Knowledge Products of Microfinance: A Synthesis of Consolidated Replies
A collection of papers that synthesize discussions emerging from the Microfinance Community of Solution Exchange that brings together people working in financial services to meet basic needs, enhance investment in income generating and asset building activities to address risks of the poor.
Responding to the query on extension of diversified credit products to individual SHG members under the SBLP, respondents shared several experiences to demonstrate the feasibility of providing customised banking services to meet the requirements of SHG clients. They emphasised the emergent need to make microfinance more clients’ responsive by introducing diversified credit products and recording the end use of loans to better understand the needs of the poor. Respondents also discussed the present system of microfinance delivery by banks, MFIs and NGOs and recommended strengthening the role of MFIs/NGOs as financial and social intermediaries.
Discussants noted that they have encountered a limited number of banks providing diversified credit products. However, they were able to share some success stories of commercial and development banks providing customer oriented microfinance services, including public sector banks and regional rural banks in Tamil Nadu, Karnataka and Orissa. In some cases, financial institutions are extending loans to NGOs so the NGO can then lend to SHGs. Subsequently, SHGs can extend loans to their group members based on their needs. Additionally, respondents cited instances of financial institutions, both banks and MFIs, delivering a range of microfinance products designed to suit the needs of individual group members such as education, housing, enterprise and consumption loans. Discussants pointed out that banks and MFIs, which design need-based customised products for individual group members tend to have high client satisfaction ratings. Further, these banks have witnessed tremendous growth in SHG gross loan portfolio, due to the wide range of products they offer.
Drawing on the success stories of these commercial and development banks in providing diversified credit products to individual group members, respondents attempted to analyse and make recommendations on National Bank for Agriculture and Rural Development’s (NABARD) SBLP model. Respondents applauded the programme as a unique and effective way of providing financial access to millions of poor households. At the same time, the group cited the following limitations with banks’ approach to SHG lending under SBLP:
Banks largely provide credit to SHGs based on the size of its cumulative savings. The criteria for deciding on a loan are not based on the needs of SHG members.
Banks lack the required skills to appraise individual’s loan absorption and repayment capacity, which results in an under or over utilisation of loans, affecting repayment behaviour.
Banks generally do not track loan repayment status at individual level only, but only at the SHG level. Bank staff lack specialised training to design specific products for clients who are SHG members.
Banks generally do not record the end use of loans. Hence, it is difficult to understand the needs of the individual clients.
Members also suggested ways to make the SBLP more client-oriented and self-sustainable: Conduct market research with the help of technical service providers and market research tools to design value added microfinance products to meet the specific requirement of different segments of the community. Train bank managers to assess the needs of clients and effectively design new products. Create a mechanism for continuous customer feedback, to improve existing products and service delivery system including a system to track loan utilisation of individual SHG members to help design demand-based products. Analyse microfinance products based on their purposes and loan terms (i.e. cash payment versus recovery or doorstep versus branch recovery system).
Have banks closely track the loan repayment history of groups and individual group members to ensure stability of the SHG before advancing subsequent loans as shown through the practice of using ‘coloured passbooks’ to distinguish groups by their track record of repayment.