As a product manager working for Ujjivan in the northern part of the country, I would say that it’s harder for people in the North to accept group guarantee than it is in the South. That bears out the theory that people in the South find it easier to identify themselves with a group than in the northern states like Uttar Pradesh.
In the North, they are ready to take the first loan at lower interest rates in a group environment, but by the second loan cycle they start to baulk at accepting the group guarantee.

I feel that the northern states also need badly to catch up with financial literacy, which means that MFIs must make more effort to educate their clients and inculcate in them financial discipline.
The MFIs also need to do a lot more to empower the women. I encounter a lot of women asking for loans for their husbands or children rather than for themselves.

I feel that a lot of clients think of MFIs as a source of low-interest, collateral-free loans rather than looking at them as a source of money that can develop their lives.  Many of such clients look at MFI loans as providing money for marriage and other needs that could be described as consumption needs.

Ujjivan is admittedly facing problems in a state like Uttar Pradesh with those who run out of patience with group guarantee in second and third loan cycles.

It depends on an MFI and its range of products as to how they respond to various livelihood activities. For example, a product could be targeted at only small shopkeepers.
Ujjivan also has a department of service quality whose personnel go to centre meetings and help a client draw up a chart of their savings and expenditure and think ahead. They help their clients apply their minds to how much savings they have now and how much money they will need, say, 10 years hence.

That’s financial education. However, there are customers who are reluctant to come to centre meetings or they would want such meetings to be monthly rather than weekly.
We also do bimonthly meetings with centre leaders or, say, after 1000 customers have been signed up by a branch. In these meetings, we teach them how best to use the money.
Before offering them higher loans, we also check their attendance in centre meetings, the reason for borrowing money, how they are likely to utilize the loan, etc.

So, directly or indirectly, we provide them education and financial literacy.

Most of our potential customers – we work in urban areas – tend to be without bank accounts; they have to borrow at very high interest rates from traditional lenders.
The convenience of an MFI’s service, the doorstep banking, is what attracts them to us. If an installment is not paid in time, it can be adjusted. It’s more of a relationship building kind of thing.

As for the ‘mission drift’ that MFIs have been accused of, I’d say it might not be the problem at every MFI. There are drastic changes going on in the microfinance sector. For example, there is now focus on social performance of an MFI, which should push the sector towards more conscientious fulfillment of its mission of financial inclusion.
(Pushkal Gupta is Product Manager with Ujjivan Financial Services Pvt. Ltd.)

'Microfinance industry is shifting its agenda to social performance'

Radhika Agashe of ACCESS Development speaks at Governance Now round-table on financial inclusion

Microfinance in India still has considerable geographical divide. The southern states have done well in terms of taking microfinance initiatives as well as in uptake. On the other hand, it’s still taking time for microfinance to pick up in northern states.

The social structure plays an important role in a community’s uptake of microfinance. Caste-ridden society, for instance, is an impediment to group formation. Financial literacy and the presence of NGOs that initiate the process of group formation are other important factors.

It is notable that the southern state of Andhra Pradesh was the first to enact the mutually-aided cooperative society Act, a very progressive version of the old cooperative law that’s still prevalent in most states. The MACS Act encouraged the formation self-help groups (SHGs) and registration and operation of their federations. That in turn contributed to the sustainability of SHGs after they have been nurtured by the NGOs.

Another divide can be seen in terms of rural and urban settings of microfinance.
Unlike in rural area where it’s easy to find people with similar social and economic backgrounds -- an important requirement for group formation -- urban settings for microfinance are characterised by people who have migrated from various regions and states of the country.

Because of cultural homogeneity of a rural setting, it’s easier for people to relate to each other, trust each other, and form a group. Such a condition rarely characterizes an urban setting. In an urban slum, for example, you can’t be sure where a person will be the next day.

In appraising the eligibility of a borrower in an urban area, the micro-finance institutions (MFIs) try to ascertain the cash-flows of the main enterprise as well as alternative and supplementary income sources of their potential client.
For example, in assessing the eligibility of a woman who runs a small shop, an MFI will also want to know what her husband does and if he has any stable source of income. Maybe her mother-in-law also works and contributes to household income.

