Microfinanciers eye personal loans

After following the group model of lending for years, microfinance institutions (MFIs) are now looking to lend to individuals.

“A few MFIs, who have successfully built and operated their joint-liability-group lending models, have now been talking about diversifying into individual lending,” said Kumar Ashish, general manager at ICICI Bank.

While MFIs have long wanted to lend to individuals, there was no system in place so far. “Now, we have some systems in place,” said Brij Mohan, a Delhi-based development consultant.

BASIX, an MFI, has already been providing loans to individuals. The difference in risk-taking capacity of individuals in a group could have triggered the MFIs’ move to look for individual loans.

“For instance, some individuals, who had earlier taken loans of up to Rs 5,000 in groups, have grown their business and now want more loans, say up to Rs 50,000. But with the higher loan amount, the risk on the group increases and other members may not be ready to take the additional risk. So lending to individuals makes sense,” explained Mohan.

However, banks and consultants have put speed breakers on their plans, citing higher risk. 

So far, the default ratios have been near zero for MFIs as the loan is given to a group and peer pressure helps limit defaults. Also, as the poor are out of the formal banking channel, their chances of getting a loan again become difficult if any member defaults.

Banks also fear that MFIs, many of which are non-banking financial companies, may grow to the size of banks if they start doing what banks do —- lend to individuals.

“If a borrower from an MFI needs a higher loan, he needn’t go through the microfinance channel again. He now has collateral that he can offer to get loans from the formal banking channel,” said a banker who did not wish to be named.

Other bankers see the loan products of MFIs as a concern. “If the individual loan product is superimposed on the microfinance product, that will be a disaster,” said Moumita Sen Sarma, head of microfinance and sustainable development in India at RBS. “The loan product needs to be developed in a way that the cash flow is seen.”

A tool that may help individual lending, if permitted, is a credit bureau, which will be able to screen “risky” loans.

Financial Information Networks Operation, an MFI with about 5 million people in its network, claims it has managed to operationalise a credit scoring solution called Sayana Ravi to equip MFIs to track the history of borrowers.