As I mentioned in last week’s post on the BISWA loan guarantee deal, IFMR Trust and ICICI Foundation have big plans to shake up India’s rural banking sector. (I’ll leave the task of providing a full description of those plans to my colleagues at the Trust who will be able to provide a much better overview than I could.) This week, staff of the IFMR Trust is in the field in rural Thanjavur talking with bank managers, local officials, land owners, and borrowers to get a better idea of the facts on the ground when it comes to banking and the poor. Nachiket Mor, Bindu Ananth, and Janhavi Dave have just sent me a very interesting list of concerns they have been hearing repeatedly from many of the people they have talked to:
- The poor are not responsible consumers of finance. Microfinance borrows only use loan money for “unnecessary” consumption activities such as weddings, funerals and other social functions which leads them further into debt traps
- Lenders should do more to ensure that money is used for productive purposes
- Any extra income that they have, the men drink it away.
- Financial Literacy must precede any lending.
- SHGs (and potentially JLGs) are merely a new breed of money lenders they do not really invest in any productive assets. A few members of the SHGs (those that supply the savings) get rich by on-lending to other members at 3% per month.
- The poor will borrow as much money as they can and run themselves into a debt trap.
- Insurance is not a product that the community members understand
- Variable component of loan officer salary does not encourage the staff members to improve the sales and services, but deters them to take up the job altogether
- Men are not responsible consumers of finance
- Men JLG model does not work
- The money lent to women, is a loan given to the household and not the woman as an individual
- Repayment can happen only on the field
These concerns are certainly not new. Indeed, most of them have been around as long as the microfinance movement itself. Still, the pessimism of many that microfinance loans used for consumption purposes will only serve to worsen the lives of the borrowers never ceases to surprise me. As Nachiket points out, we desperately need more quality research on these issues.
One of the observations, the one regarding SHGs enabling the rise of a new class of money lenders, I found quite surprising. I wonder whether this is representative of SHGs in other areas.
6 comments:
Is this a solution (?): Release of funds based on an economic activity - the idea is to release funds only to a current account that supports a business. Funds from this current account cannot be drawn as cash (except as salary in which case a salary slip is must, that too at the kiosk); instead the funds would be released to other accounts on the basis of some purchase relevant to the business. Profits could be released to a personal or households savings account periodically, which can be used as the person deems fit.
I agree this would necessitate too much of monitoring, but could be made possible with current level of technology in tracking transactions. The benefit in this is that the transactions would be a lesson of financial literacy for the users. It would be easy to explain to the user where and how the business made/lost money.
Doug says, "Indeed, most of them have been around as long as the microfinance movement itself". Actually, this has been around much earlier, since the time of priority sector lending. A common banker's woe during the eighties and the early nineties was the recovery of animal husbandry loans. In particular, loans given to rear sheep/goats would disappear along with the animals. When the loan officers went to the field to recover, they had to face some of the rough type. Eventually they tried to tag the ear of the sheep. The tags were very promptly returned. The animals continued to be killed by some vague disease.
About the SHG argument:
I know it won't lead us anywhere to discuss the rhetoric, but I wonder what those people actually mean by "SHG are merely a new breed of moneylenders."
Do they refer to moneylenders as those who charge high interest rates or those who lend without security?
If the former is the case, where's the line between moneylenders and banks?
What we need to emphasize is the fact that now a longer spectrum of financial service providers for the poor is emerging, from banks to MFIs to SHGs to moneylenders. 20 years ago, this spectrum was not even continuous. There was a spectrum for moneylenders and another for banks and they were never the same.
In the light of emerging choices for the poor, the way we call SHGs seem nothing but a footling name calling.
Insurance is not a product that the community members understand.
I have realised from talking to borrowers in Bidar, Gulbarga, Vandavasi and Nagpur that most consumers of microcredit do not like paying for insurance purely because they understand that if nothing goes wrong, then the money they have paid towards insurance is a complete waste. I think, the problem does not lie in understanding the product but in terms of associating value that their money is purchasing for them. A consumer group in Bidar told us and I quote "Our village is a healthy village. We live upto the age of 85-90 and no matter what happens elsewhere, our community remains unaffected." There is more to this than just a fatalistic belief. Unless and until the consumers of microcredit stop struggling to fulfill their basic necessities of food and shelter, contingency planning is not something that they can afford to do. Hence the fatalistic attitude, that I would rather take a chance with my health rather than pay upfront an amount I will never be able to recover. It is a simple comparison that they do 'Food for today as against illness cover for tomorrow.'
The bottom line is that insurance is still a luxury that people dont want to invest in until their basic needs are met.
Men are not responsible consumers of finance
Met one or more classic examples that dispels this altogether.
A perfect example of a successful microentrepreneur in one of the villages in Kancheepuram district. He learnt a new skill of plastic moulding while he was working in Chennai as an apprentice. Then got back to his native village, put in all his savings into a microenterprise that he set up in his own village. He also borrowed from the local money lenders, converted a small room, that was originally built for him to live, into his workshop. He has now three employees who are all people from his village and they supply to small businesses in Chennai.
