The pandemic has necessitated the need to re-look at the tenets of MFI lending
Covid-19 has impacted the MFI sector, with collections having taken an initial hit and disbursals yet to observe any meaningful thrust.
By Jagriti Bhattacharyya
The microfinance industry in India witnessed unprecedented growth over the last couple of decades; from just a few players offering SHG and JLG loans to a matured market, the industry has come a long way. The model had its genesis as a poverty alleviation tool, focused on economic and social upliftment of the marginalised sections through lending of small amounts of money without any collateral to women for income-generating activities. A recent report by MFIN, showed that the MFI loan portfolio had reached Rs 2.31 lakh crore at the end of FY2020, touching the lives of 5.89 crore customers.
Over the years, the sector has incorporated several changes in its operating model, including digital interventions across the lending value chain; these have enabled MFIs not only to reach a greater number of clients and thereby grow at a much faster pace, but also to do so in an efficient manner by streamlining processes and reducing turnaround times.
But, in their quest for growth and profitability, the social objective of MFIs—to bring in improvement in the lives of the marginalised sections of the society—seems to have been gradually eroding. While, in terms of client outreach and overall loan accounts, the numbers have been on an upward trend, the actual impact of these loans on the poverty-level of clients is sketchy as data on the relative poverty-level improvement of MFI clients is fragmented.
Anecdotal evidence also suggests that the proportion of loans utilised for non-income generating purposes could be much higher than what is stipulated by RBI. And with most of these loans being of short tenures, these credulous customers soon find themselves in the vicious debt trap of having to take another loan to pay off the first, and the cycle continues.
Does this mean that the concept of microfinance in the country is without merit? In times of exigencies, the sector provides the much-needed aid to the economically underprivileged who would have otherwise been at the mercy of the local moneylender and usurious interest rates. However, in the current scenario, the sector needs to work with a rejuvenated purpose—an agenda that resonates with the discussion in this article in order to achieve both economic and social good, as one without the other is meaningless for the sector and the nation at large.
First, while MFIs are making every possible attempt to adopt digital technologies in order to streamline their processes, enable quick customer on-boarding, loan disbursals and even cashless collections, digital should be utilised even beyond the lifecycle of the loan. MFIs should ensure that the ‘stated purpose of the loan’ that is often asked from customers at the loan-application stage is verified at the end of the tenure of the loan, to ascertain whether the loan amount has brought in any meaningful improvement in their lives; digital records of this should be maintained for further scrutiny and new loan sanctions. It is worthwhile to note that the perils of over-leveraging of this section of the society without any visible upward drift in their earning capability cannot be simply ignored.
Second, in an industry that is dominated by cash, determining household income for loan eligibility purposes poses a serious challenge. Field officers should be prudent enough to include income from all sources as underestimating income would mean that customer segments that exceed the income eligibility norms are offered loans, while overestimating or incorrectly estimating would mean that genuinely deserving customers aren’t offered any. Unsurprisingly though, field officers are found erring more on the side on conservatism.
This humongous quantum of authenticated customer data, if captured and reported properly, could serve as critical underwriting inputs when these customers (having proved their credit worthiness in the microfinance industry) chose to avail financial services from commercial banks, thereby providing the much-needed shot in the arm to boost financial inclusion!
Lastly, in order to incentivise MFIs to spend time and effort on the above two, RBI should encourage all institutions to monitor their impact on the society by means of a ‘social impact scorecard’, where customer data that is verified and captured digitally is used to evaluate the impact of each loan in the lives of the clients, subsequent improvement in their earning capacity over the years, other direct/indirect benefits rendered from loan utilisation and finally how soon MFI customers are able to transition out of the MFI fold. This last one is one of the most widely ignored statistics in the current scheme of things. This ‘social impact scorecard’ could also be leveraged when MFIs themselves seek funding to support their operations, which can serve as the crucial differentiating ‘intangible factor’ to enable commercial banks, development institutions and others in making lending decisions to MFIs.
Covid-19 has impacted the MFI sector, with collections having taken an initial hit and disbursals yet to observe any meaningful thrust. Microfinance institutions, in their quest to continue their growth momentum, need to look beyond the obvious. Capital buffers, loan moratorium and liquidity stimulus can only contribute so much when wading through the stormy tides. Caught between the devil and the deep blue sea, institutions need to focus on creating a sustainable and scalable microfinance model with a mandate that is unequivocal about both economic and social good.
(Author is Research scholar, IISc, Bangalore. Views are personal)