fintechs have emerged

to support a variety of non-traditional lending

approaches. Many peer-to-peer (P2P) business

models have emerged in this space. These lend-

ing models are set to disrupt the status quo,

especially in the small business space.

Income Growth in Emerging Markets

The average daily income for the first and second economic quintiles of national populations is on the rise.

$10

$8

$6

$4

$2

$0

Ave

rag

e D

aily

per

Cap

ita

Inco

me

(US

D)

2000

Latin America &Caribbean

Middle East &North Africa

Sub Saharan Africa

East Asia &Pacific

South Asia

2020 Projected

Figure 1

Source: Analysis by the Center for Financial Inclusion, Accion, based on data from the World Bank,

World Development Indicators, 2012 , http://www.centerforfinancialinclusion.org/storage/documents/IIF_CFI_Report_FINAL.pdf.

Cognizant 20-20 Insights

Expanding Microfinance Offerings in Emerging Markets | 3

Alternative lenders are filling a critical gap for

business segments that traditional banks have

not pursued. Potential benefits for these lenders

include:

• New asset classes.

• Transparency.

• High returns.

• Diversification.

AN MFI-P2P MODEL

We believe MFIs can leverage alternative lend-

ing models by launching a P2P lending platform,

supported by a powerful analytics engine. Given

their expertise in rural markets, these organiza-

tions are well positioned to successfully facilitate

a marketplace for semi-urban and rural investors

and borrowers.

A P2P service platform would enable MFIs to

service ultra-small loan requests (token size of

Rs100 to 2,000) with very short tenures (one to

10 days) were previously untenable due to the

high operational costs involved in recollection.

The range of services that MFIs could offer in this

segment include:

• Emergency loans (for medical/family emer-

gencies).

• Working capital loans for small vendors

(hawkers).

• Very short-term loans (one-day loans, etc.).

• Loans for college students to meet their

immediate needs.

• Month-end bridge loans.

• Education loans.

MFIs can act as intermediaries between lenders

and borrowers, and charge both parties for the

service (see Figure 2).

After providing some basic details, lenders would

enroll with the P2P site. Following registration,

Cognizant 20-20 Insights

Using P2P for Microfinance Services

MFIs post the borrower profiles and their loan needs in the P2P interface. Loan disbursement

takes place after a lender approves the loan need.

MFIs collect repayments from the borrowers with the appropriate risk management

measures in place and return it to the lender

MFI-P2P INTERFACE

BORROWERS

LENDERS

Loan Disbursement Loan Repayment

Figure 2

Expanding Microfinance Offerings in Emerging Markets | 4

lenders would be able to browse through bor-

rower profiles and assess the various risk-reward

levels that the site offers (see Figure 3).

Lenders would assess borrowers on factors

such as rate of return, credit history, etc. After

both parties agree to the terms and conditions

imposed by the MFI, the amount would be dis-

bursed to the borrower.

Similarly, borrowers would enroll with the P2P

site after furnishing basic details. After registra-

tion, borrowers would make a loan request that

includes information such as the intent of the

loan, tenure and interest rate that the individual

is willing to pay, etc. The MFI would calculate the

borrower’s credit score using its scoring model,

powered by the analytics engine. The engine

would consider parameters such as credit his-

tory, employment history, family history, etc. to

arrive at the credit score (see Figure 4).

The analytics engine could also be leveraged

by the MFIs for cross-selling products and ser-

vices to customers based on parameters such as

occupation, employment sector, credit history,

etc. This information could also be used for lead

generation.

BUSINESS USE CASES

Two business cases can help illustrate the poten-

tial of digital payments technology to solve

longstanding challenges for MFIs.

Case 1: Operating costs – including disburse-

ment and recovery – have been a pain point for

MFIs. This has prevented them from serving cus-

tomers with very short-term loans. Also, not all

rural consumers have a mobile device to access

digital solutions.

