With a maturing model and diversity of needs, flexibility helps both sides
Some microfinance institutions (MFIs) are adopting a monthly model of loan collection, matching the cash flows of their customers. This departs from the established Bangladesh model of weekly collection, which relies on connecting with customers frequently.
In the process, the loan size for consumers is on the rise, with a reduction of interest by six or seven per cent as compared to weekly repayments.
MFIs also get to keep the client base intact for a longer time, reducing the scope for poaching by competitors. The companies also reduce overhead costs, which are an average of 3.7 per cent of the total outstanding, as the field staff make only one visit in a month for collection as against four in the weekly model.
Bharatiya Samruddhi Finance Ltd, Spandana Sphoorthy Financial Ltd, Trident Micro Finance in Andhra Pradesh and one Jana Lakshmi in Bangalore are among those having products that accept monthly loan repayment.
Industry peers say more MFIs are considering launch of products for consumer durables, education loans, lifestyle products and others, which enable monthly collections.
Pluses
“It is difficult for people with monthly cash flows, say, milk vendors and kirana shops, to pay on a weekly basis. They find monthly payments more convenient,” says Padmaja Reddy, promoter of Spandana, one of the biggest microfinance players.
Spandana, which has a 4.5-million customer base has weekly, monthly and bullet repayment products. Those with a low cash flow face a problem in doing weekly payments and drop out after the first cycle. They go back to money lenders to meet their credit requirement, sometimes even at 40 per cent interest rate, she said. Adding that individual loans account for seven per cent of the company’s Rs 4,010-crore portfolio.
Typically, the loan for monthly repayments is between Rs 15,000 and Rs 25,000 and is extended to graduating clients. It comprises income generating loans, emergency loans, micro-enterprise loans, agricultural loans, general loans and loans to fund farm equipment purchase. The weekly model gives the competing MFIs access to 40 people at one go, as eight groups, each with six to eight members, meet every week.
The higher loan size in the monthly recollection model compensates for the lack of more members. However, this still keeps the average loan to individuals under control.
The experience
In the bargain, the companies take a higher risk, as the loan tenure and the loan size are large compared to the weekly model, where absence of a member for more than one meeting triggers panic among the group and the group leaders assume the responsibility of repaying or “asking” the defaulter to pay the instalments, said P Kishore Kumar, promoter and chief executive officer of Trident Microfinance, which is serving 280,000 customers.
The company gives loans upwards of Rs 30,000, with insistence on a credit record of the customers. The tenure ranges from three to five years, at an interest rate around 18 per cent. Monthly loan repayment constituted 30 per cent of the total loan portfolio of Rs 214.4 crore as of March.
“We implemented monthly collection in 30 of the 70 branches and will add six branches shortly,” says Kumar, adding that the company was in the process of infusing Rs 70 crore equity capital from FIIs and domestic players.
Typically, a Rs 10,000 loan on weekly repayment would mean paying Rs 225 every week over 52 weeks, totalling to Rs 11,700. In the monthly collections, it will be Rs 10,800 over 18 months, at Rs 600 a month. This would mean a reduction of 7.69 per cent in the net rate when paid in monthly instalments. The monthly repayment model also ensures the business of the customers is not affected so much, due to the weekly meetings.
“There is not much competition now for the high value loans,” says Sajeev Viswanathan, chief executive officer of Bharatiya Samruddhi Finance Ltd, which has a loan outstanding of Rs 1,000 crore and serves 1.3 million customers. Poaching occurs when customers need money for other activities and do not understand the implications of multiple lending, he said.
Flexibility
The product portfolio changes, too. For instance, during festivals like the Kumbh Mela and other seasonal festivals, money is lent on a daily and weekly payment basis to micro entrepreneurs.
“About 75 per cent of the portfolio is on a monthly basis and the remaining on daily and weekly basis,” says Viswanathan, adding that markets were maturing and there was need for flexibility in products.
MFIs now reach about 25 million households and have lent about Rs 24,000 crore. Typically, the cost to the borrower is 26 per cent. Personnel costs account for 6.3 per cent of the outstanding, cost of funds 13 per cent, loan loss one per cent and profit for the companies account for two per cent.
It is estimated that 150 million households need MFI assistance. The lending is mostly to support income generation activities, but industry feels the demand would increase for multiple products.
