How Artificial Intelligence is Leveraging Micro Financing in India?

In the past few decades, microfinance has played a pivotal role in transforming the lives of economically disadvantaged individuals worldwide. Micro-lending, in particular, has been a crucial force in lifting millions out of poverty, enabling numerous small-scale entrepreneurs to realise their aspirations. Institutions have consistently sought ways to expand their outreach to potential markets, investing significantly in such endeavors. The latest phase of the microfinance revolution is unfolding as Artificial Intelligence (AI) is integrated into the sector. This fusion of AI and microfinance is not only propelling growth but also broadening accessibility to a larger user base. In the following discussion, we will explore the impact of AI on the microfinance sector in the 21st century.

• Microfinancing and Artificial Intelligence

Microfinance companies encounter a significant challenge in the form of data unavailability. The primary clientele of microfinance comprises individuals with restricted access to traditional banking services, resulting in a lack of pre-existing records or data for analysis. Even in instances where data exists, it often proves inconsistent or improperly formatted. In the contemporary landscape, the widespread accessibility of the Internet, facilitated by reduced costs, has become pervasive. Through the utilisation of cell phones and information highways, Artificial Intelligence (AI) efficiently gathers and analyses extensive data, standardising it into comparable formats. This not only enables organisations to reach larger customer bases but also empowers them to realize the true potential of their clientele.

• Facilitate in determining creditworthiness

Through the utilisation of AI, microfinance firms can now establish the identities of individuals and businesses, assessing their creditworthiness even in the absence of conventional banking credit histories. This is achieved by scrutinising various factors such as location, market conditions, purchasing patterns, social media engagement, and public data. AI is not limited to analysing the data points of individual entities; it can also extend its capabilities to assess larger groups of individuals and businesses sharing similar attributes.

• Future Prediction

The most crucial inquiry confronting every company is anticipating what lies ahead in the future. AI plays a vital role in examining historical data and facilitating future predictions. Through data analysis, it can identify recurring trends in the market, offering insights into which trends are likely to persist in the future. This capability empowers companies to make well-informed decisions regarding lending, insurance payments, and remittances. A pertinent example is found in agriculture, where the unpredictability of the monsoon is a significant factor. 

• Cost efficiency

AI has proven instrumental in achieving cost savings, particularly in the realm of microfinance. By automating repetitive tasks, it enables companies to reduce operational costs and mitigate the risk of human error. A notable application is the adoption of AI-based chat software by many microfinance firms, allowing them to address customer queries around the clock. This not only eliminates constraints related to time and space but also enhances business efficiency and accuracy. The increased capacity of AI to handle larger volumes of business contributes to the growth of companies and their ability to cater to broader markets.

• Managing Risk in Contemporary Business Environment

As financial entities primarily focused on monetary transactions, microfinance companies are consistently exposed to numerous threats and risks. These hazards manifest in diverse forms, encompassing cyber fraud, financing of terrorism, money laundering, hacking, and more. AI plays a crucial role in proactively monitoring and addressing these threats, intervening before situations escalate. Another significant function of AI involves the detection of fraudulent activities and anomalies. Given the dynamic nature of government rules and regulations governing financial operations, microfinance firms must adhere to evolving compliance standards. AI ensures that organisations remain in conformity with these regulatory changes, thereby ensuring legal adherence.

Artificial intelligence has brought considerable advantages to various aspects of contemporary living, with microfinance standing out as a notable beneficiary. While some applications of AI in microfinance have been highlighted earlier, this enumeration is not exhaustive. Each passing year witnesses the continual expansion of AI applications in microfinance, simplifying and reducing costs for companies. Moreover, it contributes to enhancing the quality of life for individuals by extending access to financial services.

Microfinance serves as the initial step in establishing a credit history for numerous new customers, especially those who are typically underserved by traditional banking systems relying heavily on existing credit histories to assess creditworthiness. Conventional banks often deny credit to individuals lacking previous data for analysis. However, AI-based systems in microfinance and Non-Banking Financial Companies (NBFCs) employ various alternative data points such as location, public records, social media behaviour, educational qualifications, and professional skills to evaluate the creditworthiness of these new customers. In addition to providing essential financial services, microfinance companies and NBFCs become the inaugural entry in the credit histories of these individuals, paving the way for future access to conventional banking services through credit bureaus and traditional banks.

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Authored By

Dr. Deergha Sharma
Associate Professor
Department of Management & Commerce