Microfinance Institutions empowering women entrepreneurs amidst social challenges

Fusion Microfinance, which follows the Joint Liability Model, has disbursed loans to nearly 36 lakh women across India as of FY2023. A Joint Liability Group (JLG) is a group of people who come together to benefit from a loan through the mechanism of the group against a mutual guarantee. The members of the group are jointly entitled to the loan and are solely responsible for the debt. MFI loans are collateral-free and most operate under the same model.

Fusion branch head in Haldwani told Mint that the JLG group has now narrowed down to five from 15 in 2014. The branch manager highlighted a list of criteria based on which they disburse loans such as– Any family member of the female borrower (husband, father, father-in-law) should own a house, basic Aadhaar card of the borrower, the CIBIL score of the borrower or the nearest family member, and finally, the loan should not exceed all financial institutions ₹1,80,000. There is a loan of ₹8,375.16 crore in FY2023.

Several such microfinance institutions have helped millions of women run their own businesses by providing microcredits to those who do not have access to formal banking and related services through the JLG model.

Also read: The MFI sector posts 21% growth in lending equipment

“MFIs have always prioritized poor women, especially in rural areas to promote women’s entrepreneurship and financial independence,” said Samyak Chakrabarty, founder of Workverse.

Chakrabarty, who has worked extensively to enable micro-entrepreneurship and further training for women across rural India, said, “Qualitative observations suggest that women have much greater control over (a) judicious and legitimate use of funds and (b) comply with. promises of repayment.”

“Women have never had a presence in family financial decision-making due to social construction and patriarchy. Also, traditionally, women have thin or zero files because they have never entered a formal financial system. However, it has been suggested in some reports that they are good at repaying loans. MFIs have acknowledged these facts and hence target women borrowers,” said Kalpana Ajayan, regional head of South Asia at Women’s Global Banking. According to Sa-dhan’s Bharat Microfinance Report, women borrowers in microfinance constitute 98% of the total clientele of MFIs.

Also read: Let’s not conflate microfinance with self-help group financing

Dipti Bhandari, a micro-entrepreneur, who used to run a Kirana shop in Kaladhungi, now runs a parlor and shop. “I borrowed from Fusion three times. The first time I borrowed from him ₹40,000 and paid by IEA ₹1,700 every month. Now, it is my loan amount ₹60,000, and IEA pays for it ₹2,800 per month. With a loan, I bought a sewing machine, an interlocking machine, and added cosmetic products to my shop,” she said.

‘BLACK & WHITE MFIs’

MFIs in India have played a major role in buying small credit, especially to weaker sections without any collateral. But hailed as the magic bullet to end poverty and increase women’s empowerment, there were cases of harassment against borrowers, astronomical interest rates, debt traps, and cases of staff fraud. Several cases of foreclosure of overdue loans and lending to defaulting clients were also noted. The reputation of microfinance has taken a backseat to opinion.

Also read: Microfinance portfolio grows 21% in FY23, Sa-Dhan data shows

During the Covid pandemic, job loss, loan defaults, and a reduced standard of living were common among the vulnerable. A study by Sa-Dhan found that 94% of families had faced disruption to their normal livelihoods, 70% of families had a reduction in income and savings, 56% had improved debt levels households and that 67% of households had higher interest costs during that period. pandemic.

According to Ajayan, MFIs are serving a segment that would otherwise be difficult to reach. Even with the advent of technology, basic services still rely primarily on human resources to ensure effective delivery. The workforce in the microfinance sector has grown steadily in recent years. As on 31 March 2022, the total workforce stood at 1.95 lakh, a growth of 21% over the previous year. More than 60% of the staff in MFIs are in the field, working as branch staff, involved in sourcing applications, appraising and approving loans, monitoring loans, and collecting repayments.

“MFIs are going down to the lowest common denominator to lend these products to women. It is an expensive part of business… Lending unsecured loans in the remotest areas will also be an expensive business because it laden with the firm. inherent risk of repayment default,” Ajayan said.

Medium and small institutions also face problems with access to finance and cost of funds. Primarily, MFIs borrow from banks on the strength of the capital, which they hold. The total debt financing of these institutions stands at ₹64,693 crore for the year 2021-22.

“MFIs have adopted a policy at their Board regarding pricing. When setting the price they take into account Cost of funds, operating cost, risk cost or credit cost, and then a margin. As we know the policy rates have gone up to 250 bps.over the last 18 months, and the cost of borrowing has increased.Also, the risk induced by Covid is still having an effect.

Traditionally, MFIs have lent for both consumption and productive purposes. According to Sa-Dhan’s analysis, poor people use their loans for their emergency and consumption needs more than for livelihoods. Loans are generally productive for businesses and ideally there should be profits that can repay loans directly and in a timely manner. However, non-productive loans are non-earning activities such as marriage or education.

CEO Sa-dhan said that even non-performing loans are relevant to the needs of vulnerable populations. For example, “health and treatment are considered a consumption loan but it is actually a productive loan because it contributes to human productivity. The same is the case with education,” said Mammen. However, borrowing from various sources for such purposes could increase indebtedness and cause some stress to people, he said.

According to the founder of Workverse, Chakrabarty, “If the borrower does not manage to raise income from other sources, he/she often defaults,” he said, “Most microloan borrowers are those who following unstable careers of inconsistent income, making it impossible to pay off loans that did not result in a direct financial return”.

“Currently, there is a need to focus on two main factors in the country – unemployment and inequality. MFIs play a vital role by providing opportunities to those at the bottom of the pyramid and alleviate gender inequality by creating micro-enterprises,” said Devesh Sachdev, MD and CEO of Fusion Microfinance.

INTERVENTION OF RBI

Some women borrowers told Mint that they are not aware of the amount of interest they pay on their monthly IMIs. “We get a message on our registered mobile numbers that our payment is due and we go to the branch to make the payment or we do it online,” they said. Instant loans and accessibility were the main reasons for taking loans from microfinance institutions, said the semi-literate women borrowers.

Ombatti Sharma, an MFI borrower, said she expanded her tea stall into a fast food business. “I am proud that I am financially independent. Of course, my husband supported me to fulfill my dream. With this fast food stall, I pay my monthly rent, pay my daughter’s school fee, and save too. ₹200 per day”.

In particular, the Reserve Bank of India (RBI) allowed microfinance lenders to fix interest rates on loans with a rider that should not be unprofitable to the borrowers. A microfinance loan is defined as a collateral-free loan given to a family with an annual income of up to ₹3 lakh, as per the latest RBI guidelines.

The RBI has also capped the maximum repayment amount to 50% of the monthly household income to curb over-lending.

“RBI has laws and rules in place for collection agents. However, most of the collection operations are run by ‘goons’ who prey on semi-literate debtors or blue-collar workers who can easily manipulate them by threats. More work must be done by the RBI to educate debtors about their rights, remedies, and protections even if they are defaulters. Also, the mindset must be changed that not all defaulters are willing, that they are victims of many circumstances and therefore cannot be put in. the same category as debtors who will have fraudulent intentions,” said Chakrabarty.

SIDBI has also initiated a third-party Code of Conduct Assessment that measures MFIs’ adherence to ethical and sound lending practices. “MFIs also submit financial and operational data regularly, at periodic intervals that enable transparency,” the national development bank said.

MFIs are one of the few institutions that attract an overwhelming share of women and can act as a potential vehicle for women empowerment and can play a significant role in closing the gender gap.

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Updated: 11 November 2023, 11:14 AM IST