Easy loans,hard paybacks

As the table shows (and this was verified by the FGDs),the majority of the loans disbursed in Kolkata were taken for business purposes. However,the actual number of loans used for business purposes drops from 73% of total loans disbursed to 63% of total loan utilisation. As end usage of loans was directed majorly towards business,borrowers found it easier to pay back. The participants in the discussions did report that at times when income cycles did not match the regimented weekly pay-backs,borrowers resorted to procuring informal loans to pay off the instalments. The group also reported cases of multiple loans,but rationalised it by arguing that the loan amount obtained per MFI was not sufficient to meet their requirements.

On the other hand,in the FGDs conducted in Hyderabad,an interesting issue cropped up while discussing the purpose of borrowing,also corroborated by the primary survey. Unlike Kolkata,of the total loans applied for in Hyderabad,only 20% of the borrowers applied for a business loan,while 16% applied for consumption purposes,6% for social purposes and 28% were taken for other reasons that include medical emergencies,legal charges etc. It was the view of the participants that the ease with which the loans had been made available had led to an increase in their demand,for purposes other than income generation. Additionally,they reported that loan requests were often camouflaged with entrepreneurial purposes.

In such a scenario,where loans have not been taken for productive,income generating purposes,repayments will obviously become a nightmare. Many borrowers,therefore,resort to procuring loans each week at much higher rates from informal sources to pay off the MFIs and thus enter the vicious debt cycle.

The different scenarios in Kolkata and Hyderabad pose some interesting questions. Is it the duty of the MFI to regulate the end use of the loan? Should multiple loans be provided? Should the borrower’s ability to pay back,especially in the case of consumption smoothening loans,be taken into consideration?

In view of the problems and the issues regarding the industry,the borrowers in the FGDs made some practical and thoughtful suggestions. In addition to requesting the lowering of interest rates,they requested flexibility in repayment cycles by reducing the number of instalments (for example,from weekly to monthly). While the general consensus was in favour of disallowing multiple loans,for higher loan amounts it was felt that the experience with credit and past record of borrowers should be considered.

While considerable strides have been made in the 60 years since Independence,the struggle to develop a suitable channel to bring the financially excluded sections of society into the system still continues. While various approaches have been experimented with,the results have been mixed so far. However,over the last decade or so,the MFI approach has been particularly successful in making inroads into the otherwise neglected regions. International experience has also shown that MFIs,as a concept,are a very novel approach,one that has not only worked but is also easily scalable.

However,the industry has been subject to intense criticism regarding dubious lending practices,usurious interest rates,sky rocketing salaries etc. But for all the criticism and charges that have been levied against the industry and the players,no one can deny that the phenomenal growth achieved by the MFIs has helped in deepening financial penetration.

—The author is director,NCAER-CMCR