Earlier today, I was reading this article in the Stanford Progressive, which argues that for microfinance to better help the poor, microfinance institutions (MFIs) must become larger in order to allow them to overcome basic infrastructure problems (e.g., bad roads, poor legal systems, spread out markets). This sentiment "of bigger is better" is a growing trend, as many argue that only with scale of credit (and institutions) will microfinance really reach poor households.
Scale of institutions may matter, but another more fundamental question that often is overlooked is whether MFIs' products are meeting the needs of their clients. During meetings this week in Washington DC with organizations like the World Bank, CGAP and the Center for Global Development (CGDEV), people asked us (me and the executive director at CMF, Justin Oliver) what were the main upcoming challenges in Indian microfinance. Justin would mention outreach in poorer states, but would really hone in on the fact that Indian MFIs typically offer very general and standardized products. The 1st loan is often in the range of Rs 6,000-10,000 (USD $120-200), and is paid back weekly over one year. The 2nd loan is typically about Rs 12,000 (USD $240) and the 3rd loan is about Rs 15,000 (USD $300), and repayment is done the same way with both of these cycles as was done with the 1st loan. Even the most successful entrepreneurs would fall under this rigid structure, and would only be able to receive about Rs. 15,000 (USD $300) in their 3rd year of successful repayment. If they need more capital, they will need to go to a moneylender or another MFI, regardless of their track record.
I think MFIs in India should better tailor their microcredit products to their clients. Some clients need larger loan amounts, a monthly infusion of cash, or daily loans (e.g., auto-drivers that rent their autos at a daily rate). It could be difficult to train loan officers on how these different loan products work, and which type of client may benefit from these differentiated products, but it's crucial that Indian microcredit becomes more flexible. In my mind, more flexibility would benefit clients more than the growth in scale of the microcredit available today.
Any thoughts or examples of Indian MFIs who are developing more flexible products? Do others agree or disagree with my argument?
5 comments:
I feel that it may be useful for the IFMR Researchers to take a closer look at the work of IFMR Trust (www.ifmrtrust.co.in) and its KGFS model. It speaks specifically to the challenges that you and Justin raise. They are also collaborating, along with, CMF with the Centre for Global Development on systemic issues that would arise for their approach towards providing comprehensive financial services to low-income communities.
I am currently an intern at Ujjivan Bangalore.
At Ujjivan, we do have a few loans tailor made for the needs of the customers. The successful entrepreneur can get an Individual Borrowing Loan (IBL) that can typically be around Rs 50,000.
We even have education loans that are disbursed during the season of school admissions.
However, I agree that MFIs need to keep innovating on creating products that serve the poor better. There is definitely a lot to be done with respect to repayment cycles.
I agree with you dear Indian microfinancing system is good way to develop India , and I think Indian money market should be spread because still now , it is limited upto the main dealers of commercial banks and it must grow upto poor and middle person of India after this we can take the dream of development of india
Nachiket, I agree that the KGFS model, in which branches are set-up in rural areas that aim to serve all the potential customers in the area, from wealthier to poorer, with a range of products (e.g., credit, savings, insurance) is innovative. Really, my post was an argument for experimentation and product mix, and KGFS is one of the leaders in building off credit to provide more comprehensive financial services. In a way, I am arguing that other institutions, including MFIs with large footprints already, should also create more flexible products for their clients.
Rachit, it's great to hear that Ujjivan has developed targeted loan products that increase in loan size. Thanks so much for bringing this to our attention.
Drawing from our lessons in the KGFS work of IFMR Trust, I feel that the ability to deliver on flexible and comprehensive financial services hinge critically on: 1. Processes that really build understanding of customer needs and appropriate product responses 2. the training infrastructure that can build capability in the front-line staff to handle variety and complexity 3. back-end technology that can deal with daily interest computation, pre-payments and part-payments 4. for larger loans, simple ways of assessing and mitigating enterprise/supply chain risk.
So there is some re-engineering at the backend that is required (not hard)so that this flexibility can be delivered, even where the desire to do so exists for the MFI.
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