How Digital Tools are Transforming the Way Microfinance Institutions (MFIs) Collect Loan Repayments
Microfinance institutions (MFIs) are financial agencies that provide small loans to customers who need access to banking facilities. A loan below Rs. 1 lakh will be considered a microloan microfinance institution’s offer. Microloans have various benefits for people and are essential to economic development. However, microfinance faces several challenges, including a need for more investment validation, debt collection, and more.
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The Challenges for Microfinance Institutions (MFIs)
The main objective of the microfinance concept is the financial growth of backward sections, especially women in India. This concept has helped improve the country’s economy since it was introduced. But MFIs still face several challenges that they must overcome. The MFIs face indebtedness because of poor risk management. Microfinance institutions provide collateral for loans, increasing the risk of bad debt. Hence, microfinance institutions require a robust risk management system.
Another issue microfinance institutions face is regulatory oversight. The RBI is the premier regulatory body for MFIs in India. Some regulations from the RBI benefit MFIs, but other regulations must address any issues. With new regulations, microfinance experiences structural and operational changes, which also cause ambiguity in norms of conduct. Hence, the microfinance industry requires separate regulatory authorities to survive.
Microfinance institutions are as dependent on the Indian banking system as commercial banks, and most MFIs are non-governmental organizations (NGOs). The banks help MFIS stabilize the fund and carry out their lending activities. The commercial banks that offer loans to microfinance institutes charge higher interest rates for a shorter period. It causes microfinance institutions to charge higher loan interest rates than mainstream banks. Also, people prefer loans with low-interest rates, causing MFIs to lose potential customers.
The solution to these challenges for the microfinance institution includes proper regulation, a complete variety of products, different sources of funds, technology like debt collection software, etc.
The Benefits of Digital Tools in Loan Repayment Collection
Digital tools like automated cash collection solutions help MFIs minimize the risk of defaults. Moreover, digital tools offer more benefits to MFIs. Let’s look at the key benefits of digital tools hold for loan repayment collection:
Tracking the Loans Correctly
With a digital solution, MFIs can track debtor accounts. You can easily access the unpaid loan data immediately with the help of a Cash collection system. For instance, one of your customers purchases a loan from you to buy a car and pay off their loans. Normally, it takes a long time to update this information. However, if you have an automated system, you can see loan repayment updates immediately. You can also track your buyer’s financial position and find the right time to connect and remind them to repay the remaining loan.
Automate Communication with Borrowers
Debt collection software allows lenders to automate communication with their borrowers across several channels, such as SMS, email, and calls. People have different preferences for communication channels. You can improve your customer contact strategies by using digital tools to determine which communication channel each customer prefers.
For example, some customers may feel more comfortable sending an email, while others may prefer a live chat. The digital solution gives you a clear picture of which channels your customers prefer so that you can tailor your message to each one. You can also automate contacting people to improve your debt collection.
Sending Timely Repayment Notifications
Aside from recovering debt, a digital solution can make any process automated. Hence, improving the workflows for the organization. It will help the MFIs to reach the larger customer pool as your service volume increases.
Automation also helps you regularly send notifications to customers to help them remember to repay their loans. It reduces the risk of bad debt and allows you to recover the loan on time. It can send messages to customers via different channels and can keep a conversation with them at any time. Digital solutions also analyze and predict the best time to contact clients.
Streamlining the Tasks
Another benefit of automation in the operation of the microfinance sector is that it drives more efficiency. Digital solutions help generate machine learning-based chatbots that communicate with your clients in their language. It can also increase agent efficiency by freeing call center agents for other, more complex tasks. It also saves a lot of time to conduct manual and transactional processes for the organization.
Automation also aids MFIs in testing different strategies and discovering one that works best. You can make small changes in send time or written copy and compare them with each other to find the best engagement results.
Better Transparency between Lenders and Borrowers
Using digital solutions to maintain transparency between the borrowers allows lenders to obtain comprehensive insight into customers. Lenders can easily access the data describing borrowers’ behavior with a cash collection tool. It helps lenders choose the right borrowers and better understand the customer’s credit risk. It also helps MFIs to make better and faster decisions regarding loan applications. In simple words, digital solutions help collectors to predict future repayment and the risk of delinquency. With this MFIs can significantly protect themselves from the risk of delinquency. It also allows lenders to find trustworthy clients who can repay their loans on time.
Calculating Additional Charges Due to Late Repayment
A debt collection software is integrated with various digital tools and technologies. Hence, MFIs can use this software to instantly calculate their customer’s overall due loan information. It can also send this information to respective customers and help them understand the repayment plan. Knowing the penalties on their late loan repayment will prevent the customers from becoming delinquent. It enables you to get your money fast and maintain the cash flow. Effective collection software solutions include convenient payment options for customers, making a collection of signatures for payment arrangements easier
Quick and Hassle-free Dispute Management
With digital solutions, you can notify your clients about the progress of their disputes, analyze the cause, and speed up the resolutions. It will help MFI boost its image as a reliable sales partner. Automating the collection process allows you to send the payment reminder notice before the invoice is due. It also reduces the risk of errors, meaning less cause of dispute between the customers. A cash collection software tracks and collects all relevant information about the customer accounts to reduce the chance of misunderstanding when different employees work on the same accounts. Hence, you can improve customer satisfaction with digital solutions by providing accurate and responsive information about their account status.
Nowadays, people prefer companies that offer a wide range of payment options. The microfinance sector also uses the technology to improve its Cash collection system. MIMOIQ offers a well-integrated software solution for NBFCs and microfinance institutions along with cash collection services. The cash collection software helps the MFI handle all their cash management needs. The key benefits of debt collection software service from MIMOIQ include simple-to-use service, reduced risk of fraud, theft, & mismanagement, and fast settlements.
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