To get around this hurdle, an MFI can create

a group of borrowers or potential borrowers

1

Lender Interaction with the P2P Site

MFI-P2P interface

Furnish basic details and complete registration

Confirm terms and agreement

Finalize the borrower

Look at enrolled borrowers

Browse through the bouquet of services

Look at risk-reward levels on offer

Disburse amount

to borrower

BORROWER

LENDER

Figure 3

Borrower Interaction with P2P Site

MFI-P2P interface

Furnish basic details and complete registration

Borrower confirms terms and agreement

A lender agrees to offer loan

Lenders browse through the loan

requests

Credit score for the individual is calculated

Borrower posts the request for a loan

BORROWER

Amount is

disbursed

Figure 4

Cognizant 20-20 Insights

Expanding Microfinance Offerings in Emerging Markets | 5

under a leader. The leader acts as a touchpoint

for customers using digital payments. Disburse-

ment and money recovery can be done via the

leader, which would work with digital wallet ser-

vice providers such as Paytm and MobiKwik. This

will reduce operational costs for the MFIs (see

Figure 5).

Case 2: While MFIs have a range of measures

in place to ensure loans are put to productive

use, there are still instances of customers using

a loan for purposes other than those for which

it was disbursed. Digital technologies can help

MFIs ensure proper use of the loan. For example,

if a loan is sought for purchasing certain mer-

Reducing Operational Costs for Short-Term Loans

Lender releasesfunds

MFI gets the money

Amount sent to area distributor

Borrower collectsthe loan

DIGITAL WALLET SERVICE PROVIDER DIGITAL WALLET SERVICE PROVIDER

Lender repays to area distributor

Area distributor repays MFI

MFI releases funds to the lender

Lender gets the repayment

LOAN DISBURSEMENT LOAN REPAYMENT

Figure 5

Working with Merchants in P2P

MFI-P2P interface

Merchandise

Merchandise

Merchandise

Loan request

Loan acceptance

Lender Borrower Borrower

Borrower

Borrower

MFI-P2P interface

MFI-P2P interface

Loan request

Loan acceptance

Lender Borrower

Loan request

Loan acceptance

Lender Borrower

MERCHANT

Figure 6

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Expanding Microfinance Offerings in Emerging Markets | 6

chandise, MFIs can partner with online retailers/

merchants or with small neighborhood retail

stores (known in some regions as “kiranas”)

with access to digital wallets. The retailers could

deliver the merchandise directly to the borrower

rather than disbursing cash (see Figure 6, previ-

ous page).

Figure 7 lists some examples of the players in the

MFI-P2P model.

RISK MITIGATION MEASURES FOR LENDERS

MFIs currently have several risk mitigation mea-

sures in place, including:

• Offer group loans only.

• Peer pressure and individual repayment

assessment.

• Initial margin requirements in the form of

gold, real estate, etc.

• Requirement of a guarantor or other collat-

eral, such as a post-dated check or jewelry.

• Use of the Critical Rating Index (CRI) or a sim-

ilar quality assessment tool.

Given that in a P2P platform most lenders will

be from urban areas, MFIs can put in place addi-

tional measures, such as offering compensation

in the event of a default or creating a capital

requirement fund.

LOOKING FORWARD

MFIs have successfully penetrated the rural

market over the past two decades. It is time for

them to take advantage of the digital initiatives

disrupting the market right now and serve a

broader customer base. This will enable them to

secure both top- and bottom-line growth in the

segment. A marketplace lending model should

attract investors as it offers them more options.

Lenders are always on the lookout for new invest-

ment options, which should make the MFI-P2P

model a success.

Merchant, Borrower, Lender Examples

MERCHANT EXAMPLES

• Local neighbor-hood stores

• Flipkart• Amazon• Big Basket

• Paytm• MobiKwik• PayUmoney

BORROWER EXAMPLES

• Farmers• Hawkers• College

students• Self-help groups• Small-scale

industries

• Very low-income group

• Small local neighborhood store owners

LENDER EXAMPLES

• Pawn brokers• Salaried employees looking for

an alternate investment option

Figure 7

Cognizant 20-20 Insights

Expanding Microfinance Offerings in Emerging Markets | 7

REFERENCES

• Pratik Bhakta, “P2P Firms Look to Hit Fund Trail to Get Rs 2-Crore Starting Capital,” The Economic Times, June 13, 2016,

http://economictimes.indiatimes.com/small-biz/startups/p2p-firms-look-to-hit-fund-trail-to-get-rs-2-crore-starting-capital/

articleshow/52723753.cms.

