Multiple Borrowings: Finding Solutions
Suresh K Krishna, Managing Director | Grameen Koota
Microfinance has accomplished what several of it’s detractors thought it never would – 100% loan utilisation and, most inportantly, recovery. The earnest and well-founded hope for a better life motivates women to enter into the contract of microfinance; business successes among borrowers only strengthens this faith in the institution of microfinance and draws more clients, who would otherwise have no access to credit, into the system.
However, it has been noticed that some clients, in an effort to procure the maximum possible funds, borrow from all available MFI sources. Despite efforts by some MFIs to educate clients on the maintenance of stable cashflow, the problem of multiple borrowing persists and is now threatens considerable damage to the sector.
Areas of Concern
1. Aiming to increase business volumes, some MFIs either inadequately check or ignore client borrowing habits. Multiple borrowings springing from such a situation adversely affect the quality of the loan portfolio as clients put themselves at a higher default risk.
2. In some areas, clients borrow from more than 7 MFIs at once. The absorption capability is not assessed; consequently, loans are misdirected, i.e. not used for the productive/income generating purposes stated in the loan application data.
3. With increasing debts and misdirected funds, clients turn to informal sources (friends, relatives, money lenders etc) for further credit, further aggravating the debt trap. Several in this situation have held distress sales of movable assets. In extreme cases, mental depression resulting from the financial pressure causes some to commit suicide. These situations taint the image of an otherwise honourable sector.
4. Some clients have sought the intervention of religious leaders, political representatives and a-political individuals. Dictats issues by these parties to either delay or stop repayments, is disadvantageous to the microfinance structure.
5. Non-repayments and delayed repayments adversely affect the PAR of MFI. If the impact moves beyond acceptance levels, lenders will rethink their future investments, making it difficult for MFIs to access credit.
A well-rounded understanding of the situation and coordinated efforts of MFIs can draw out viable solutions to address this situation from aggregating. These steps will, in the long run, enable microfinance to continue to service the credit needs of the poor.
Recommendations to MFIs
1. Multiple borrowing is not uncontrollable and can be tackled by the collaborated efforts of MFIs through a common platform.
2. A thorough mapping of wards and villages within the state and a subsequent allocation of areas to MFIs can help in better planning of activity. A similar strategy was adopted by the RBI through the Service Area Approach, which eliminated multiple financing by commercial banks in rural areas.
2. At present, some members have over borrowed from multiple MFI sources. By sharing information, these institutions can ensure that no individual member receives more than Rs 50,000 from the microfinance sector.
3. A client’s ability to absorb credit and repay debts must be analysed before loans are disbursed. Discrete inquiries reagarding borrowings can also be made to determing whether cash generation meets existing repayment commitments.
4. In areas of high MFI density, all MFI’s can impose maximum sealing on the loan size all loans, regardless of the loan cycle.
5. Regular Loan Utilisation Checks must be conducted to confirm the appropriate use of funds and also to determine the total borrowings and utilisation of funds.
6. Raise awareness in the field staff and members about the drawbacks and ill-effects of multiple borrowing. This will result in financially aware and disciplined members as well as a quality loan portfolio. Non credit services should also be highlighted.
While, like every other sector, microfinance too faces regular challenges, these hurdles are not insurmountable. Harnessing the knowledge and experience of the individual MFIs can result in effective remedial measures that will serve to strengthen the sector and it’s impact on poverty.