Why is Microfinance facing headwinds in India

From regulators to business magazines to MFis, last few months everyone seems to be talking about how there is a demand problem in Microfinance and how borrowers have been over leveraged. While I agree to the existing borrowers carrying more debt than what they can comfortably service, it’s the 1st assessment that’s preposterous. Are we saying there aren’t many borrowers left to take Microfinance loans which are typically given to below poverty line population, towards income generation?

?

When I 1st entered the Microfinance industry in 2017, one thing that was clear as day was – Microfinance will always be supply driven, we have enough and more borrowers available in the country, and a demand deficit won’t happen. So, what changed?

?

Let’s first see how microfinance functions. While there are 2 major products – SHG & JLG, we will discuss JLG here. JLG, or Joint Liability Groups, consists of a group of 20-30 female borrowers, from the same locality. They are all given loans as a center and the collection also happens in a center meeting. If 1 borrower is absent in the meeting, others contribute and make up for the absentee’s EMI (EWI as most MFIs collect weekly)

?

Every loan officer typically starts his collection meetings, early morning and does between 5-8 meetings every day. In a 6-day week, that’s 30-45 meetings. Thus, the usual loan portfolio of every loan officer is between 750-900 clients. Do you see the problem?

?

Problem 1 – to get 20-30 women in one center, one would ideally need a village of 50-80 families. Most MFIs mandate that the borrowers be within walking distance from the center, thus members from far away cannot become part of that center.

Problem 2 – to do more meetings in a day, one would want the centers to be near each other. Ideally, in same village. So, to have 3 centers in a village, one is looking at a village of 200-250 families.

?

Since the past few years, incentive structures have also changed. Instead of being rewarded for their Collection %, loan officers are being incentivised on Loan Disbursals. This results in them going to the easiest, most accessible and most productive markets.

So, what happens to smaller villages? Well, the loan officers won’t go there. What happens to the sparsely populated areas like hills, states like Rajasthan with lower density? Again, the loan officer won’t go. These villages aren’t productive for him and aren’t profitable for the company. That’s why one sees densely populated states with a large poor population having a high concentration of MFIs, like Bengal, Bihar, Orissa. Ultimately borrowers in these densely populated areas get over leveraged.

?

There are many states, where MFIs have either 0 or insignificant distribution, like Himachal, Manipur, Sikkim and more. So, does that mean there are no poor people who need income generating loans?

?

Obviously, one cannot expect MFI companies to start operations in areas where it’s not profitable for them. The solution lies in Micro Lending.

?

Since about 2019 I have talked about transforming the loan process and making it digital.

?

The loan officer won’t go to a small village, but mobile phones have reached those pockets. These people have the JAM trinity with them. They have a Jandhan account, an Aadhaar card and a Mobile phone.

?

Digital transformation does not mean giving Tablets and biometric scanners to Loan Officers. It means a loan that originates at a borrower’s phone, gets qualified using Aadhaar, is processed centrally and disbursed to their bank account.

?

Many will say that what about loan collection, which is the real role of a loan officer. Let me ask something, since 2017 every MFI has talked about digital collections. Yet, none has done it! Is it really a skill issue or a will issue? Its about carrying the weight of a legacy. Many find pride in stating how large teams they handle. Why look elsewhere for example, I myself used to talk about having 6000+ people in my team.

?

A complete digital journey

1.??????? Helps enhance productivity of your current workforce

2.??????? Expands distribution in villages, where you wouldn’t go physically

3.??????? Reduces your cost of operation by 66%. From the usual 8-10% to 2-3% of portfolio

?

As of 2011 census, 121000 villages had a population of less than 200. Even if 50% of females here are eligible for loans, we have anywhere between 35 to 50 lakh women who are eligible for a Microfinance. Considering the current distribution model, majority of these will be untouched.

An over-dependance on legacy architecture, extremely slow evolution wrt market dynamics and the stress of growth has meant that we keep giving more and more loans to existing customers and end up giving them more collection pressure than they can handle or generate via increased income.

New customers, new distribution, new geographies will be key in shaping Microfinance in India. The most efficient and productive way forward in this is through technology. Microlending, digital lending & digital collection can reinvent & rejuvenate the Microfinance industry. Let's see who has the willingness to bring about this change!

#Microfinance #Digital #Growth #Banking #India