How MFIs work?
Many of us will be aware that micro finance means provision of financial services such as loan to people living in poverty, while some institutions particularly strive for uplift in lives of poor women and their families.
The Microfinance Institutions (MFIs) take little or no collateral security for the credit extended. The people covered are mostly those who can’t avail loans from banks and other such financial institutions due to the lack of ability to provide guarantee or collateral security against the money borrowed. Although the amount of finance provided individually is less (say around 5-10 thousand), they aggregate to a substantial amount when the entire financial year is considered (most cases running to crores).
The main reason behind the banks failing to extend loans to this section of people is the high default risk for repayment of interest and in some cases, the principle amount itself. So the question arises as to how the MFIs are able to thrive and perhaps record a staggering growth rate over the years and how they almost nullify the risk of default of repayment. This article discusses the basic techniques followed by leading MFIs. It is pertinent to note that the individuals availing loans are divided into groups (each group consisting of say 5 members) headed by one leader from the group. The amount to be repaid by every individual member is guaranteed by the remaining members of the group. 4-5 groups from one particular locality form a batch, again headed by a leader from amongst the members of different groups.
A field officer, who is the employee of MFI, is put in-charge of each batch, who conducts meetings periodically (say every week) where the collections are made. It is quite clear that the mutuality concept is used here to the extent that, groups of persons with a common objective and mutual interest are involved. The default risk is further reduced by applying more conditions.
A few of them are:-
(i) An individual can avail his/her initial loan, only after attending certain number of batch meetings.
(ii) Subsequent loans can be availed depending on the history of repayments made towards earlier loans.
(iii) Size of loans will be increased gradually.
(iv) Interest on a single loan will be reduced gradually during each collection period.
The inverse hierarchy of reporting / operational hierarchy can be understood as:- Individual -> Group ->Batches ->Field Officer ->Branch officer ->Divisional officer ->Regional officer ->Head office The individuals are provided the amount of loan at the branch office and not by the field officer. This brings us a more a clear picture and indeed the reason behind how the MFIs are able to achieve a phenomenal loan repayment record of more than 95% without obtaining any reasonable security. In fact, it was very hard to find out any probable occurrence of fraud at this level of operations. If the reader is able to identify risks of fraud, do share for benefit of everyone.
Suggestions, comments and feedback are welcome at fahim.haniffa@yahoo.com fahimhaniffa.blogspot.com
CAclubindia
