Multiple Borrowing & Competition
Impact on Credit Quality
Sucharita Mukherjee
9th January 2010
Agenda
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Impact of competition and multiple borrowing on credit quality
Trends in the microfinance sector
Solutions for the future
Why is competition and multiple borrowing a concern?
 Individual client default probability
increases
 Current level of credit versus credit
capacity
 Information asymmetry
 Systematic risk (i.e. the risk inherent
to the entire MFI) increases due to
deterioration in origination and collection
processes of the MFI
Impact on Credit Quality of Microloan Portfolios
1
Origination
Process
 How is proof of identity and proof of residence checked?
 Does the MFI educate the client adequately about the loan
product, its features and financial discipline required?
 Proxy questions on loans availed during the group recognition
test to check multiple borrowings
 Loan appraisal process: How is the ticket size decided?
 Attendance in group meetings
Proxy for multiple borrowings?
Is it recorded in the system?
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Systems &
Policies
 How strong are MFIs’ systems to check utilization of loans?
 How is the staff trained and retained?
 How is the staff incentivized?
 Personal guarantees!
 Loan recovery mechanisms
 What are the processes for internal audit?
 uniform implementation of systems and processes
 Static pool analysis
Impact on Credit Quality of Microloan Portfolios
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Competition
 How does the MFI decide which areas/villages to enter?
 Has the MFI made any changes to it’s operational model or
products to counter competition? Are there any specific risks
posed by the change?
Centre leader transforms into an agent!
 Frequency of group meetings
 Knowledge of competitors at the level of branch staff
How is this information being recorded/utilised?
 How does the MFI build on its relationship with the client?
Is the MFI part of any regional forum or credit bureau
initiatives(eg Akmi, Alpha)?
Why does this matter?
For the microfinance sector to scale
up:
• High quality origination or
frontline provision of financial
services
• Orderly transfer of risk
- well-capitalised financial
institutions to manage risk
-IFMR Capital: the vital link
 Investment/holding of risk by wellcapitalised diversified entities such
as mutual funds, insurance
companies and pension funds
Microfinance Sector Trends
Microfinance Sector Trends
Solutions for the future
 Formation of Credit bureau at National level
 25 MFIs have formed a trust called Alpha to put together a credit bureau
 Enables information sharing, capturing fraudulent transactions, solving localized
common problems, and adopting a common code of conduct
 MFIs to focus on origination quality
 Proper assessment of borrowers including CGT, GRT and continuous monitoring
 Assessment of overall credit capacity
 Development of tailored financial products
 Market development - IFMR Capital’s role
 Market standards for MFIs
 Continuous oversight
 Encourage transparency regarding quality of operations : make information available to
capital markets
 Workshops/training programmes for partner MFIs to develop capacities in risk
management, credit assessment
Thank you
1, Cenotaph Road | Teynampet | Chennai - 18
www.capital.ifmr.co.in
Appendix
Multiple Borrowings in Kolar – Context
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Karnataka is a heavily banked state with a bank branch for every 11000 people*.
Total number of households = 11.16 million of which 2.77 million are poor
Total of 27 MFI’s (& 45 NGOs) operating with 18 of them headquartered in the state
In March ’09, no of estimated microfinance accounts = 7.31 Million
Hence, 7.31/11.16 = 65% households having MFIs loans (Assuming each house has a
microfinance loan)
If loans cover only poor households, each household has 7.31/2.77 = 2.63 accounts
Average MFI loan size = 6600 Rs, about 10% higher than national average
Usually Microfinance loans don’t go to the poor, but ‘near’ poor which implies
number of loan accounts per borrower is likely to be more than two
Credit deposit ratio of banks in March 08 = 304 percent
Compounded with SHGs , this region was heavy on debt.
* RBI banking statistics, 2008
Problems in Kolar
External Conditions
Internal Conditions
 Religious issue: Hurting the Islamic sentiments of people
 Local economy was on the decline
– Handicraft & silk industry not strong
– Droughts visiting this district for 3 years; District
dependent on rains for 70% of cultivable land
 Farm loan waiver by government
 Product deficiencies: Sericulture & street hawkers
required different types of loans – cash flow & loan
repayment mismatch
 Process infirmities, flawed incentive structure for staff,
inadequate training and capacity building
 Intense competition eroded the discipline
 Neglected early warning signs
CMF Study on Multiple borrowing & Competition in
Indian Microfinance sector
 The Study done in Sept, 2007
 Analyzing data set of over 500,000 clients loan and repayment records from 7
MFIs over a 3 year tenure funded by ICICI
 The extend and effects of multiple borrowing and competition on repayment are
quantified
 Interviews with selected clients with multiple membership to understand clients’
key drivers
 Qualitative interviews with leading sector experts and practitioners on the issues
of competition and commercialization
The Results
 The key finding - there is no negative relationship between multiple borrowing and
repayment performance
 A majority of the multiple borrowers interviewed reported that they used the second
loan for investment purposes and none had repayment difficulties
 All the MFIs, except one operating in urban locations only, had equal or better
repayment rates in more competitive branch locations (defined as villages with at
least 3 MFIs with multiple borrowers) – More rigorous examination is needed
 On average, 7.28% of the MFIs’ clients in the sample are multiple borrowers. An
estimated 10.28% of all the clients in the state are multiple borrowers.