As microfinance institutes continue to prove their role in forwarding the government’s agenda of overall financial inclusion, particularly in ‘last mile’ access to loans in far-flung villages, it is time for the government to increase its efforts in encouraging MFIs to support SMEs. Taking a right step in this direction would be to allow MFIs expand the repayment period for microloan customers, which will help not just to minimise their lending rate but will also allow them to distribute payments of interest over a longer time period. Since most MFIs follow a rigid contract, most installments are paid back on a weekly basis, starting within a few days of a loan being disbursed.

The repayment frequency and the short span within which the first repayment is made, however, do not always guarantee better repayment behavior or on kinds of investments they make. Studies by researchers, as well as ground realities have revealed that less frequent repayments does not mean increase defaults. Even though a two-month grace period before the first repayment is made did slightly raise the default rate slightly, it also allowed entrepreneurs to invest more in their businesses and resulted in long term economic gains. A section of MFIs have argued that weekly repayment meetings create a sense of fiscal responsibility, besides increasing interactions with loan officers, which help build as stronger sense of trust between customers and MFIs.

Weekly repayment schedules might mitigate risk to certain extents but it also makes payment collection more expensive for MFIs. In a more pragmatic approach, if the frequency of repayments from far-flung areas is reduced, the cost of collection will go down and could help MFIs to offer lower rates of interest from customers.

It has also been noticed that when borrowers are made to make the initial repayments within days of the loan being disbursed, they typically set aside a part of the loan amount for the purpose of repaying the first few installments. In the process, they feel discouraged to invest in raw materials or even proper infrastructure, which, in the long run, prevents them from scaling up their business.

Even though recent models have shown definite signs that expanding repayment periods will have long-term positive effect on both borrowers as well as micro lenders, most MFIs continue to stick to the traditional model of repayment contract. It is here that the government may proactively encourage MFIs to accept repayments over an expand schedule.