The government’s decision to demonetize two denominations of high value currency notes and to push forth the idea of a cashless economy since November 8, 2016 is indeed a paradigm shift in India’s economic history. Since the platform for ‘Digital India’ was launched, MFIs have been playing a very important role in taking it forward.

Even though the transition was not easy for MFIs, given that majority of their customers are in rural areas, which have traditionally remained under-served by commercial banks, and almost all transactions were done in cash. MFIs, like VFS, have been working towards implementing a system where cashless transactions are encouraged.

While supporting the significant transition to remain in sync with ‘Digital India’ had its roadblocks, MFIs have adopted ways to disburse loans in a cashless manner, and have even been encouraging similar process for repayment. Digital transaction has also emerged beneficial for MFIs as this helps to mitigate risks and bring down operational costs, by cutting down on the system to handle large volumes of cash every day.

A post-demonetization report from Microfinance Institutions Network (MFIN), the umbrella agency for MFIs in India, found that more than 60 percent of micro-lenders have taken up cashless methods to disburse loans, with more than 39 percent of loans disbursed in the financial year 2016-17 was done digitally. The report found that in 2016-17, while 88 percent of total MFI loan disbursements were electronically, 50 percent repayments were via cheques and 33 percent through electronic transfers.

Based on the understanding that the best possible methods for them to go digital, a large number of MFIs have initiated processes and technology of promoting digital technology in their business. For its own purpose, VFS has developed a mobile app to connect the entire organisation, from the topmost stakeholder to the last person working at last mile connectivity. The internal app was inspired by the vision that the digital process will help achieve a much better form of financial inclusion.

Going digital has not just helped MFIs like VFS to provide seamless and faster dissemination of loan, the process has also helped gain better cost benefits. MFIs are also working on using other transaction models, like Aadhaar-enabled payments, mobile wallets and pre-paid cards. A general belief in the microfinance industry is that with increasing use of digital methods and MFIs actively promoting cashless payments, more than 100 million e-transactions could be seen by 2020.