GRADUATING JLG CLIENTS TO ENTERPRISE LOANS – DRAWING INFERENCE FROM DATA ~ Technical Partner : CRIF Highmark

Clients segments that were being served by MFIs are now being covered by other (non MFI) non-banking finance companies and commercial banks as well. All the three categories of financial institutional are disbursing microfinance (JLG) loans in addition to some institutions offering retail and enterprise loans possibly to the same clientele (non JLG).  CRIF presented industry insights from the study of India’s microfinance customer base and the graduation of borrowers to individual loans over time and highlighted the emerging trends and patterns of lending.  The session deliberated on the scope and challenges for MFIs and other financial institutions to offer more differentiated and suitable products to microfinance borrowers that have the potential to graduate from the JLG methodology to retail loans. Panelists discussed the current landscape, opportunities, scope and challenges for MFIs to offer more differentiated and meaningful products to graduated JLG borrowers, challenges faced by them to scale the unsecured small ticket individual product offering within the qualifying asset limit ambit.

Key findings from CRIF study
• There is no difference in repayment rates, roll forward and roll backward rates for customer cohorts who had taken group-backed loans only and a combination of group-backed loans and individual loans.
• Asset quality at portfolio level for the cohort which had both individual loan and group
backed loans did not reveal any relationship between repayment behavior of customer
towards individual liability and group liability. CRIF highlighted, before any conclusions to be drawn on possible co-relation or independence of customer behavior towards repayment, the vintage and seasoning of individual loan portfolio has to be considered.
• There in recent increase in volume of disbursements towards smaller ticket individual loans indicating service provider’s preference towards disbursing personal loans or consumer durable loans.
• Clients of group-backed product serviced by only banks (bank-only micro-finance group
customer) were offered standard bank products like PSL agri loans, Home Loans and later business loans as cross-sell offering from banks.
• Customers who were serviced only by NBFC-MFIs under group-loans usually received
two-wheeler loans, gold loans followed by business loans by NBFCs and NBFC-MFIs
subsequently.
• The cross-sell product profile has also a very clear rural-urban pivot to it and is largely state driven. For. Eg. Cross-sell of non-JLG product is largely urban dominated by housing and home improvement loans in Maharashtra. While in states like Odisha, Bihar, WB, cross-sell is observed in rural segment mirroring the JLG portfolio. Cross-sell in Rajasthan was fairly interesting with preponderance of business loans in semi-urban and urban area and mostly dominated by local financiers and not necessarily PAN –India service providers.

Key Takeaways
• From a practitioner’s point of view, the transition from pure operating business
model with clear and tested cost, risk and return framework under group-backed
micro-finance operation to a more credit underwriting led business model with fairly
different gestation period, cost, risk and return paradigm is extremely challenging.
The transition call for a “mass-standard” product to a “mass-customized” product
which is adaptive, responsive and innovative needs serious investment in building
teams, culture and capabilities.
• MFIs in India attract largely growth capital. Investors and boards of MFIs mostly have
growth orientation and return expectation resulting from consistent, scalable growth
and steady asset quality. Under such a scenario, scaling individual lending will need
testing and piloting of different models and hence attracting risk-capital investors will
be critical for any MFIs to seriously scale non-JLG portfolio.
• Finding interest from debt investors to support new products is extremely difficult.
MFIs with new products within their 15% non-qualifying limit available find it challenging to convince regular debt investors for fund-raise for standard JLG-portfolio. The relative riskiness attached to an unseasoned, lesser vintage portfolio is high.
• At an operational level, non-group lending product design in India is mostly responsive
in nature and is largely driven by customer demand or field officer feedback. Data
driven customer segmentation is critical and materially significant for a sound
proactive product design. However current mode of customer level data collection,
storage and retrieval are not seamlessly integrated and amicable enough for any
meaningful non-group product design-exercise.

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Inclusive Finance India Summit

Inclusive Finance India is a global policy platform on financial Inclusion setup with the objective of enabling cross-pollination of best practices and breakthroughs,specifically to influence India’s Financial Inclusion strategy and campaign. Recognizing the need and to support this cause, ACCESS has been organizing “The Inclusive Finance Summit” since 2004. This year the Summit is being held on January 18 - 19, 2021 in New Delhi.

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