How AI is shaping the microlending sector
The integration of AI and microfinance is catapulting the growth in the segment and making the service accessible to a larger user base, says Sucheta Mahapatra - India MD, Branch Personal Finance
By Sucheta Mahapatra
Ever since microfinance came into the picture several decades ago, it has been continuously transforming the lives of the economically backward across the world. Micro-lending has been instrumental in pulling millions out of the clutches of poverty. It has helped millions of small-scale entrepreneurs realise their dreams. Starting from providing loans to people with minimal to no access to traditional banking, microfinance has now graduated to micro-savings, micro-insurances, fund transfers, payment services and remittances.
Microfinance companies have been continuously looking for avenues to expand their reach into the potential markets and investing heavily in doing so. We are now witnessing the next wave of microfinance revolution with the inclusion of Artificial Intelligence (AI). The integration of AI and microfinance is catapulting the growth in the segment and making the service accessible to a larger user base. We shall now examine how AI has been shaping the microfinance sector in the 21st century.
Data is the key
One of the most difficult hurdles faced by microfinance companies is the non-availability of data. Microfinance majorly deals with the section of society which has limited access to banking facilities. Therefore, there are no previous records or data to analyse. Even at places where data is available, it is either inconsistent or in improper format. Today due to its reduced costs, the internet has penetrated everywhere. With help of mobile phones and the internet, AI collects and analyses huge amounts of data and puts it in comparable formats. This helps the organisations reach larger amounts of customers and helps them realise their true potential.
Helps determining credit worthiness
With the help of AI, microfinance companies can now establish identities of individuals and businesses and determine their credit worthiness. In absence of any credit history with the mainstreaming banking, this is done by analysing their location, market conditions, purchase behaviour, social media behaviour, public data etc. AI can not only analyse the data points of one individual or business but also a larger group of individuals and businesses with similar attributes.
Predict the future
What to expect in future is perhaps the most critical question faced by every company. AI helps analyse historical data and helps predict the future. By analysing data, it can also list out the repeating trends in the market and forecast which trends might repeat in the future. This can help the companies make informed decisions about lending, insurance payments and remittances. One example in this regard could be taken from agriculture. Indian agriculture is considered the gamble of monsoon. AI can help microfinance companies in predicting the upcoming monsoon season and determine the creditworthiness of the farmers.
One of the most important utilities of AI has been in cost saving. AI helps the microfinance companies in saving operational costs related to repetitive tasks. Besides saving costs, it also minimises human error. Many microfinance companies are now employing AI based chat software which can address customer queries 24 hours a day. This has removed the limitation of time and space. AI can handle higher volumes of business with much more efficiency and accuracy, thus helping the companies grow and cater to larger markets.
By virtue of being money-oriented organisations, microfinance companies continuously face several threats and risks. These threats exist in various forms such as cyber frauds, terror financing, money laundering, hacking etc. AI helps continuously keep check on these threats and takes corrective measures before things get out of hand. Detecting frauds and anomalies is also another important feature of AI. Companies dealing in finance also need to comply with various government rules and regulations, which keep changing from time to time. AI makes sure that the organisations are in compliance with the government regulations, thus keeping law at the bay.
Artificial intelligence has been benefitting almost every field of modern life. Microfinance has been one of its prime beneficiaries. Few of the applications of AI in microfinance have been listed above however this list is not exhaustive. AI is finding more and more applications in microfinance with every passing year. It is not only making business easier and cheaper for the companies but also it is making life easier for many individuals by making financial services available to them.
Microfinance also acts as the starting point of credit history for millions of new customers. The new customers are often underserved in conventional banking as traditional banks depend largely on credit history to determine credit worthiness. In absence of any previous data for analysis, these new customers are often denied credit. AI based systems in microfinance and NBFCs analyse various improvised data points such as location, public data, social media behaviour, educational qualification, professional skills etc and determine the credit worthiness of new customers. Besides providing essential finance to these customers, microfinance companies and NBFCs also become the first milestone of credit history, with credit bureaus and traditional banks, for the new customers. In future, these customers can leverage this credit history to access the services of conventional banking.