Responsible finance - an essential component of Microfinance industry (CRIF’s views in Bharat Microfinance Report 2016)
The idea of Responsible Finance pivots around transparency, inclusion and customer-centricity. Though, these principles should make their way to the charter of every financial service they are altogether more important in Microfinance industry given the client base is underserved population. Prevailing higher interest rates for the Joint Liability Group(JLG) Loans which are offered to perhaps the most needy and vulnerable (read financially-less-aware) borrowers tend to raise eyebrows more often than rates in other loan categories. Concern of profit earning targets of private capital overwhelming the social objectives, primarily revolves around areas like over-indebtedness, lack of customer’s interest, underserved geographies and customer education among others.
Indebtedness
The gross loan portfolio of the Microfinance JLG Industry increased more than five folds to nearly Rs 81000 crores in 2016 from about Rs 15000 crores in 2011,. The gross loan portfolio of top 100 districts grew by 54% between March 2015 and March 2016, a good 20 percent points higher than the national number. Few leading players have grown their gross loan portfolios by over 80% in 12 months of 2015-16. Such steep growth in loan portfolios without proportionate growth in borrower base indicate potential case of over-indebtedness and subsequent lack of client protection. Although the 30 day portfolio at risk has been under 0.3%, a close monitoring of situation in 16 of top 200 districts could help where 7% of borrowers have loans with more than 2 lenders.
To promote Responsible Finance amongst microfinance lenders, the Reserve Bank of India and the Self-Regulatory Organizations (Sa-Dhan & MFIN) had intervened by setting up a code of conduct -- capping interest rates, defining practices to control over-lending to an individual, and laying out other best practices. RBI and SROs have been keeping a close watch on the happenings within the industry to make sure code of conduct guidelines are adhered to.
Credit Bureaus such as CRIF High Mark have helped lenders to comply with these guidelines, especially with the ones related to over indebtedness. However, the distribution of loan portfolios is changing from NBFC-MFIs to other type of institutions. Bandhan has become a private bank, and other 8 erstwhile NBFC-MFIs are transforming themselves into Small Finance Banks (SFBs). Other private players including banks and NBFCs, and public sector banks are also building up significant JLG portfolios, directly as well as through business correspondent channels. The guidelines still refer to NBFC-MFIs, whereas currently 40% of portfolio is not with NBFC-MFIs. Once these 8 players become SFBs, the gross loan portfolio with NBFC-MFIs will reduce further to just about 35-40%.
The assessment of indebtedness for a microfinance borrower is incomplete without the evaluation of borrower’s exposure to individual and SHG loans. The Reserve Bank of India has advised all banks to capture and share borrower level data for SHG loans, this data has just started flowing into credit bureau database. CRIF High Mark already provides information to lenders about indebtedness of borrower on JLG loans and Individual loans. We are working with many smaller cooperative banks and NBFCs also to even include their entire data in bureau database, this will enable getting even fuller picture of the borrower’s indebtedness.
The code of conduct guidelines which now are required to be followed only by NBFC-MFIs, should be reviewed with the changing legal structures of leading microfinance lenders to at least include all lenders practicing JLG loans irrespective of their legal organization. Should the exposure limit of Rs 1 lakh also consider individual loans and SHG loans instead of just JLG loans? A revised guideline can support lenders to avoid over burdening of the end-borrower.
Customer-Centricity
Microfinance lenders are significantly investing in improving process efficiencies, mostly through technology-enabled solutions. Tablet based loan origination solutions have not only helped improve productivity for the lender, but also improved service quality for the customer by lowering turn-around time. The field executive is able to now able to check credit history of the customer real-time, instead of a lag of batch process, and take a lending decision. Decision of whether to lend and how much to lend are being automated using technology, thus enforcing consistency in policies for the lender and minimizing reviewer’s subjectivity for the consumer.
The actual beneficiary may be misled by an intermediary into use of personal identity for the benefit of intermediary. The consumer’s interest can be protected against such misuse by improving upon authentication and avoidance of cash transactions between end-beneficiary and the lender.
Aadhaar which is slated to address the authentication problems especially for such segment of customers, is now the most available identifier in the country with coverage across nearly 79 crore adults (as of August 2016). Barring few states such as Assam and Meghalaya, other states have 90%+ adult population covered under Aadhaar. 55% of newly disbursed loans by MFIN members in last 15 months are seeded with Aadhaar (UID). Other lenders are also increasingly preferring Aadhaar as the proof of identity. Lenders are now testing and exploring use of Aadhaar biometric-based eKYC service, which once implemented across the system will help address the issue of “presence” in addition to that of “identity”.
Under the Prime Minister’s Jan Dhan Yojana (PMJDY), 24 crore banking accounts have been opened in last 2 years ensuring almost households in India with banking access. This unforeseeable penetration of banking accounts and growing availability of banking avenues even in rural areas, can enable electronic disbursements of microfinance loans only to banking account of the consumer, thereby reducing dealing in cash through the intermediaries and thus, the possible misappropriation of funds. The repayments of the loans could also be encouraged through digital means, to begin with in urban areas.
We have seen a lowering of interest rate by MFIs (especially larger ones) over past few years. Well-performing MFIs have been able to raise funds at lower cost. These MFIs have also been able to become more cost-efficient over the years. These benefits seem to have been passed to customer.
Inclusion of deeper geographies
It wouldn’t be totally incorrect to say that substantial part of country is now serviced by the Microfinance industry. There are 200+ districts which have 20 or more lenders operating, 500+ districts which have 5 or more lenders operating and 40 more districts which now have more than two lenders active. Despite such wide coverage, 60% of JLG lending is concentrated in urban areas. CRIF High Mark provides PinPoint reports generally at pin-code level and occasionally at village level to lenders to help them identify business opportunities in newer geographies, thus creating possibilities for them to explore deeper geographies. Development Financial Institutions such as SIDBI also use such reports to influence financing of the MFIs operating in under-penetrated areas.
Education and Support
The borrowers need to be educated on how to manage debt better. MFIs as part of their initial training module help borrowers understand importance of better debt management. World Bank has also taken initiatives to create educational material to create more awareness amongst borrowers. MFIs also support these customers in taking their concerns to credit bureaus in case of any potential dispute on the credit report. We at CRIF have been investing to provide adequate support to address such queries.
Collectively, MFIs, other lenders, developmental institutions, industry associations and regulators can help make micro-lending more responsible. We as Credit Bureau are geared up to provide the required support to keep the underserved customer at the centre and include them in mainstream.