[dropcap color=”#008040″ boxed=”yes” boxed_radius=”8px” class=”” id=””]T[/dropcap]here is good news coming on the financial inclusion space in India. India climbed seven spots to tie with Philippines for the third position in the world in creating a favorable regulatory environment for financial inclusion (Global Microscope, 2016). The consistent improvement in financial inclusion is no accident though. The political will of the government combined with the robust institutional support of the RBI makes this look sustainable in the years to come. The remarkable progress in financial inclusion opens up several challenges as well as exciting times for the key stakeholders in the financial inclusion game, namely the MFI (Microfinance Institutions).
In India, NGO (Non Governmental Organisations), NBFC (Non Banking Financial Institutions), payment banks, small banks and regular commercial banks operate in the financial inclusion space with varying business models.
The post 2009 period for the microfinance institutions has been marked with challenges to reform, regulate and reinvent following the crisis that hit Andhra Pradesh. MFI had slipped into an aggressive “lend and coerce” mode which helped volumes but made the business unsustainable for the MFI and unethical in the regulator and general public perception. The comeback has been remarkable, essentially because MFI have continuously experimented and recreated their business models with a strong consumer focus.
The current scenario augurs well for the players in the financial inclusion space because of differentiated institutions with flexible business models. In India, NGO (Non Governmental Organisations), NBFC (Non Banking Financial Institutions), payment banks, small banks and regular commercial banks operate in the financial inclusion space with varying business models. The “lend and collect” was prevalent in the starting days of microfinance. MFI would aggressively lend and focus all efforts on collection. However it is now giving way to a more extensive “train and lend” model in which MFI give livelihood training to potential borrowers so that the borrowers can generate cash flows to repay their loans. It looks like nothing can go wrong from hereon, with an enabling policy environment, robust regulation and responsive MFI. Yet, here and now is the time for caution. Several MFI opt for livelihood training because they are inexpensive and relatively easier to administer. The most common livelihood training programmes are weaving, candle making, handicrafts, pickle making etc. While the skills are easy to acquire and the entry barrier is low, there is no substantial investment on marketing or brand building. So these micro enterprises have no leeway in pricing causing severe pressure on margins and risking business sustainability. The glut of simple to administer and easy to replicate training would crowd the market place with similar and replicable products or services. Such minimalist business models create another serious problem-absence of capital creation. This raises serious questions on long term sustainability of micro enterprises as well as MFI which would need to be addressed with innovative product offerings.
[dropcap color=”#008040″ boxed=”yes” boxed_radius=”8px” class=”” id=””]T[/dropcap]his brings us to microleasing – a product offering not very often used in microfinance. The need to consider this is obvious enough – unless borrowers create differentiated products themselves, the sustainability of the lender as well as the borrower is suspect. Microleasing is a simple variation of the regular microfinance loan. The borrower pays lease charges for an equipment instead of an EMI (Equated Monthly Instalment) on a loan. Equipment can vary from sewing machines to livestock. Lease is an improvement over a vanilla loan product because an asset gets created at the outset without blocking the capital of the microenterprise. This gives an enormous advantage to the lender since traditional microfinance does not empower the lender with a collateral. This also creates some tangible assets in the microfinance eco system making it more creditworthy.
There have been experiences of microleasing predominantly in Bangladesh, African and Latin American countries.
Why then is microleasing underutilized by the MFI? The reasons are not too difficult to understand. For starters, the asset/ equipment could be highly non standardized causing a two-fold problem of value assessment and difficulty in liquidation in case of repossession. Secondly, the borrower needs specialized training to operate the equipment. The socio economic conditions and the literacy levels of the borrowers would put the onus on the lender to administer or facilitate such training.
There have been experiences of microleasing predominantly in Bangladesh, African and Latin American countries. The experience of Bangladesh has some very interesting takeaways for firms considering the microlease offering. There was need for training the borrower in not only handling the equipment but also in proper preventive maintenance. The loan officers had to be given additional training in handling and administering microlease products. A Bolivian microfinance firm, ANED leased out tractors, farm ploughs and other agricultural implements. In addition to providing a livelihood implement, this arrangement also helped the borrowers to access the suppliers and procure in a cost effective manner. The challenges to the lender, however were manifold, quite a few of them similar to what was faced in Bangladesh. The product required additional time commitment from the loan officers. Non standardized equipment also required additional efforts in credit assessment.
While the challenges in micro leasing may be a disincentive for MFI to go for it in a big way, it would do well to recognize that these challenges are not unsurmountable. It requires focus on three essential pre conditions:
- A robust training solution not only for the borrower in equipment handling and maintenance, but also to the loan officer to administer the product effectively
- A risk management system including insurance on the asset and regular service of the premium
- A preventive maintenance schedule for the asset to be monitored by the lender
[dropcap color=”#008040″ boxed=”yes” boxed_radius=”8px” class=”” id=””]I[/dropcap]ndia offers scope for microleasing enabling borrowers to make capital purchases. Agricultural implements as well as other minor capital equipment could be funded through this. While the lease can be either operating lease (where lease rentals are charged for use) or a financial lease ( in which cost of the equipment along with interest on capital is charged by the lessor), the product will be priced to give the same returns as a microloan. A beginning point for the product could be to fund standard assets/ equipment which have a clear-cut market value. Non standard assets can be added to the product range once the MFI irons out the teething troubles.
Microleasing could well be the next innovation in the MFI sector if learnings are drawn from past experiences…
When the macro Indicators are positive and the sentiments are favorable, MFI should innovate and evolve by differentiating. Today MFI are focusing on obtaining a banking license and several MFI are operationally self-sustaining. Microleasing could well be the next innovation in the MFI sector if learnings are drawn from past experiences and the product is fine tuned and delivered to make it a winning situation for all.
“The Synergy of Microfinance”- Binod. B. Nayak , Sage Publications (pp 201-216)
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