Faced with the challenge of bank funding and stringent regulatory norms, many microfinance institutions (MFIs) are drifting from the traditional Grameen model of lending. The idea is to reduce operational cost, while maintaining low default rates. Many MFIs, especially those in the southern states, are experimenting with a monthly repayment system, rather than weekly repayment, to reduce costs. For example, Hyderabad-based Trident Microfinance and Chennai-based Equitas Microfinance have started experimenting with the monthly repayment model.
The Grameen model, dating back to 1976, stipulates weekly repayments under group lending, whereby the members of a group constantly create peer pressure for timely repayment of loans. As a result, the rate of default in most MFIs is as low as one or two per cent.
However, with margins coming under pressure and operational costs remaining high, after the crisis in the MFI sector, micro lenders are finding it difficult to continue with the weekly repayment system. Most MFIs in Andhra Pradesh, where majority of the industry was concentrated before the 2010 crisis, have substantially cut workforce at field level to bare minimum.
Recently, Trident Microfinance shifted from weekly to monthly repayment model of lending on a pilot basis in Madhya Pradesh. “The disbursement and repayment from the monthly repayment model is same as from the weekly one. It has reduced the cost as MFIs are struggling to stay afloat,” said Puli Kishore Kumar, promoter and chief executive officer, Trident.
Equitas, which had been operating on a fortnightly repayment model for lending since 2007, started monthly repayment model a year before.
At present, nearly 40 per cent of its customers are under monthly repayment schedule, while 60 per cent are in the fortnightly repayment schedule.
“We have begun offering monthly repayment options to our clients, and there had been no issues with repayments,” said P N Vasudevan, founder of Equitas. The monthly system of repayment in MFIs could reduce the cost of operations, which constitute a major expense for small lenders, by 25 per cent, said Alok Prasad, chief executive officer of the Microfinance Institutions Network (MFIN), the representative body of MFIs.
However, the inherent risks of deviating from the Grameen model are not ruled out.
“Some MFIs are looking at monthly repayment system, as the operational cost is much lower. However, there are inherent risks in the model as the cash flows may not meet repayments. Expectation that a borrower will pay a lump sum amount of money at the end of the month can be unrealistic,” said Prasad.