Digital Transformation in Microfinance:Empirical Evidence from India's Fintech-Enabled MFI Ecosystem

Abstract

Abstract: This paper examines the impact of digital transformation on operational efficiency, outreach, and borrower outcomes across microfinance institutions (MFIs) in India. Drawing on a panel dataset of 284 registered MFIs spanning 2018 to 2023, combined with primary survey data from 1,620 borrowers across five states—Uttar Pradesh, Odisha, Maharashtra, Tamil Nadu, and Rajasthan—we employ a difference-in-differences (DiD) framework augmented with propensity score matching (PSM) to isolate the causal effect of fintech adoption. We find that digitally transformed MFIs reduce cost per borrower by an average of 31.4%, improve portfolio-at-risk (PAR-30) ratios by 18.2 percentage points, and expand outreach to previously unbanked households by 24.7% relative to non-digitised counterparts. Borrower-level analysis reveals significant gains in financial literacy, repayment regularity, and micro-enterprise revenue among clients served through digital channels. However, significant heterogeneity exists: rural and semi-urban MFIs face persistent infrastructure constraints that attenuate these gains, and women-headed micro-enterprises exhibit slower adoption of digital interfaces. The findings contribute to the growing empirical literature on fintech-microfinance convergence and carry direct policy implications for RBI's Priority Sector Lending framework and the PM Jan Dhan Yojana digital outreach agenda..