Posted by : Ravinder V, Ragini Chaudhary, Sanjoy Sanyal. The Future of Microfinance – Insights from Caspian Webinar Series
The microfinance industry knows how to survive existential crises. The last one the industry survived was that of demonetization. COVID19 and its aftermath will test its battle-hardened character like never before. Microfinance customers make repayment to lenders through physical cash payments during group meetings. During the lockdown phase, such physical group meetings could not take. In addition, an economic slowdown is likely to impact the repayment capacity of the borrowers. The mass migration of laborers from cities to the villages will reduce remittances to rural areas. Microfinance institutions (MFIs) operating in urban areas may struggle to locate their clients.
In the past, MFIs have been able to survive a crisis by making operating shifts in their business model. What changes will the current crisis bring about?
Caspian Debt organized a webinar on the topic of “Future of Microfinance” with Industry leaders on July 6th, 2020. Panelists included
• PN Vasudevan (Founder Equitas),
• Rahul Mittra (Founder Margdarshak),
• Joby CO (CEO Dvara KGFS) and,
• Ganesh Rao (Founder NOCPL).
This session was moderated by Viswanatha Prasad, Founder and Managing Director of Caspian Debt.
Key points from the webinar are captured as under
1. With all its changes in operations, the Microfinance model has depended on group lending for five decades, even without COVID this was going to change.
With all the changes it has weathered, the industry is following the Grameen model – of joint group lending – for over 5 decades. The Grameen model addressed the challenges that kept away formal lenders to poor people. There was no credit history of the borrower and proof of income was difficult to establish. The single solution for that entire problem was a joint liability group (JLG). MFIs relied on the word of neighbors to take a view on credit risk. “The microfinance, as we all know, the 1975 Grameen model, I think we are all an offshoot off,” As noted by PN Vasudev, Founder Equitas Small Finance Bank. Group bonding and social peer pressure is the core of the microfinance model.
However, the social fabric of the communities has been rapidly changing in recent times. The social collateral which use to provide a peer guarantee to the group started diluting during demonetization. Members were reluctant to take on repayments on the behalf of other members when they were themselves stretched. In rural areas, the group bonding is weakening and in urban and peri-urban areas it does not even exist. There is a need to accept that the social fabric for supporting the group lending will no longer be there. Rahul Mitra, Founder Margdarshak, further added that “There is a need to accept this fact and move out of that comfort of doing only group lending. We are likely to see customers preferring to move out of the JLG framework over the next 4-5 years. The current pandemic the economy is facing will only add wheels to the pace of change”
2. Technology has been leveraged to the extent it can be, hence fin-techs not likely to replace specialized microfinance lenders any time soon,
Technology adoption hastened by efficiency pressures of interest rate cap has been considerable in the microfinance industry. Ganesh Rao Founder NOCPL emphasizes, “every single process is digitalized. The money goes to the bank account directly, onboarding happens digitally, instant approval is given, what is not digital? Except when you are delivering financial literacy program which requires interaction, other processes are completely digitalized. Disbursement which used to take 14 days is now cut to 3-4 days. All you need is a mobile, these are paperless offices.” However, on the microfinance borrowers front, the income from business or wages is mostly received in cash. There is no motivation for the customer to take the pain of walking to the local bank branch, stand in a queue for hours only to facilitate the loan repayments digitally. Hence, a high touch model is unlikely to change anytime soon until the entire economy moves towards digital means of payments. Ganesh strongly believes that “ my business is not the promotion of digital, my business is lending. Giving and collecting money is the core of my business. Digitalization is only a facilitator for me, it is not going to be the core of my business at any point in time. Secondly, without a documented income proof, it is not possible for pure fintech to lend to this segment of the borrowers”.
Until the time borrower receives their incomes digitally and make expenses digitally, pure fin-tech platform led lending is not an option for this segment of customers.
3. Scope for using the information available with micro-lenders more effectively to reimagine business models
MFI staff is constantly in touch with their borrowers and has access to considerable information that is not formally captured. Joby CEO Dvara, explains, “Uber and Ola have come up with a rating system for drivers and passengers. Where driver and passenger rate their whole experience for short 30 mins travel. All this data is captured effectively. Similarly, in microfinance, the field officer has an enormous amount of experience which is not captured. All that can help the lender to create a risk profile of the customer”. There is scope to build this further as MFIs begin to re-imagine the next phase of microfinance lending.
4. Small MFIs will need to collaborate and reinvent
Rahul feels optimistic about the future as he has seen many crises. He goes on to add, “the flexibility will be the key to survival and as an entrepreneur, as a businessman, we will now need to be open to collaborations, to partnerships, and also giving space to your incoming partners”. He believes, acquisitions and consolidations happen and it will happen faster among smaller ones. Capital will be available, however accessing it will take a longer time and the journey will be tougher than earlier. It will require convincing the incoming investors that the organization though small is resilient to withstand changes in the operational environment. Joby believes that smaller organization are much better placed to bring in process changes and innovation, while these are two seemingly contradictory views – the message is clear – Small MFIs which are able to show resilience are likely to survive, there is an opportunity for consolidation and also there is a hope that smaller MFIs may be able to innovate fast and be more resilient.
In conclusion -there is a need to question the fundamentals
The key worries that MFI leaders are grappling with are staff health and safety, political propaganda which could derail customer’s willingness to pay, bringing back collections to pre-COVID levels and livelihood restoration of customers in light of economic slowdown. There is considerable optimism around the resilience of customers, some fundamental shifts in MFI operations, increased digitalization, and deeper customer engagement. Joby continues to be hopeful about reimagining the microfinance lending. He goes on to say, “while there are challenges in moving from high touch business model of Microfinance, the industry has come a long way over the last decade. Today a lot of fundamental pillars of microfinance can be questioned”.
He further adds, “today, Identity and address proof challenges are largely being solved by Aadhar. The peer pressure and the social rejection that the customer faced was a huge deterrent for borrowers to default. The advantage of the credit bureau is that not only your neighbors, the whole world knows.
While obtaining a salary certificate may not be possible for a lot of people in this country. However, there are many other ways to understand a customer. Customer pays their electricity bill from their mobile phones, there are an enormous amount of data in bank accounts. Further, the microfinance industry has already built a huge high touch network. What industry has not effectively done is capturing the knowledge of the customer. “
There might be a need to revisit the five-decade-old Grameen model of microfinance given the changes in social fabric. However, undertaking some or all the above needs a lot of courage for the lender. We believe existing players have leverage over new digital lenders given the availability to data and existing touchpoint with the borrowers. The discussion ended on an optimistic note with opportunity to leverage existing data and make a differentiated offerings to the customers as proposed by Joby. For example: customers can be given the option to choose between a loan at 16-18% which needs to repaid digitally or have cash collected at home with a 24% interest rate. As P.N. Vasudeven put it, “But the way credit is delivered today is what might change significantly in the next few years. That again would be for the benefit of the clients,.. so next 2-3 years is really a time to watch out”. However, he cautions on the thrust for digitalization “You cannot just go through the entire microfinance model and pick up .. one customer interaction and say now I will just convert this into digital.” There is need for business process re-engineering and reimagining of the whole model.
We hope, COVID crisis can accelerate the pace of change in microfinance borrower and society to adopt digital medium of payments, leverage customer data which can help MFIs accelerate the change towards Individual lending.
Please watch the panel discussion on “Future of Microfinance”.
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