Microfinance in the Field: Why I didn’t become a Client of Microfinance Institution
- Monday, May 10, 2010, 23:01
- Featured News
- 11 comments
Babuben
Microfinance Focus, May 10, 2010: Babuben, a middle aged woman runs a small grocery shop in South Bangalore, India. In spite of sitting in a microfinance hub and surrounded by neighbours who have found a way out of poverty with the help of microfinance, she still chooses to stay away from it. Babuben rather preferred taking loans of about Rs. 70, 000 from 11 separate financial sources which includes 9 Moneylenders, 1 Co-Operative Bank and 1 Chit Fund for her business.
When approached by Microfinance Focus to know the reasons of her being distant from microfinance institutions, she gave some thought provoking replies. She did evaluate the idea of joining one but found other options to be more feasible. Typical features of microfinance institutions like weekly repayments, lengthy process and joint liability were the major causes of concern for her. Sighting the fact that her neighbourhood largely comprises of migrant labourers, she found it risky to be a part of a joint liability. Although she doesn’t know the interest rate which moneylenders are charging her, she finds their card system flexible and simple. The fact that, with moneylenders she can repay her interest and loan amount according to her convenience is of great significance to her. Moreover, moneylenders neither verify any documents nor do they check homes of their clients like some microfinance institutions do.
Where on the one hand, microfinance is winning accolades for its outreach and impact; we have on the other hand deserving people like Babuben, who still find it incompatible with their needs. This case could well be an indication for microfinance institutions to develop innovative products and evolve with their client’s requirements.
Related Posts:
- Microfinance in the Field: Interview with a Moneylender-1
- Microfinance Interest Rate: A Factor of Operating Expenses or Cost of Funds?
- Done Card gets RBI nod, to operate pre-paid cash card in rural India
- Insurers aim high: Vow to cover 500 mln Indians in 5 years
- Open Source, SaaS to drive future of microfinance IT: Grameen Technology Center
- India’s First Smart Card based PDS Solution for Below Poverty Line
- Abdul Kalam to launch Commonwealth Microfinance’s prepaid card at Chennai
- Ed: Microfinance Institutions Need to Review Lending Rates & Reinvent Mission
© 2010, Microfinance News. All rights reserved. 2008-09
11 Comments on “Microfinance in the Field: Why I didn’t become a Client of Microfinance Institution”
Trackbacks
Write a Comment
Gravatars are small images that can show your personality. You can get your gravatar for free today!
I may be missing something, but it appears that the “moneylenders” referred to in this article are about a billion times less abusive than most moneylenders.
If anyone knows much about how informal moneylenders are adapting in a mfi-charged climate, I’d love to learn more.
Hello Alex,
We tried to put forward her own views , not fabricating anything from our side. Personally, it was surprising for me as well … However , her views could be very usefull in the context of developing services in new ways (From MFIs) …
Vikash | Microfinance Focus
One swallow does not a summer make. One Babuben does not indicate a “trend” as the writer seems to suggest. What is glaringly staring at us in this sad episode of Babuben is the lack of financial literacy among her ilk. Not knowing the rate she is paying the moneylender is a huge factor in her not opting for MFIs (despite the processes). Not to mention the multiple never-ending borrowings. I wonder how many Babubens would exist if they were made more knowledgeable of financial basics.
It is puzzling to see why some people at this level still prefer convenience in repayment over pricing, is it lack of self descipline at consumer level or they are just naive ?. It also highlighs the fact that microfinance banks have not yet been able to project themselves as an effective alterante fianceing channel across the social stratum.
Interesting read only because it brings out a counter intutive thought with an example. I’m keen to know the financial history of “Babuben” – in search of the answers to the following questions 1) how many years has she been availing of loans from “moneylenders” 2) what is the rate of interest that she is paying the moneylenders 3) has she been able to repay any of the loans availed earlier 4) how many of the 9 loans that she has availed were for rolling over existing loans 5) Is Babuben a case for over indebtedness – 9 lenders / Rs.70K overall borrowings – where the estimated HOUSEHOLD debt absorption capacity is pegged at about Rs.50K 6) Also in the light of 9 lenders / Rs.70K overall borrowings – re-examine the point would her neighbours (who would be reasonably aware of her financial status) stand joint gurantee to her ?
It is certainly a story that needs further probing.
Interesting, this might be a product/service development opportunity for this group but it might be a risk for MFIs because we don’t know the MFIs do rejected here loan applications or she don’t approached MFI since we notice that she currently accessing to 9 sources of fund, if this case in Cambodia we will reject here loan application as well.
This makes interesting reading but having so many lenders for the amount in question , particularly when you do not know the cost points to financial naivety of the highest order . However it clearly points out to the need for product diversification and innovation as the group lending proposition in an environment where there is fluidity in respect membership movement renders group members liable in the event of default.
A one size fit all approach of group lending needs a serious rethink
I know that Babuben is correct and which can also be counter checked with any sincere employee of MFI as to how much stress and pressure he/She goes to working under Grameen model since cash flow from the loan money is not at all commensurate with the weekly repayment of thousands of women like Babuben and then the only option left with all the employee is to force for and put undue pressure on client to get the repayment and since literally very few business can be started with Rs.8000 or Rs10,000 which will give you natural weekly repayments with high rate of interest of more than 30% which many of the NBFC MFI are charging at this movement needs to be thought and debated and literally no innovation in any loan products from any MFI which wants to expand horizontly so fast that they never whant to use their brain but uses brown in doing so therefore it is not at all client centric and will not sustain very long which every body will see very soon, therefore the answer is to innovate and launch client centric products and expand vertically and not horizontly.
One of the important characteristic of rural poor is “irregular cash flow”. Their cash inflow is not regulated as us (salary at the end of each month). Therefore they often prefer convenience in repayment over pricing.
Lending to poor with a flexible repayment schedule will enhance risk faced by MFIs. MFI would prefer to loose a client rather than enhancing his portfolio risk. This would also affect the standardization developed within the organization.
One of the possible solution is to adopt monthly repayment schedule rather than weekly. (means monthly fixed, not flexible). This might ease the risk on both the side (client as well as MFI). And of course client need to be taught on interest rate.
It is interesting but there is a point in stories like that of Babuben. I am in micro finance since 1991 and have often come across complaints from SHG members that they were better off with moneylenders who often allow repayment of principal installment postponed if the clients expressed difficulties but they could not expect the same from SHGs or MFIs.
Professional money lenders apart there are number of people like teachers, salaried employees, fertilizer vendors etc who act as money lenders. Most of them are comfortable with small group of clients but who are regular in repayment of interest. In fact the money lender would not put pressure on principal repayment if interest is coming regularly.
To this date the banking sector has not been able to find a way to finance farmers who would need repayment holiday till the harvest is marketed. The agri card is the lone product of this nature but is available only to better off farmers. Cooperatives allow their members repayment at the time of harvest but in availing loan there is condition of availing a portion of loan in kind like fertilizers, seeds etc. So jewel loan is very popular in the South with small and marginal farmers and tenant cultivators. Micro finance also does not have a loan product with flexible repayment schedule.
Nevertheless the developments in micro finance has pushed down the moneylenders’ interest rate also.
Often people borrow from money lenders to meet the strict repayment commitments under micro finance. It seems we cannot wish away the money lender. Not many years ago the hire purchase loans for vehicles and computers were loaded with 36 to 48 per cent rate of interest but now the rates have come down to 18 to 24%.
So our focus should be on creating an environment of competition which will make informal sources of credit more affordable. Micro finance is doing this and we should encourage it.