Kuldip Maity

In the last post I argued in favour of the indispensability of handholding and why technology can at best be a facilitator rather than being a total replacement of human intervention in the microfinance segment. This was argued in the perspective of the accepted axiomatic premise of the entire microfinance movement.

Let me start this blog by reiterating the basic tenet of the microfinance movement that is so relevant for my argument in this post. Microfinance movement evolved from the realisation that unless a system evolves that provides resources to create capacity at the level of the needy, the Gordian knot of vicious grip of poverty cannot be sliced. However, as this argument rules out a comprehensive dole based model, the concept of micro loan evolved. One does not need to be reminded that loan requires repayment and risk bearing ability.

The poor do not have any resource other than their enterprise that they are forced to learn from their daily compulsion to survive against odds. This led to the concept of joint liability group. The logic here is that a member takes credit and the risk is borne by the entire group. Further, the group knows the skill of a fellow member and since they jointly and severally bear the risk, they will ensure timely loan repayment and act as risk minimising machinery. And of course enterprise is something that is part of their daily life.

But this concept of joint liability is now decades old. The demands and the opportunities over the time have drastically changed. So have the risks. To illustrate, with the spread of the mobile phone, motor driven two and three wheelers or myriad other accoutrements even in the rural areas, the demand for their maintenance skill has also gone up. But to meet the need for such varied demands also carries with them varied degrees of risk. When the joint liability group was thought of, the market demand spectrum was less varied as it is now. And it was easier for the groups to comprehend their collective risk bearing ability.

In a nutshell, JLGs acted somewhat like a credit monitoring mechanism at the local level. However with the compliances and structural changes brought about in the recent time, individuals are getting monitored and rated based on their own activities.

A study by European Bank and our own experience is now pointing to a clear shifting of the demand for loan more towards individual in sync with the market reality precisely due to the reason mentioned above. The challenge for us is to accept this reality and evolve a comprehensive structure to meet the demand while at the same time sticking to the basic ethos of microfinance.

Microfinance as a facilitator to cut the vicious cycle of poverty and lay out a clear direction towards capacity creation for triggering a revenue stream as an instrument for development has been debated in all its nuances. Yes, it is also true that despite the decades of debate there are still areas that need to be thought through. This is only natural as the perspective of the relevance of microfinance is dynamic and changes in sync with the changing economic and technological reality.

The current idea that is almost about to put a blinker at the level of implementation is the thought that the tremendous progress made in the realm of technology will make human intervention irrelevant in the microfinance industry The argument is that, technology by itself will lend its might so overwhelmingly as to make what we at the microfinance industry are doing through ground level direct engagement irrelevant.

This is a thought that doesn’t get supported by the reality and experience of the industry as this idea of rejecting the need for human interaction tends to ignore the reality at the beneficiary level. The requirement of the human engagement is dictated by the quality of the functional level of literacy. In the current complex social situation, knowing the alphabet and the ability to put signature on documents don’t count as literacy. The definition of functional literacy assumes understanding of the material read. And the financial inclusion requires financial literacy and access to financial products. Add the requirement of business and fit that into the swath and you will start realising the need for the spread of the engagement required for the microfinance customers.

To illustrate the logic of the situation let us take the case of a beneficiary or a customer who supplements the family’s income by rearing goats. If she needs a loan to expand she will have to repay it. But given her station in life the requirements that she needs to satisfy to obtain the loan is beyond her skill. Training and financial judgment will be key in her case. And no digital intervention can make the need for human interaction redundant in cases of this nature. The microfinance industry is therefore compelled to dedicate itself not merely to disbursement of loan to help create economic capacity but is also required to lend its hand in creating human resource without which economic capacity creation will remain a pipedream. In other words, the model followed in this segment focuses on her functional literacy as well.

There is an indirect statistical support to what I have reasoned. The fact that human intervention is so relevant is supported by the growth statistics contained in the MFIN Micrometer, March, 2018 issue. It says that the loan outstanding growth in FY 2017-18 compared to the previous year for banks has been 23 per cent. Compared to that NBFC-MFIs (excluding banking correspondents) have chalked up a figure of an impressive 48 per cent. This can be straightway attributed to the model of handholding that the NBFC-MFIs follow.

Therefore while the evolving digital technology may help connect, but when it comes to addressing the social roadblocks like literacy that stands in the way of cutting the Gordian knot of vicious cycle of poverty in the subcontinent, human intervention still holds the key.

At the beginning of the microfinance movement, the thought of how to secure the credit was paramount. With the poor being the focus, it was quite natural that a collateral as a pledge against any loan would be hard to come by. The concept of joint liability group was thought of as a solution that could address the issue of loan without conventional concept of collateral. The logic behind it was quite ingeniously simple.

Within a small locality neighbours are known to each other. Each one knows the others’ credit and trustworthiness. So if a group is formed by a set of neighbours and together they bear the risk of default by any member the problem of credit risk would be largely addressed by the group taking up the liability jointly. Should any member default, the group would take up the liability of repaying the defaulter’s debt. Hence it is dubbed as the Joint Liability Group or JLG.

However, the process couldn’t be an automatic one. Given the low level of literacy and corresponding low level of financial awareness, the process involved a direct engagement of staff representing the microfinance institutions. The group members needed to be taught ways of managing the credit they are accessing and its efficient deployment. This of course involves an intensely detailed engagement between the credit institutions and the group.

The logic worked and the system, as we can see, is thriving. However, with the changing times the need for products focused on individual requirements is being felt more pressingly every day. The JLG logic requires acceptance by the group concerned of an individual member’s loan requirement and also the purpose for which the loan is being taken.

With the growing opportunities, requirement spectrum of the customers is also exponentially getting wide. In the initial days, within a group, the deployment purpose of the credit used to be almost homogeneous. Therefore, acceptance of a member’s need by the others within the group was not a challenge. Now, however, it is as various members have varied deployment purposes that may not be acceptable as a liability risk by the group concerned. There is also another factor that is looming large. Within the same group some members perform better than others in terms of entrepreneurial ability. As a result their fund requirement to sustain their next stage of growth is often found to be beyond both the ability and willingness of the group to bear the liability involved in the demand for funds made by the member concerned.

The changing characteristics as discussed above are leading to a rising demand for individual loans from the microfinance institutions. Unless these demands are met the members will not be able to convert their initial success into a sustainable one. This would call for a new and different approach in microfinance.