Microfinance or Microcredit is a significant part of the retail finance industry in India. It is the mainstay for providing access to finance to low-income households esp to women. Approx. 60 million women, who enjoy the largest share of the customer base, have a credit portfolio outstanding of almost Rs. 3 lakh crores. But the COVID-19 pandemic pushed in lockdowns that halted almost all businesses (except essential services) also had a very significant impact on the MFI sector. However, despite the unforeseen setback, the sector seems to be on a path to recovery – and we can see why from the conversation below between Mr. Mani Parthasarathy, Founder of Habile Technologies Private Limited and Mr. Prashant Thakker, Executive Director and CEO of Centrum Microcredit Limited.
Prashant, COVID-19 has hit the whole world badly. In your opinion, how were Microfinance Institutions (MFIs) affected because of the pandemic?
Microfinance has been a high-tech, customer-facing and customer-connected industry. From a COVID-19 perspective, these aspects have come out to the fore. From March-April 2020, we lost physical connect and contact with our customers but, we were able to deploy a multi-pronged digital, email call and SMS reach out program that has helped us to stay connected and recover collections more rapidly than the retail lending industry. In the true sense, we were exposed to the impact of the pandemic on the microfinance customers’ livelihoods, jobs and businesses.
The initial 3 months were quite difficult, but since September we have recovered well. Today if you look at the collection figures of the microcredit/microfinance asset class, we are right up there at over 90%.
We’d like to understand the size of the microfinance industry – how many MFIs are there, the market size and types of entities supporting rural credit, etc. Can you shed some light on this?
Microfinance is the only industry which has what is called a ‘Self-Regulatory Organization’ (SRO), licensed by the RBI. There are two SROs in the microfinance sector – MFIN and Sa-Dhan. MFIN (Microfinance Institutions Network) covers RBI-licensed, leading NBFC (Non-Banking Financial Institutions) microfinance entities and is mandated with the objective of promoting and regulating a large chunk of the microfinance sector in India. Other entities like banks, BCs and NBFCs are also members. Sa-Dhan also covers NGOs and cooperative societies and serves to build community development finance in India.
According to MFIN data, there are 84 NBFC MFIs, 12 banks, 8 small finance banks, around 46 NBFCs (having microfinance operations), and about 21 others – 180 entities servicing a mammoth 10.5 crores customers, with a portfolio outstanding of Rs. 2,31,000 crores! Extend this portfolio to include entities enrolled in the NABARD SHG-Bank Linkage Programme, and the total market size jumps to Rs. 3,35,000 crores.
Wow, I think that’s a massive industry size. Prashant, could you run us through the day-to-day activities in an MFI?
Yes, Microfinance is one of the largest retail segments after housing finance. Here is how the loan cycle in microfinance works, under the JLG model, a group of women customers are introduced to the concept of a joint liability group. The credit parameters are set for this group and credit is given to each member of the group. More often than not, each member gets a similar loan amount as the others, forming a joint-liability group (JLG). This means that if one member defaults, the other would have to cover up that member’s repayment.
It’s remarkable how deeply regulated this sector is by RBI: interest rate caps, regulated margins, what documentation to provide the client, how to approach and interact with clients, code of conduct and responsible lending. – all aspects are regulated. The key here is that the client gets access to finance at her doorstep and within her community – something that the other lending segments cannot do with such regulations. For this, the client is able to afford the premium, and companies like ours who have a social and an economic motive can provide them with the right financing.
And how have these activities been disrupted due to COVID-19?
With respect to the disruption of these activities during the pandemic, there are a few noteworthy points:
We’re curious, Prashant – how does a new member get added to a group? A loan officer would have to physically go and talk to a potential member and add them to the group? But due to COVID-19, this would have been interrupted, wouldn’t it? So how are you countering this challenge?
The slide in liquidity in the industry has forced many players to focus primarily on existing customers. If you take our disbursals since September, 78% was of our existing clientele who have either graduated to the next loan cycle or have closed and taken a new loan. The influx of 22% new clients was majorly because of the efforts of existing client groups, which have gone out and added other members.
How have repayments been affected due to COVID-19 and the moratorium?
Significantly. April and May were a washout for the industry with single digit collection percentage (of ‘due demand’). This is essentially what amount was due in a month over what was actually collected in that month. It was about 5% in April, consistently increased and rose to 70% by July. Post the moratorium period, the industry is at about 85% collection rates!
This triggers another question – assuming I’m a borrower and I use the free RBI moratorium and don’t do my repayments; will this affect my CIBIL or CRIF High Mark score?
Look, the industry doesn’t exactly work on a credit score model, although this information is available to us from the credit bureaus. MFIs regulations dictate that we ensure our customers don’t become too indebted, and that no more than 3 NBFC MFIs can work with a single borrower. So, 3 factors – overall indebtedness, number of companies the customer is indebted to and their credit history – decide the creditworthiness of our borrowers. During the COVID, given the moratorium,and the inability of MFIs to collect, reporting to the credit bureau had been temporarily suspended which has now resumed.
