Microfinance Institutions empowering women entrepreneurs amidst social challenges

Ruchi Mittal, who runs Ma Bhagwati Enterprise in Haldwani, Uttarakhand, took her first-ever loan from Fusion Microfinance during the first wave of the Covid pandemic. “I took a loan of ₹25,000 at that time. This year, I reapplied for the loan to expand my business from plastic items like buckets, pots, and toys to taking a distributorship of Neha Mehandi.” Mittal said she took the loan from Fusion Microfinance after recommendations from her friends who have also borrowed capital from the same firm.

Fusion Microfinance, which follows the Joint Liability Model, disbursed loans to nearly 36 lakh women across India as of FY2023. A Joint Liability Group (JLG) is a group of individuals who come together to avail loan through the group mechanism against mutual guarantee. The members of the group are jointly eligible for the loan and own the debt liability jointly. MFI loans are collateral-free and most of them work under the same model.

Fusion's branch head in Haldwani told Mint that currently, a JLG group has narrowed to five from 15 in 2014. The branch manager underlined a list of criteria based on which they disburse loans such as--Any of the family members of the women borrower (husband, father, father-in-law) should own a house, an original Aadhaar card of the borrower, CIBIL score of the borrower or closest family member, and lastly, the loan across all financial institution should not exceed ₹1,80,000. Fusion Microfinance has disbursed a loan of ₹8,375.16 crore in FY2023.

Several such microfinance institutions have helped millions of women to run their own businesses by providing them micro-credits who otherwise lack access to formal banking and related services through the JLG model. 

Also read: MFI sector posts 21% growth in loan kitty

"MFIs have always given preference to impoverished women, especially in the rural areas in a bid to promote female entrepreneurship and financial independence," Samyak Chakrabarty, founder, Workverse said.

 Chakrabarty, who has worked extensively in enabling micro-entrepreneurship and upskilling for women across rural India added, “Qualitative observations suggest that women have a far greater discipline when it comes to (a) judicious and rightful utilization of funds and (b) adhering to payback commitments.”

"Women never had presence in a family's financial decision due to social construct and patriarchy. Also, traditionally, women have either thin or zero files because they never entered into a formal financial system. However, several reports have suggested they are excellent at repaying loans. MFIs have acknowledged these facts and so they focus on women borrowers," Kalpana Ajayan, regional head of South Asia at Women's World Banking said. According to the Bharat Microfinance Report by Sa-dhan, women borrowers in microfinance comprise 98% of the total clientele of MFIs.

Also read: Let’s not conflate microfinance with self-help-group financing

Dipti Bhandari, a microentrepreneur, who used to run a Kirana store in Kaladhungi, runs a parlour and boutique now. "I have taken a loan from Fusion thrice. The first time I took a loan of ₹40,000 and paid EMI of ₹1,700 every month. Now, my loan amount is ₹60,000, and pay an EMI of ₹2,800/month. With a loan, I purchased a sewing machine, an interlock machine, and added cosmetics products in my shop," she said.

'BLACK & WHITE OF MFIs'

MFIs in India have been playing a major role in the purveyance of small credit especially to weaker sections without any collaterals. But being lauded as the magic bullet to eradicate poverty and increase women's empowerment, there have been instances of harassment against borrowers, astronomical interest rates, debt traps, and cases of staff fraud. Some instances of ever-greening of overdue loans and lending to defaulting clients have also been noticed. The reputation of microfinance has gone through a rollercoaster of opinions. 

Also read: Microfinance portfolio grows 21% in FY23, shows Sa-Dhan data

During the Covid pandemic, job losses, loan defaults, and reduced quality of life became commonplace among vulnerable people. A study by Sa-Dhan found that 94% of families had faced disruption to normal livelihoods, 70% of households saw a decline in incomes and savings, 56% of households experienced enhanced debt levels and 67% of households faced higher interest costs during the pandemic.

According to Ajayan, MFIs are catering to a segment that otherwise is difficult to reach. Even with the advent of technology, the basic services still predominantly depend on human resources to ensure effective delivery. There has been a steady growth of the workforce in the microfinance sector in the past few years. As of 31st March 2022, the total workforce stood at 1.95 lakh, which is a growth of 21% over the previous year. More than 60% of the staff in MFIs are in the field, working as branch staff, involved in the sourcing of applications, appraisal, and sanction of loans, loan monitoring, and collection of repayments.