So MFIs look at the cash-flow of an entire household to make sure that the potential borrower has enough of financial leeway to meet her repayment obligations. They also speak with neighbours to understand the social and economic circumstances of their potential clients.
In fostering a joint liability group (JLG), MFIs want to make sure that all members are comfortable with each other and will stick together for a reasonably long duration of time.
The appraisal process is pretty elaborate for the first loan, but becomes relaxed in second and subsequent loan cycles.

As for the regulation that’s needed for the microfinance sector, I would say the government has a lot of valid reasons to tread this path cautiously. India has had bitter experience with NBFCs when they were allowed to take deposits and that was mainly urban market. Now we are talking about a large rural market consisting of people who are not very financially savvy.

It’s a challenge for the government to design a regulatory framework for savings of those whom the microfinance practitioners want to serve because public deposits are a very sensitive issue.
As far as credit and insurance are concerned, the regulation is much simpler.

I think it has to be the banks that would have to shoulder the responsibility of handling savings. If business correspondents are not succeeding, some way will have to be found out to make them work better. One of the ways being considered is hiking the margins of the business correspondents in order to enable them to recover their costs.

MFIs also need to address the issues of transparency and social performance.
Development institutions that earlier helped MFIs develop and establish their lending model have now shifted their agenda to issues like transparency and social performance.

ACCESS Development Services, for example, has tied up with Microfinance Transparency, an international organization, to start in India an initiative to ascertain and publish pricing, shareholding and profitability of various MFIs.
So the market itself is responding to some of the problems.

I think it would be good idea to concern ourselves with a comprehensive economic inclusion model that will integrate finance, livelihoods, legal rights and social security, etc. It’s obvious that currently there is no coordination between various governmental and non-governmental agencies that are working on this wide variety of development themes.
(Radhika Agashe is Associate Director at ACCESS Development Services)

'All development measures should be integrated at block level'

K Natarajan of Sa-Dhan speaks at the Governance Now round-table on financial inclusion

A milestone in the microfinance sector was reached in 1992 when banks were allowed to open accounts of self-help groups (SHGs). The SHGs also became eligible to receive loans from banks and such lending was deemed to be the priority sector lending.

By the end of the financial year 2008-09, there were about 61 lakh SHGs in operation, consisting of over six crore members who have benefited from bank services. These 61 lakh SHGs had total savings of about Rs 5,500 crore in their bank accounts, which represented a 46 per cent increase over the amount of savings in the previous year.
The outstanding amount of the loans that the SHGs had received from banks by the end of 2008-09 was about Rs 22,680 crore.

It’s easy to see that the SHG-bank linkage programme is a model of financial inclusion that is more geared towards development and empowerment of the needy than the MFI model. It requires the beneficiaries to wait for six months before they become eligible to receive loans from banks. So the SHG-bank linkage has its own gestation period.
It’s also seen that the average loan amount absorbed through SHGs is lower than that of the MFIs mainly because the MFIs have been very proactive in advancing loans. We also see that of late the quality of SHGs is being compromised mainly because the banks and the organizations that promote SHGs are not able to reach the high level of commitment needed to develop such groups.

I understand that the RBI has taken a policy decision to deregulate the interest rates charged by the banks on loans up to Rs 2 lakh. A likely outcome of this deregulation is that banks will be more willing to act themselves as lenders rather than rely on NGOs and business correspondents. That is because with larger lending rates they’d be more willing to bear the cost of reaching out to the clients.

An important feature of modern microfinance is that it recognizes the consumption needs of the poor, as opposed to the integrated rural development programme (IRDP) which overlooked the consumption needs.
It’s important to realize that people are ready to wholeheartedly engage in productive activities only after their basic consumption needs have been met.