Prashant, let’s assume I’m a borrower with a credit score of 700 and during the moratorium period, I defaulted on my repayments for 1-2 months, will this affect my overall credit rating as an MFI borrower?
No, the Indian government and the Supreme Court announced that this doesn’t apply to microfinance and other retail finance sectors. For anybody who has an outstanding amount of less than Rs. 2 crores, their credit bureau scores won’t be affected for the moratorium period (until 31st August).
Changing direction to digital solutions – what kind of digital lending solution are you using in Centrum?
Centrum loan origination and management is completely digitalised. From the point of the 1st interaction with the customer, and through the entire loan life cycle, each step is digitised. The origination, KYC, on boarding, credit appraisal, approval, client relationship management, Customer Group Training and Disbursement. The collection process is digitalised, but in the MFI sector the loan is still largely collected in Cash. However, the industry has adopted an assisted cash to the digital model. We are all trying to change employee and customer behaviour and encourage them to use digital payments as well. This will take some time.
Assisted digitalization, which involves using tablets, apps and ID recognition softwares, are the key factors that the NBFCs and other lenders in microfinance use to improve their efficiency and reduce costs.
How is technology helping Centrum to overcome challenges during COVID? Are MFIs truly going digital in essence?
Since we are already deployed on a digital platform end-to-end, all loan origination, disbursal, MIS, dashboards and collections are at the click of a button. Our on-field loan origination staff are quite digitally literate, helping us become more paperless while interacting with customers and partners.
Despite people’s perception of “going digital”, not everything is actually digital. The journey has to start somewhere right? Example, through an ID number, voter ID, Aadhar Card number etc. For instance, companies like us do a digital capture of these KYC identity documents from customers, but because our clientele are not fully digitally literate, we still have to go through some paperwork during the origination process.
Digitalization in the sense of storing, transferring, analysing customer data and submitting to the credit bureaus if fine, but for our client persona, we still need to see some ID, check some physical documents, maybe even visit their home.
What would be the cost per lead/acquisition for a customer in microfinance?
In the Microfinance industry, given the regulated margins, the OPEX (Operating Expenses) to AUM (Assets Under Management) ratio would easily tell how efficient our operations are. For every Rs. 100 crore of portfolio, your total HR costs shouldn’t be over 4%. Actually, the cost of acquisition of a customer would be zero for me, as the group leader is who is pulling new customers in.
What’s your opinion on social media credit scoring in microfinance?
It’s not very prevalent. See, the people in this income segment have a very thin digital or social media footprint; so, there isn’t much analysis you can do about them. Yes, it’s growing every day but it’s still far away from being used for credit decisions. We still have to see demonstrated efficiency of prediction that digital/social media analysis through AI is going to help make credit decisions. Let it go through an economic cycle, be tested, re-tested and then see.
But I fear there may be huge legal backlashes against such methods. Many lenders and fintech companies are asking users to download an app and through this, they read customer data, SMS’s, app data, WhatsApp messages and more. In principle, yes, the user has given consent. But my worry is that the user does not understand the extent of the consent he has given. We are already seeing the issues that have come up recently around the unregulated lending apps, who follow no code and now the customers find themselves at the receiving end.
Do you think this is a positive or a negative thing?
From a data privacy, confidentiality and transparency standpoint, this is has to evolve to a point where it is not pervasive for the client. For customer outreach, financial data access and economic growth of the lending industry, it’s a positive sign. There should be a balance here.
Have you introduced any new financial products in Centrum post-COVID?
Yes, actually COVID gave us the opportunity to prepare for new product launches. We have participated in the Pradhan Mantri Street Vendor Nidhi program, which would financially help street vendors impacted severely by the pandemic to get back on their feet and continue doing business. We also launched MEL (Micro-enterprise Loan) product, we had our first disbursement during the lockdown itself. This product is designed keeping in mind the capital needs of our customer’s business. We cater to Micro, Small and Medium enterprises like small manufacturers or traders or service providers. These loans could be used as Working capital or for Business Expansion. We have also focused on special loans for Water, sanitation and hygiene in our rural branches.
We are seeing a sudden surge in issuance of gold loans; do you see that as a challenge or is it good for lending?
The more digitalized gold becomes, and the less people have in their safes, the better. Plus, in case of a crisis this asset class has traditionally been used as back up but I only see this as a positive uptick. However, people only give gold out when they’re in a dire financial situation, so the increase in number of gold loans means the economic stress on these customers has increased and that is the negative takeaway.
Need your closing remarks, Prashant. For smaller NBFCs, MFIs and fintech firms, what advice would you give, from a COVID perspective?
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