Smart cards and P D As to change the face of Indian Microfinance Sector

Perhaps the most amazing thing that happened to microfinance sector after Professor Mohd Younis won Noble Peace Prize was introduction of technology in this sector. All over the globe we see that new technologies are redefining financial services in innumerable ways. Even countries like Nigeria and other West African Nations have seen introduction of technologies in microfinance sector. Some institutes are already working with Automated Teller Machine networks, smart card operations and other computing technologies. It is unlikely that organizations that started in 1980’s would have imagined the use of such technologies.


Need of automation


Before we learn more about Smart Cards and the Personal Digital Assistant (PDA) lets learn about the need of automation in this sector. Almost all Microfinance Institutes are challenged to find a suitable way to serve low income clients in a most cost-effective way. Automating the operations would just lead to increase in cost in short run. The two most important reasons for automation are:


  • Enhanced efficiency of the institute
  • Satisfaction of the customer

    Automation can lead to efficiency improvements due to efficient systems and reduction in labour costs, which forms the largest expense in an MFI’s balance sheet. Technology can also accelerate service delivery and offer customers more flexibility and convenience. These improvements permit microfinance institutions to remain competitive in the industry. If implemented correctly, technology can be used to cut costs, expand outreach and provide better services.


    Use of PDA to Increase the efficiency of a loan officer


    PDA is a light weight hand held device. It looks like a tiny computer but performs other specific functions. The use of PDA gives the liberty to a loan officer who virtually brings the entire information system to the field near the clients. This reduces the burden of carrying papers and other sheets and subsequent entries to the information system of the organization.


    Advantages of PDA include:


  • It support software that enables the loan officer to conduct quick meetings and collection from the clients
  • Helps in collection of information, conducting loan analysis and disbursement of funds, therefore reducing the time taken for each activity.

  • Reduction in chances of fraud and theft.

    However PDAs do not work in solitude. It has to be integrated with the management information system of the organization. Such integration allows loan officers to generate credit reports and other daily statements that directly from their PDA based software.


    Cost involved:


    An institute has to shed, on an average, USD 150 for this machine. Apart from this there are other charges for software development. This would come to around USD 200 per machine.


    PDAs are currently being used extensively by Compartmos in Mexico where the loan officer brings customer information from the field. PDA is also used for doing credit analysis to make quick loan decisions.


    Use of Smart Cards


    A smart card looks like an ordinary credit and debit card. But unlike a credit card it has a microchip instead of magnetic strip. Such a microchip can hold information 800 times more then a magnetic strip and manages numerous personal information regarding different products taken by the clients (e.g. loan, savings, insurance). Smart card is even more secure then a credit card and the device get activated only by a retina scan or fingerprint. Smart cards are also enabled to hold and transfer currency. One important advantage of smart card is that it they can conduct transactions off-line. So no telephone lines are required to complete the transaction of money. All account information is stored in the chip.


    The main advantages of smart cards are:


  • It is more secured then other cards and institutes can use it as an electronic passbook.
  • Over the coming years the card would help in understanding the pattern that the consumer adopts in taking different products and as such would help the institute to innovate new products without any extra cost. For e.g. For example, if many customers use the smart card to buy products from a particular vendor, the MFI can form an alliance with the vendor in which customers get a discount on goods in exchange for the MFI’s promotion of the vendor. The vendor may even refer current customers to the MFI.
  • Reduction in chances fraud and theft.
  • Cost involved:


    The cost of the card would depend upon the features in contains. The least amount that an institute charges from clients is USD 3 per card.


    In India, SKS has been using the smart card with a slighter different version of PDA suited to guard information against rain and humidity. However the use has not been extended throughout the country by the organization.


    Smart card also works as an identification card of the client




    Whatever technology is used in this sector, the aim remains one, to extend service to poor and ultra poor is extreme areas of the country. Conversion from manual accounting to computerised accounting brought credibility in the eyes of the lenders who started to trust the Microfinance Institutes with the borrowed money.


    These latest technologies would help MFIs to work even more closely with the rural India and increase its outreach in a cost effective manner. One need to remember that MFI can only play a part in rural development only when it becomes profitable in itself.


    Implementation of technologies also involves cost and since its benefits are not achieved in short run most of the organizations try to avoid computerization and automation. However, if a microfinance institution has carefully implemented the project by conducting an analysis of current and future needs, a careful and methodical cost assessment, pilot tests, and suitable staff training and preparation, it is less likely to experience a money-losing venture in automation. Institutions that cut corners on analysis, testing, and training, are likely to make more profits in long run then they could have ever imagined without such automation.


    Pradyuman Singh Rawat

    [Image source:]