Bengaluru: Grameen Koota Financial Services Pvt. Ltd, a mid-sized microlender from Karnataka, is experimenting with handing out loans up to ₹ 5 lakh to individual borrowers and assigning them mentors.
The mentors would guide the borrowers in setting up small businesses like grocery stores or tea stalls and help in maintaining accounts.
Microfinance companies are typically keen to offer newer products to retain customers and go up the value chain. However, individual loans has been one segment that not many have been able to crack. In fact, it accounts for only 2% of the ₹ 44,000 crore total gross loan portfolio of microfinance in the country.
These loans will be higher than what borrowers get under group liability.
The sector largely works on a group lending model, where loans of around ₹ 10,000-50,000 are assigned to 10 women borrowers, who take each other’s responsibility for repaying. But, to run a small business, a much higher amount of loan is required, and this remains an unmet need.
“It can be a risky proposition to lend individuals as information from credit bureau is limited to how much loan they have taken and from whom. There is no credit score for individuals. In this case, we would lend amounts up to ₹ 5 lakh to individuals who have a good repayment record with us and assign them a mentor," said Udaya Kumar, managing director and chief executive, Grameen Koota.
The role of the mentor here would be to familiarize the borrower with bank transactions, book-keeping, accounts and vendor networking. The company would run a pilot this year at 10 mature branches in Karnataka, where borrowers have completed 3-4 repayment cycles.
“Individual loans are just 2% of the total industry. Of this, a huge part comes from urban areas and not rural ones. The risk proposition in this space is much higher," said Ratna Vishwanathan, CEO of Microfinance Institutions Network, an industry lobby group.
The interest rates in such loans could be higher than group loans by about 1%, at around 24 -25%.
A few years ago, SKS Microfinance Ltd had piloted giving individual loans, but did not continue with it because of operational challenges, said an official who did not wish to be named.
Grameen Koota’s model, Udaya Kumar says, ensures that the borrower turns into a successful entrepreneur even as the company keeps a track on how the borrower utilizes the money. “The model is a differentiated one and we are in the stages of chalking out details," he said, adding that this would involve hiring a new set of employees and training them.
Bengaluru-based companies Ujjivan Financial Services Ltd and Janalakshmi Financial Services Pvt. Ltd had also started lending to individuals two years ago.
“This business is new to us and we are cautious and graduating slowly and offer it only to our existing customers," said Sudha Suresh, chief financial officer at Ujjivan.