Because of this hasty generalisation, he is unable to get loans from microfinance institutions and still needs to turn to money lenders. Clearly there is scope here to identify men who are creditworthy rather than just leave them out.
Dear Nachiket and Team, some cents from my side –
1&2: This is a bizarre truth. My experience, but, is that not all the money goes for consumption either. There are clients who actually utilize money for productive purposes, and this certainly depends on client’s attitude. The screening process of clients will ensure that we are getting more clients who will utilize good part of money in productive purposes.
3. If the problem of drinking is pertinent, we will face repayment crisis every week/month. The place I live, this happens everytime and MFI too thinks of not giving loans to those families or community notorious for this.
And, this wastage can only go away with some implicit savings model in our product, which will require some out of box thining.
4. Need some elaboration on this aspect, what type of financial literacy? Do we mean teaching profit-loss, account maintenance and increased awareness on livelihood opportunities?
5. On-lending by SHGs is a very small phenomenon, and depends on the dynamics of the group too. Obviously it is an institution that provides credit support, but i do not envisage a problem coming from this side. I would be intersted to know more about the exact situation at Tanjavur.
6. This is absolutely true. They push themselves in debt traps. Possible solutions can be – 1. Restricted access to finance (which is not rational), 2. Teach them about debt traps and various ways to utilize the credit properly that leads us to point no 1 and 4.
7. Yes, that’s why many MFIs just use it as an add-on to the loan, when some people get benefits out if it, the understanding is more. I think gradually people would understand the importance of insurance. One major hurdle with insurance is LIC’s insurance where people get some money after the insurance term is over, people often compare other insurances with Life insurance. So, we need to generate more awareness regarding insurance products, which must include examples from field.
8. My experience is that it works, rather incentives lead to bad screening of clients (which is an obvious problem) and this can be addressed through monitoring and operational audit systems.
We may try to project the incentives in some other way.
9. 10. Absolutely, Yes.
11. Correct, not all the women will start something of their own; it will go to ongoing economic activity led by the men, mostly. I think this is ok, if woman is the one who is bringing money for the family to increase income; it works positively for her and her reputation. However, sometimes women do start something on their own.
12. If you are the only player you can push your choices, but what do we want them to do? And we can try ways to operationalize this.
These are just some thoughts and comments based on my experience; I hope this will be useful. Do let me know if you want to discuss some issues further.
Here is a rather longish comment on Notes from the field. I wanted to address two points:
1. Microfinance works only with women.
I would argue that currently there is not much evidence to support this view (which is not to say that we may not discover that it is in fact true). Significantly, there is evidence to show that often loans are often taken by women but meant for their husbands. (See Jones et al, 2003 on a survey on bank managers in Madhya Pradesh: “While many managers believed women clients compared well to men, being superior in trustworthiness (73 per cent), repayment (80 per cent), and skills in enterprise development (62 per cent), more (87 per cent) thought that allocating credit to women resulted in men using women to obtain loans”)
My own field experience confirms this. In the rural areas around Bangalore, an overwhelming majority of women indicated in informal conversations that they were borrowing either for their husband’s business (ex: buying an auto for her husband) or for their joint business (ex: kirana store they ran together). Clearly, the husband’s income is going into repaying their microfinance loan.
Furthermore, even if for all the wrong reasons, men typically tend to make more money, are already in some productive occupation. As such, their capacity to repay and to save is perceptibly higher than their spouses. From a business and fiscal perspective, it makes sense to include them as microfinance clients (of course, this does dilute the social aspect of microfinance for women). There are claims that men drink their money away, don’t save etc – I am not sure how many rigorous studies there are which support this. But I certainly think a pilot involving male clients is worthwhile. NABARD already forms farmer’s groups – perhaps these can be used. At any rate, we need more thoughtful evidence-based discussion on this issue.
2. Loans are not being used for productive purposes
Here again, there is a lot of evidence to show that the first microfinance loan is typically used for consumption purposes and then perhaps the second or third loan, clients graduate to productive loans.
What we need to ask ourselves is what kind of productive investments can microfinance clients make? CMF’s impact evaluation of credit in Hyderabad shows that while it is common for households to own businesses, there is very little diversification of activities. In our survey, managed by CMF RA Aparna Dasika, 17% own a Kirana store, 8% own a fruits and vegetable sellers, 6.6% own a telephone booth, 6.3% have a milk business and 4.31% are auto drivers. As a result, the revenues earned via these businesses are quite small. I would posit that there are two main obstacles: one returns are low and two perhaps people simply don’t know what kind of productive investments to make. We need more capacity building programmes and we need more market linkages so that it makes sense for microfinance clients to take out productive loans.
I would also argue that loans often substitute for other financial products like insurance and savings. In the Spandana instance, the most popular reason why people took out a loan was for medical expenses. Here credit is substituting for insurance. Similarly, in the instance where SHG members with greater savings on-lend to those without savings, the former’s savings are providing credit for the latter. Here this calls for provision of these other financial products by financial institutions. Before this comment becomes longer than the post itself, on insurance, we need to do more work on how to make people understand this product better.. for instance will marketing a certain way lead to more claims. CMF RA Monika Singh and Lakshmi Krishnan are involved in a project on weather insurance looking at some of these issues.
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