The Hindu Business Line : `Group lending efficiency must be improved'

The group lending model of microfinance in India can do with less stringency, according to Mr Dean. S. Karlan, Visiting Assistant Professor of Economics, Yale University. Flexibility towards individual lending should be explored, he said.

Presenting a paper on `Microfinance around the world' at the Institute for Financial Management and Research (IFMR), Mr Karlan and his co-author, Mr Sendhil Mullainathan, Professor of Economics at Harvard University, shared case studies from three countries on differences in microfinance lending with a shift from the public sector to the private sector in these countries.

Mr Karlan suggested that organisations should lend to individuals at lower interest rates compared to group lending. This would help people to gradually shift to individual lending and later to regular finance offerings by banks, according to him.

Currently, microfinance organisations give large-size loans for groups and not individuals. Consequently, the rate of interest across the globe for group lending is generally higher than individual lending.

Mr Karlan said that the efficiency of group lending in India must be improved and studies on the frequency of lending undertaken.

Analysing reasons for low penetration of microfinance, Mr Karlan said that most nations did not consider wage fluctuation (for people in seasonal businesses like farming) during loan disbursals and expected fixed values of instalments even during lean months. This was attributed as one of the reasons for people hesitating to take loans.

High rate of interest on microfinance loans was also discussed.

"India has a much lower interest rate compared to other countries where rates are as high as 80 per cent a year," said Mr Karlan. He added that low interest rates attract people and India must not raise its rates.

A team of researchers worked with the Green Bank at Caraga in the Philippines to study if group liability generated greater loan repayment when compared to individual liability.

Though no change in repayment was found, many new members seemed to prefer the joint liability model.

"People preferred joint liability model because one can't point out defaulters. In an individual liability scenario, it would be a matter of shame if one could not pay back one's loan," said Mr Karlan.

In Peru, the team worked with two branches of FINCA, a credit lending institution, to identify if credit offered with educational services would influence people applying for loans.

FINCA trained its staff to educate customers, specifically women in areas like healthcare, nutrition and girl child education.

Not only did this scheme register more people, it saw greater loan repayment rates and regular payments even during lean months. More girl children were found to attend school during this tenure of the loan.

In South Africa, the team conducted tests on sensitivity to loan size and interest rates and found that people preferred short-term loans for specific amounts.

"They would want a 500-rand loan for six months, but if we offered them 800 rands for 12 months, they would not take it," Mr Karlan said.

Strict measures for screening ensured loan facilities were available only to a select few. Mr Karlan said that if this screening were less stringent, more people would be willing to borrow larger amounts.

Areas of research for the future were discussed. These include studying impact of competitiveness in different microfinance institutions, liability structure and impact of linking credit with formal insurance. "We want to use psychology to understand customers' savings designs. We do not know what people actually use loans for. If we knew that, we could offer tailormade loans," he said.

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