• Namrata Acharya, “P2P Lenders Chalk Out Aggressive Expansion Plan Post RBI Recognition,” Business Standard, May 3,

2016, http://www.business-standard.com/article/finance/p2p-lenders-chalk-out-aggressive-expansion-plan-post-rbi-recogni-

tion-116050300895_1.html.

• “Peer Pressure: How Peer-to-Peer Lending Platforms Are Transforming the Consumer Lending Industry,” PricewaterhouseC-

oopers, February 2015, http://www.pwc.com/us/en/consumer-finance/publications/peer-to-peer-lending.html.

• Pratik Bhakta, “RBI Keeps a Watch, Demands P2P Lending Only Via Bank Accounts,” The Economic Times, May 27, 2016,

http://economictimes.indiatimes.com/industry/banking/finance/banking/rbi-keeps-a-watch-demands-p2p-lending-only-via-

bank-accounts/articleshow/52457529.cms.

• “India Top 50 Microfinance Institutions,” CRISIL, October 2009, http://www.crisil.com/pdf/ratings/CRISIL-ratings_india-top-

50-mfis.pdf.

• “The Business of Financial Inclusion: Insights from Banks in Emerging Markets,” Institute of International Finance, Center for

Financial Inclusion, Accion, July 2016, http://www.centerforfinancialinclusion.org/storage/documents/IIF_CFI_Report_FINAL.

pdf.

FOOTNOTES

1 “Financial Inclusion Summit 2016,” Resurgent India, 2016, http://resurgentindia.com/wp-content/uploads/research/FINANCE/

Financial%20Inclusion%20Summit.pdf.

Cognizant 20-20 Insights

Expanding Microfinance Offerings in Emerging Markets | 8

Sathish ThiruvenkataswamyDirector, Cognizant Business Consulting

Shyam PrakashBusiness Analyst, Cognizant Business Consulting

Pranav NarangConsultant, Cognizant Business Consulting

Sathish Thiruvenkataswamy is a Director within Cognizant Busi-

ness Consulting. He has over 16 years of technology and consulting

experience in the banking and financial sector. Sathish holds a

post-graduate diploma from IIM Calcutta and earned his bachelor’s

degree from National Institute of Technology, Silchar. He can be

reached at Sathish.Thiruvenkataswamy@cognizant.com.

The authors would like to thank Kamesh Krishnamoorthy for

reviewing the paper and providing valuable feedback. Kamesh

is a Consulting Partner and Practice Leader in the Banking and

Financial Services business unit at Cognizant and leads Cognizant

Business Consulting in India.

The authors would also like to thank Dr. Jeyaseelan for his valuable

inputs in the ideation stage. Dr. Jeyaseelan has worked for more

than two decades in rural banking. He has been a consultant to

UNDP, UNOPS, GTZ, Agricultural Finance Corporation, Tamil Nadu

Corporation for Development of Women Ltd., various microfinance

institutions and Water Partner International (USA). He is currently

the Group CEO at Hand in Hand India.

Shyam Prakash is a Business Analyst within Cognizant Business

Consulting. He has over five years of technology and consulting

experience in the banking and financial sector. Shyam holds a

post-graduate diploma from Institute for Financial Management and

Research and earned his bachelor’s degree from Sri Venkateswara

College of Engineering at Anna University. He can be reached at

Shyam.PrakashR@cognizant.com.

Pranav Narang is a Consultant within Cognizant Business Consult-

ing. He has over five years of technology and consulting experience

in the banking and financial sector. Pranav holds a post-graduate

diploma from Indian Institute of Foreign Trade, Delhi, and earned his

bachelor’s degree from NIT Calicut. He can be reached at Pranav.

Narang@cognizant.com.

ABOUT THE AUTHORS

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