The date 8th November 2016 strikes fear in the minds and hearts of many. Overnight Demonetization wreaked havoc on many cash-heavy businesses. Microfinance Industry serving more than 50 million base of the pyramid households and heavily reliant on cash for its disbursement and collection also went through a torrid time. The industry, however, has a history of rapidly innovating and emerging stronger when faced with a crisis.Many new-age MFI’s like Svatantra were disbursing digitally in bank accounts since 2013, but Industry at large shifted to Cashless disbursement only post 2016. One leg of the cash-heavy business had been solved albeit reluctantly and only when pushed to the brink.

But since the digital infrastructure wasn’t deep enough, the incentives for cashless collection weren’t strong enough, over 99% of collections remained in Cash. The Industry probably asked itself why fix something which is not broken? What are the odds of another DeMon happening again? While there were isolated attempts by many players trying out various modes of digital collections like NACH and AEPS these players and the clients trying it out remained an insignificant minority. The law of diffusion of innovation hadn’t moved past even the early innovators (2.5%) at an Industry level.

The way any problem statement is defined decides the course of action while the Purpose of solving the problem often decides the commitment of an organization to solve it. For far too long the need for Digital payments in Microfinance has been posited as a productivity hack or a way of reducing operating expenses only. Since it takes significant time and effort for these benefits to accrue, no organization has completely committed itself to cashless collection.

I argue that the digital payments in Microfinance is not just a tech initiative but it is an Employee Safety Imperative. There are more than 100,000 field officers in the industry carrying cash virtually every day. Every single week, in multiple corners of India, there are attacks on field officers with an attempt of snatching cash. Sometimes the attacks are fatal and the field officers lose their life. For far too long, this has been treated as an occupational hazard. No better time to change it than today amidst COVID since the value of human life and suffering is shared more strongly by everyone now more than ever. All benefits of increased productivity, increased engagement of employees and clients, and of course lower operating expenses will flow from this not to mention the immense goodwill this will generate among the frontline employees.

Now that the WHY part of the Digital payments in Microfinance is settled, let us move to the HOW of it.

Well, the problem is two-fold.

a) Having a seamless system to set up a mandate for recurring payments
Today the only way a client can set up a mandate without the need of a smartphone is the NACH way. The number literate client still has to sign on the mandate which is verified with the signature during her bank account opening. The TAT is long, rejections are high and hence is far from being efficient. Even after going through the pain of setting up the mandate the fear of bounce charges looms large on the minds of the client and the MFI. A bounce rate of 15% to 20% is quite common even in the affordable housing industry, where the borrowers are slightly more evolved in banking habits. The bounce charge as high as the EMI for clients without banking habits is draconian. It is an equivalent of having negative marking in exams for primary school kids. It kills any incentive for the clients to sign up for it. Moreover, since there is also a bank charge for the MFI in the event of bounce by the client, it further deters the MFI from committing to it. The UPI 2.0 recurring mandate is elitist since only a smartphone user can create a mandate, leaving a good 65% of MFI borrowers out. An equitable solution would be creating a mandate using the AEPS mechanism, where the borrower needs only a bank account seeded with Aadhaar. No signatures, no smartphones, and certainly no bounce charges. Hope NPCI the Umbrella organization for digital payments comes up with such a product soon. It has the potential to be a game-changer.

b) Funding the bank account by the clients so that the recurring payments go through
As Nandan Nilkani puts it "Cash destroys Economic Velocity since cash can be used only locally". But to digitize cash, we also need a hyper-local network of touchpoints. India Post has spectacularly failed in being that touchpoint. It has squandered that opportunity and ceded that space to many Cash Management companies, who are painstakingly creating a network even in the remotest of villages. The MFI's need to work with these CMS (Cash Management Service) companies with great rigour to ensure the accounts are funded and payments are transferred directly by CMS companies to MFIs. This ensures that the front line officers of MFIs don't carry any cash since as discussed earlier carrying cash in the hinterlands of India isn't a safe proposition.

At Svatantra, we have defined Digital Payments as an Employee Safety Imperative and are making all efforts now to go largely cashless. We had started AEPS collections in May 2019, had gained good traction by February 2020 and we would have reached close to 40% of total collections by now if not for COVID. We have tied up with 4 CMS Partners and are creating a network in every village that we are operating in. This may not happen tomorrow, but I do not doubt in my mind that it will happen sooner than later. It is as they say not a matter of "If" by "When". We at Svatantra are extremely hopeful to be the change that we wish to see.


Chief Executive Officer
at Svatantra Microfin Pvt Ltd