Wednesday, December 31, 2008

Reserve Bank Survey on MFI

In order to have a better understanding of the working of MFIs, regional offices of the Reserve Bank carried out a survey of MFIs operating in their areas of jurisdiction in November-December 2007. The objective of the study was to gain an insight into the activities of MFIs, especially in rural areas, to assess the financial services needs of the rural households and the informal products and processes that currently meet these needs. The study was aimed at gaining a better understanding of the operations of the MFIs and explore the possibility of linkages with banks resulting in extending banking outreach to the poor. In all, 77 MFIs were surveyed in the States of Karnataka, Orissa, Andhra Pradesh, Madhya Pradesh, Bihar, West Bengal, Kerala, Maharashtra, Rajasthan and Tamil Nadu. The survey was carried out through the lead district officers (LDOs) who held discussions with officials of district administration, branch managers, borrowers and MFIs.

The survey revealed that MFIs were adopting various models for micro finance such as through the SHGs, Grameen model/joint liability groups (JLGs) model, individuals as well as through cluster associations of the SHGs. The loan range varied widely across MFIs and across states. The loan range also varied across individuals and across SHGs. For individuals the loans ranged from as low as Rs.1,000 to Rs.20,000. For the SHGs, the range was between Rs.30,000 to Rs.2 lakh. The number of clients served by the MFIs varied significantly across the States and ranged from as low as 79 to more than 100,000. The average loan range per client was between Rs.4,000 to Rs.5,000 for individuals and between Rs.60,000 to Rs. 1.3 lakh for the SHGs. Majority of the loans given by the MFIs in the surveyed States were for work or occupation related purposes.

Occupation related loans ranged from 46 to 100 per cent of the total loans in most of the states. This was followed by other purposes like consumption, social events, health, travel and education. The duration of the loans ranged from 6 to 20 months. The interest rates charged by the MFIs were not uniform and varied widely across MFIs and across states. While some MFIs charged flat rates of interest, others charged diminishing rates. The flat rates ranged between 10-14 percent and the diminishing rates ranged between 10-27 percent. Besides, many MFIs charged flat processing fee in the rage of 1 to 1.5 per cent. Apart from the loans, some of the MFIs offered other services such as health insurance and life insurance. In many cases, asset insurance was compulsory, especially when it related to loans for animal husbandry. Almost all the MFIs reported good recovery percentage of the loans, i.e., more than 90 per cent. Most of the borrowers also reported that the MFIs adopted fair practices for recovery. The MFIs have a close monitoring system which ensures that there are minimum defaults. Only a few MFIs were providing performance related incentives to their staff.

Some of the parameters used for providing the incentives were:
(i) business turnover;
(ii) maintenance of clientele (low customer drop out rate);
(iii) reaching the annual target about number of customers;
(iv) recovery performance;
(v) percentage of insurance coverage; and
(vi) loan utilisation.

Only in the States of Karnataka and Andhra Pradesh, MFIs reported that the money lending legislations were applicable to them. In other States the MFIs reported that they were not bound by the money lending legislations. Almost in all States surveyed, the enforceability of money lending legislation was very poor. Commercial banks remained the most important source of funds for almost all the MFIs. Some of the MFIs also received funds from other financial and developmental institutions and donor agencies. The survey attempted to find out what additional support the MFIs expected from banks.
Some of the suggestions and expectations were:

(i) low interest loans;
(ii) loans for operational and infrastructure expenses;
(iii) flexible banking products;
(iv) continuous lending support;
(v) better customer service;
(vi) simplified access;
(vii) capacity building by banks;
(viii) IT and EDP support;
(ix) sharing establishment costs; and
(x) training.

Almost all the MFIs were willing to work as business correspondents (BC) of banks. One MFI however suggested that it was unwilling to work as a BC because it would lose focus on its core activity. Another MFI was unwilling to work as a BC because of the stringent conditions stipulated by banks for their BCs. In most of the States surveyed, district administration was not maintaining the details of MFIs in the district as it was not compulsory. Furthermore, there were only very few complaints against the MFIs received by the district administration. In Krishna district in Andhra Pradesh there were complaints against MFIs for charging high rates of interest and forcible loan recovery. In Madhya Pradesh also there were some complaints pertaining to high interest rates. The survey also attempted to obtain the response of clients with respect to the ease of availing loans from MFIs. Most of the borrowers surveyed reported that it was easy or a easy to get a loan from MFIs. Almost all the bank branch managers opined that MFIs were good customers of banks and they could be used as business facilitators or correspondents.

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