The post focuses on the specific differences in client’s response to various aspects and attributes of micro-lending principles and practice, in rural and urban areas. It is based on observations* from the field visits done as part of our regular monitoring visits.
The complete oeuvre of micro-finance was conceptualised and framed by Prof. Yunus with the strong premise of “Poor are Bankable”. This was designed with a strong sense of imbedded social collateral (in place of conventional collateral), group discipline and small but frequent repayments. This was started with a belief that when poor are provided with timely credit, they try their best to make productive use of it. In practice it was ensured that the principles are followed in day-to-day operations of Grameen Bank. When the micro-lending model was replicated in India, the micro-finance service providers started operations in rural area (which had very similar socio-economic texture as it was in Bangladesh) and religiously practiced the principles preached by Prof. Yunus.
Processes and procedures aligned to the premises and principles of micro-credit were developed and practised in full rigour. Checks and balances were slowly built into the operation that has resulted in a matured micro-finance industry. Operations are now largely standardised across different players in the industry – client data sharing with credit bureaus (HighMark & Equifax) is a norm now; the industry has MFIN as an SRO, which actively engages with various stakeholders within the industry and the RBI as the regulatory body for NBFC-MFIs that defines the larger regulatory and compliance framework for them. Post-Andhra Pradesh crisis (October 2010), the industry has rebounded lucratively and as of today promises, significant growth opportunities, both in terms of attractive investment opportunities for investors and financial sustainability and the ability to realise the social dream of achieving financial inclusion and institutional outreach.
The target customer segment of the micro-finance service provider over the last few years has gradually moved towards low-income households in urban areas. The service providers have tried to replicate the process and procedures as they used to do in the rural context. However, the response of the urban client to the process and procedure is not the same as it was by rural clients. The group dynamics is not as prominent in urban set-up as it is in the rural set-up. The nature of peer pressure and repayment in case of group guarantee invocation varies across rural and urban area. The appetite for higher ticket size loan, the loan use pattern and the underlying mechanism and dynamics that govern the loan utilisation are significantly different.
The following table highlights some of the difference in response, to the premises and principles of providing micro-credit. These are based on some of the observations gathered during visits to client locations of NBFC MFIs.
Rural Set up
|Importance of group
Clients perceive affiliation to group (which is also an indicator of socio-economic status) as crucial to their access to credit. In the absence of group, the client has hardly any access to reliable, affordable formal credit due to poor penetration of formal financial institutions in rural areas.
Clients perceive “groups” as a means to an accessible loan; Micro-credit in urban set-up is easier for clients to access because of the absence of collateral and ease of repayment – staffs collects the instalment at doorstep. In the absence of group, clients can still approach banks for loan although this is less accessible.
|Discipline (in terms of attendance, group register maintenance)
Clients perceive presence in centre meeting an important task and manage their time for daily chores in a way, which allows them to attend meetings. Attendance is on an average 90-100%. Practices that reinforce group bonding such as reciting group pledge etc. is routinely followed. Group documents are properly maintained.
|Attending centre meeting is not the key priority of the clients (as most of the clients work outside their house). Centre attendance may be as low as 25-30% in some locations. Reciting group promises is barely done, which in a way is indicative of how strong is the group adherence.
|Repayment and Invocation of Group guarantee (GG)
While repayment responsibility is largely of the woman (the borrower), the repayment is largely funded by supply of repayment instalment from household’s occupation as a whole.
In the event of earning member’s unwillingness/inability to supply the requisite funds, women borrower substitute funds from their ‘expenditure-saving’ activities, daily subsistence resources and resort to distressed consumption. In case, of GG invocation, the shared instalment of the defaulting member is actually paid from collective household income of other group members.
Since most of the borrowers in urban set-up are employed – either self-employed or offer service, repayment of instalment of defaulting member, in case of GG invocation, is largely met by the woman herself through her own individual income.
The key driver of default avoidance is stress generated by peer group pressure to avoid default on loans by any of their members with the prime objective to maintain group’s future creditworthiness. As member assign social status in adhering to specific groups, rarely do members consider moving to new groups.
The key driver of default avoidance is client’s concern about individual credit worthiness (calculated in terms of DPD (Days past due) count Highmark report); peer group pressure does not play as important role as it assumes in rural set-up. Clients find alternative groups and usually have floating loyalty towards group membership.
|Appetite for higher ticket size loan
Clients asking for higher ticket size loan are guided by their understanding of how well they can utilise the loan (either for consumptive or productive purpose). Very often, customers do mention that they do not want to take loan unless they foresee a real need for cash. Clients do understand that higher ticket size loan translates to higher instalment amount, which may or may not be, under their loan servicing ability.
Urban clients have relatively higher appetite for higher ticket size loan. This is based on the client’s understanding of certainty and regularity of her domestic cash flows and the potential increase in income, which she perceives because of the productive usage of offered loan.
It may be necessary for micro-credit service providers catering to urban customer segment to identify, understand and appreciate these differences and design products, processes, procedures and practices based on an in-depth understanding of urban-client behaviour. It will benefit both the service providers and clients equally, as suitably designed micro-credit/finance service delivery will ensure increased acceptability and enhanced efficiency within the service provider as well as more effective risk management practices.
* – These observations are based on interactions with around 200 rural customers in the rural areas of Uttar Pradesh, Madhya Pradesh, Gujarat and 140 urban clients from cities like Mumbai, Pune and Bhopal.