In all my blogs I have been reiterating the reason for instistutionalising the concept of micro finance that there is a developmental perspective to it and hence the concept of micro finance has social call to respond to. In my last blog I had talked about the concept of double bottomline, about the meaning of responsibility and responsiveness of micro finance institutes and their implications. As a natural extension of the concept of both responsiveness and responsibility I now need to talk about the concept of social collateral and customer engagement and their implication.
In my previous blogs I have talked about joint liability groups. Let me, in this blog, focus on the rationale of social collateral and consequently joint liability groups. The functional onus of the micro finance institutions rest on connecting to the poor through credit lines and yet stay profitable. The job is at this level similar to the commercial lenders.
But commercial lenders extend their credit lines against encashable collaterals. The concept of collateral rose from the realisation of repayment in the event of a failure. The poor do not have any surplus to mortgage – be that in physical or liquid form. Yet credit line in any form needs collateral to support the engagement. So the solution was to look for a functional institution of guarantee for the credit line. The concept of social collateral emerged from this. If a person takes a loan and a group similarly engaged and of similar economic status stand guarantee to the credit line, the group becomes socially responsible for the loan and if the person fails to pay back, the onus of repayment will fall on the group. The concept of collateral rose from the realisation of repayment in the event of a failure.
This was the root of the emergence of the concept of joint liability groups. The credit engagements through the micro finance institutions are with joint liability groups in which the groups bear the repayment onus jointly and severally. But in the case of the poor treating a group as social collateral for a credit line is not enough. While the social responsibility creates a high probability that the members would hold each other responsible for the repayment burden should they together fail due to lack of knowledge in putting money to productive use what will happen then?
This is where the issue of customer engagement takes up paramount importance. The microfinance institutions are also tasked with the responsibility of hand-holding the groups in terms of making them financially aware, teaching them how best to put the credit line to yield a surplus and ride through different cycles of credit into prosperity. One of the tests of the success of a micro finance institutions therefore is the position of NPAs on book in relation to the industry average. It wouldn’t be out of place to say here that VFS carries nearly zero NPA on its book and the credit goes entirely to our team’s dedicated customer engagement in which they are hand-held in their journey by making them aware in the best utilisation of their loans.
The fact that only through creation of effective social collateral and customer engagement can an MFI sustain their double bottomline has etched their ensurance as the golden rule.