The objectives of sustainable businesses are well-aligned with ensuring the financial health of households, and this holds true for all types of lending businesses. In the specific context of microfinance businesses of NBFC-MFIs, this translates to the business objective of avoiding overindebtedness of borrowers because of lending to them. Since the universe of borrowers can be characterised as belonging to low-income and vulnerable or potentially vulnerable backgrounds, lending institutions need to be particularly careful in ensuring this business objective is met as a matter of business process. This is particularly so given that the history of the microfinance sector has been chequered with political risk events that have exacerbated business risk in the absence of due process that exhibited an intent by providers to prevent households from becoming over-indebted because of lending to them.
However, a more important reason for why a transition to better creditworthiness assessments that can help to prevent over-indebtedness of households is one that is closely linked to the future of the microfinance business model itself. Servicing through customer life-cycles is more sustainable than lending low ticket loans as prescribed for the NBFC-MFI licensing model and skimming geographies in search of borrowers who are not already being served by existing MFIs (and who cannot be lent to on this account).
This Note provides a set of ideas for operationalising Suitability in microcredit. These ideas can be incorporated into existing business workflows based on the level of sophistication each institution desires for itself given its unique context.
Read the note here.