Since the MFI model is not focused on livelihoods, I believe it would in their own interest for MFIs to help their clients use the borrowed money in some sustainable productive activity.  Sole focus on advancing loans without regard to livelihoods results in problems. We now know of the phenomenon of ‘kite flying’, which means that some people are borrowing from one MFI and using the borrowed money to repay a loan taken from another MFI.
This practice suggests that the client might not even have any stable income-generation activity to speak of; they might just be taking one loan to pay off another.
The problem of multiple borrowing has been seen recently in places like Kolar (Karnataka) and Kanpur (Uttar Pradesh) and we fear that the incidence of this problem will only increase unless MFIs take remedial measures.

The MFIs also need to become more transparent in their operations.
An important step taken recently by the Andhra Pradesh government is to set up village-level committees consisting of officials and borrowers to monitor the activities of the MFIs.

The central government is currently in a dilemma as to what will be the features of the legislation for the microfinance factor. The current version of the bill only covers 20-25 per cent of the microfinance sector. One view is that since NBFCs, which together have the largest portfolio of loans, are anyway regulated by the RBI, why should they be regulated through the proposed legislation.
I believe, however, there should be a comprehensive bill that should cover all kinds of MFIs.

As far as the need for a comprehensive economic inclusion policy for people in the informal economy is concerned, I would submit that India have always had policies for the poor; the problem has been in their implementation.
We need a multi-pronged approach to address poverty and economic exclusion. There should be some mechanism that should devolve and integrate all development interventions and poverty alleviation programmes from the district level to the block level; that will require block-level coordination machinery.
A poor person should be made aware of all his entitlements under different programmes as well as how they could benefit from financial inclusion schemes.
(K. Natarajan is Manager -- Member Affairs and Standards, Sa-Dhan)

'MFIs are drifting away from their mission'

Gunjan Grover of M-CRIL speaks at the Governance Now round-table on financial inclusion

"A very prominent approach to financial inclusion in India has been to encourage needy women with similar social and economic backgrounds to come together into self-help groups (SHGs), start pooling their savings, and advance small loans to each other.
The members of an SHG are also expected to keep an account of their transactions. After six months of this kind of collective experience in thrift, credit and financial discipline, the SHG is able to open an account with a public-sector bank and becomes eligible for a bank loan, which the group can then divide into smaller advances to its members.

Another feature of the SHG-bank linkage programme, as this approach is officially known as, is that it seeks to promote livelihood initiatives.

A competing approach to financial inclusion is to create a special financial intermediary in the form of a microfinance institution (MFI), which, in India, acts primarily as a lender to those who cannot access bank loans.

The SHG-bank linkage and the MFI models have their own advantages and disadvantages. While the former seeks to foster SHGs as an independent institution in itself and is the only model focused on savings, the latter has proven to be very successful in rapidly covering the huge market for small loans.

The MFI model has shown itself to be rapidly scalable because of its commercial orientation as compared to the SHG-bank linkage where the financial incentives for the organizations that nurture SHGs have not been well defined.

The commercial orientation, on the other hand, has also proven to be the reason for many of the ills affecting the MFI model, especially the operations of non-banking finance companies (NBFCs).

All NBFC-MFIs, for example, have been focusing on low-hanging fruits – areas with good road and banking infrastructure, characterized by trading activities and good cash flows. Since such areas are convenient to reach for all MFIs, we are seeing intense competition between them and consequent problems.

A client in such an area could be borrowing from multiple MFIs and might also be borrowing from one to pay off a loan taken from another.

It’s difficult to track where the MFI money is going, because money is fungible and there is no sharing of information between lenders.

It is all very well to say that an MFI goes and check what a client is doing with a loan, but the ground reality is that most MFIs have set huge targets for their loan officers. When a loan officer is required to reach out to 600-700 clients, it becomes impossible for them to check each and every client.

The need of the hour is for MFIs to take a step back and recall their mission, which is to lend responsibly and not just focus on margins and profits.

Our study shows that while the expense ratios of the MFIs have been steadily going down, their interest rates have been simultaneously rising.

Recently some of the malpractices of the MFI promoters were also highlighted, such as the use of trusts and other bodies to benefit from capital gains and using money through private equity.

I believe MFIs operations require some regulation, especially in the area of bringing transparency in the operations of the lenders.
The government, on its part, has the challenge of balancing facilitation with regulation."

Gunjan Grover is a senior analyst with M-CRIL.