Interview| Digital lending to be the next big thing in microfinance: Arohan Finance MD

The microfinance segment, which has played a crucial role in bridging the gap between formal lenders and the unbanked rural segments, will see digital lending as the new key driver of growth and inclusion, said Manoj Nambiar, Managing Director & Chief Executive Officer (MD & CEO), Arohan Financial Services, a non-banking financial company and microfinance institution (NBFC-MFI).

In an interview with Moneycontrol, Nambiar said digital lending pilots have yielded a positive response and feedback from their microfinance customers.

“Currently, our digital lending pilot has around 10,000 customers and we have total assets under management (AUM) of Rs 50 crore. This will grow to Rs 300 crore in this financial year. Going ahead, we see this number growing to Rs 2,000 crore in the next 2-3 years,” Nambiar said.

Nambiar said that the demand for digital services among microfinance customers is increasing as they are attracted to digital services due to the flexibility factor, rewards, cashbacks and since they are easy to use.

Edited excerpts:

In the first place, when did you see the demand for digital lending in the MFI space?

The early realisation of the need for digital and cashless services in the microfinance industry was felt during demonetisation in 2016, when there was a cash shortage in the market.

During that period, what we saw was the slow and rising demand for digital payments.

How has the response been for your digital lending pilot?

Currently, in Arohan Privilege, our digital lending business, we have around 10,000 applications through our mobile applications, through which we have disbursed around Rs 50 crore. We see the number of customers for fiscal 2023-24 rising to around 25,000 and we are looking to disburse around Rs 200 crore-Rs 300 crore.

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In the next 2-3 years, we see our digital lending portfolio rising to around Rs 2,000 crore or one-third of our total portfolio, which, at the moment, stands around Rs 5,600 crore.

What is the response to digital lending channels?

The first thing our customers have realised is the space for flexibility in the services. From repayments to loans, they can access everything on their mobile phones.

Generally, a microfinance customer is used to the traditional model wherein they would go to branches for accessing financial services. With time, we’ve seen a rising number of customers opting for digital services due to mobile phones and digital penetration in the hinterlands of the country.

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From the company’s end, we have introduced several reward schemes, points and cashback services, which has firstly kept existing customers in place and secondly attracted some new customers.

What were the key challenges?

For our digital lending business, we picked up the top 1 percent of the customers who have been doing business with us for a long time and have a good credit record. With time, we started to have new customers. We worked on their credit record by accessing their previous credit record (if any). This took us time.

On the repayment side, we have fairly seen a good record from our customers. Only 1 percent of our customers need a repayment reminder.

Lately, we’ve seen banks going aggressive on microfinance business with some acquiring small MFIs. How do you see that?

The banks which are going aggressive are mainly those who have a strong microfinance customer base. The other banks are looking at the opportunity in the segment.

What is your outlook for the microfinance industry?

The stage for the MFI industry is set to grow in the days ahead. With more spending and economic activities happening around, we see that the demand in the sector is rising. The current AUM of the industry is around Rs 3.5 lakh crore, which, we feel, is just 35-40 percent of the penetration done. There is still space for growth in the sector.

An issue that we see, not only in the MFI industry but also in the larger financial sector, is high attrition. Employees are leaving companies too soon for various reasons. This needs to be checked.