"MFIs are going down to the lowest common denominator to lend these products to women. It is an expensive component of a business...Lending unsecured loans in the farthest areas will also be a costly affair for a firm as it is fraught with the inherent risk of repayment default," Ajayan said.

The mid and small-size institutions also face problems with access to finance and the cost of funds. Primarily, MFIs borrow from banks on the strength of the capital, they hold. The total outstanding debt funding of these institutions stood at ₹64,693 crore for the year 2021-22.

"MFIs have a policy adopted by their Board regarding pricing. While fixing the price they take into account of Cost of funds, operational cost, risk cost or credit cost, and then margin. As we know the policy rates have gone up by 250 bps in the last 18 months, and the cost of borrowing has increased. Also, the Covid-induced risk has still an effect. The credit losses are estimated to be around 250bps," Jiji Mammen, Executive Director and CEO of Sa-dhan said.

Traditionally, MFIs have been lending for both consumption and productive purposes. As per Sa-Dhan's analysis, poor people use their loans for their emergency and consumption needs more than for livelihoods. Productive loans are generally for businesses where ideally there should be profits that can enable direct and timely payback of loans. However, non-productive loans such as marriage or education are non-earning pursuits.

CEO of Sa-dhan added that even non-productive loans are pertinent for the needs of vulnerable populations. For instance, "health and treatment is considered as a consumption loan but it is actually a productive loan as it enhances the productivity of the person. Similar is the education," Mammen said. However, borrowing from various sources for such purposes can increase indebtedness and can cause some stress on people, he added.

According to Workverse founder Chakrabarty, "If the debtor does not experience a rise in income from other sources, he/she will often default," he added, "Majority of the micro-loans borrowers are those pursuing unstable occupations for inconsistent income thereby not being able to pay for loans that did not directly result in financial yield".

"At present, two key factors need focus in the country--joblessness and inequality. MFIs are playing a critical role by giving opportunities to those who are at the bottom of the pyramid and mitigating gender inequality by creating women microentrepreneurs," Devesh Sachdev, MD and CEO of Fusion Microfinance said.

RBI's INTERVENTION

Several women borrowers told Mint they are not much aware of how much interest they pay on their monthly EMIs. "We get a message on our registered mobile numbers that our payment is due and we either go to the branch to make the payment or do it online," they said. Instant loans and accessibility have been a prime reason for them to take loans from microfinance institutions, the women borrowers who are semi-literate said.

Ombatti Sharma, a borrower from a MFI said she expanded her tea stall into a fast food business. "I am proud that I am financially independent. Of course, my husband has supported me to fulfill my dream. With this fast food stall, I pay my monthly rent, pay the school fee of my daughter, and also save ₹200 per day".

Notably, the Reserve Bank of India (RBI) allowed microfinance lenders to fix interest rates on loans with a rider that should not be usurious for the borrowers.  A microfinance loan is defined as a collateral-free loan given to a household having an annual income of up to ₹3 lakh, according to RBI's latest guidelines.

The RBI has also put a limit on the maximum repayment value to 50% of the monthly household income to curtail over-lending.

"There are laws and rules that RBI has in place for collection agents. However, the majority of collection operations are run by 'goons' who pry on semi-literate debtors or blue-collar workers who can be easily manipulated by threats. More work needs to be done by the RBI to educate debtors about their rights, remedies, and protections even if they are defaulters. Also, the mindset needs to change that not all defaulters are wilfull, many are victims of circumstances and hence they cannot be put in the same category as debtors will fraudulent intentions," Chakrabarty said.

SIDBI has also instituted a third-party Code of Conduct Assessment that measures MFI's adherence to ethical and sound lending practices. "MFIs also regularly submit financial and operational data, at periodic intervals-enabling transparency," the national development bank said.

MFIs are one of the very few institutions that attract an overwhelming share of women and can therefore serve as a potential vehicle for female empowerment and can play a significant role in closing the gender gap.