By – Rahul Ranjan Sinha & Arshiya Halder
Umera Devi, who rears livestock in a village barely 5 kms away from the city of Prayagraj, still uses informal sources for her credit needs frequently, in spite of being an MFI(Micro Finance Institutions) client. Many women in her village share a similar credit status with her, even though their locality boasts of better penetration of MFIs and commercial banks. The underlying sentiment is unanimously articulated- the credit products provided by the various MFIs and the banks simply do not fulfill their needs. Women like Umera, therefore, end up having loans from multiple sources which often lie outside the ambit of formal financial institutions. The experience of Umera perfectly sums up the need for appropriate product designing for women from low-income households in realizing the objective of meaningful financial inclusion.
Research studies also indicate a persistent gender gap in the access to formal credit in India. According to the two Findex rounds in 2014 and 2017, the extent of women’s access to bank loans and dependence upon informal sources in India had not changed between these two years. Study shows that a huge percentage of households eligible for MFI loans, do not have an MFI loan, and prefer to borrow from other sources (Banerjee et al., 2014). Hence, it becomes a top priority to understand the demand-side to inform the designing of these credit products.
Top 6 attributes women MFI Clients seek in a credit product
Grameen Foundation India conducted a Client Satisfaction Survey at Fusion Microfinance Pvt Ltd in 2019 in the five states of Bihar, Haryana, Madhya Pradesh, Uttar Pradesh, and Uttarakhand. One of the aims of the study was to tap into the women’s psyche in order to gain an insight into what product features they seek in a credit product. The study adopted a qualitative approach to understanding the key features MFI-clients look for, in a credit product. Using the Product Attribute Ranking tool, the study ranked various product attributes of a credit product. The six key attributes which emerged are shown in the figure below, in the order of decreasing priority:
Figure 1: Top six key attributes women clients of MFI seek in a credit product
Most women claimed that the loan amount provided by the major MFIs was not sufficient to meet their livelihood needs. Women like Umera, who depend upon livestock as their primary source of income, often face a credit constraint at the formal financial institutions where they cannot get sufficient loan amount necessary to purchase their livestock. Hence, most of them diversify their credit sources, which includes informal sources of money-lenders, and end up getting themselves trapped in the circle of over-indebtedness.
‘Repayment Schedule’ emerged as the second most crucial feature women seek in a credit product. Most of these women, hailing from low-income households, have an irregular stream of income. Payment of installments twice a month adds unnecessary financial as well as psychological stress. Women also lookout for lower interest rates while availing loans. They compare the interest amount on principal to estimate the interest rate. Understandably, interest rate follows next in their priority.
The study also revealed that after the first three priorities are met, women lookout for the mandatory insurance charges that come attached with the loan amount and the approval time of the loan. Lower mandatory fixed charges, as well as shorter approval time of loans, serve to ameliorate their financial condition as their needs are primarily livelihood-based and often immediate. Women clients of MFIs often aim for pre-closure of loans due to the cyclical nature of their income flows or avail larger sum of money, which is why the ‘Prepayment Option’ feature emerged as important.
3 steps practitioners can take based on the available information are:
- Diversify product offerings: One size fits all approach has to be done away with, when it comes to product offerings. Segmenting the target and tailoring the products to suit the client is the way forward to meaningfully engage with clients. MFIs should aim to diversify their product offerings; some of these products can be aimed for health financing, age-financing and so on.
- Tinker repayment schedule – align it with income flow of client: Repayment schedule for the credit product ranks quite high when it comes to product features clients seek while looking for a credit product. MFIs should aim to tinker the repayment schedule to align it with the income flow of client. For e.g. repayment schedule for Agri loans can be designed as per the harvest cycle. Introducing grace period for income generating loans can provide the stimulus microentrepreneurs need to build their business.
- Improve operational efficiency – It is highly recommended for MFIs to improve their organisational efficiency and share the benefits with the clients. Increased operational efficiency may lead to reduction in approval time and extra charges like loan processing fees. Results suggest that these product features rank high on clients’ priorities and improving them will yield greater economic returns for organisations.
Throughout the globe, microfinance has been a boon to millions of self-made entrepreneurs and marginalized communities. In India, the time has now arrived to push the success story of MFIs to the next level by making their services more effective and flexible for their clients. By acknowledging the diverse needs of the different income segments of their clientele, MFIs can build better-curated credit products which can usher the next leap in the growth trajectory of microfinance in India.