Breaking the myths of microfinance

A poor woman approaches a microfinance lender along with a couple of her neighbours and friends.

She gets the loan, paying interest rates of between 25 and 40 per cent per annum, turns entrepreneur, gets out of the poverty cycle, repays the money and lives happily ever after. That is the narrative that one usually hears from microfinance lenders.

Tara Thiagarajan, Chairperson, Madura Micro Finance, debunks that script and points out wryly, “no one makes money borrowing at that rate.”

Then taking a swipe at the media, she remarks with a smile that the media want to hear stories of this one borrower whose life has been transformed by microfinance. Even other MFIs and their investors believed in this narrative. Reality is different and does not necessarily follow this fairy tale script, she says.

Challenging the assumption that the poor borrower automatically turns entrepreneurial with a microfinance loan, she draws a distinction between borrowing for sustenance and livelihood and borrowing for building enterprises and capacity.

Low numerical literacy

When she ran a survey some years ago, she found that most borrowers did not understand either the interest calculation method or the amount they were paying as interest. Numerical literacy was low and many lenders just preyed on this lack of understanding, according to her.

There was also a staggering lack of relevant data on borrowers. What existed was largely the most minimal information collected to fulfil some basic Know-Your-Customer (KYC) compliance.

Detailed knowledge about the borrower, she says, would enable microfinance lenders like her company, to offer better and customised products based on income and repayment abilities.

Besides higher loan amounts can be offered to the deserving instead of the same amount for all borrowers. She reveals that when she did a detailed household mapping across 70 villages, she found that the median income varied between ₹3,500 and ₹20,000.

“This is an industry that has grown on the back of anecdotes rather than empirical data,” she says. This realisation led her to mount a 15-month long effort to clean up her database of borrowers and acquire better and more relevant data.

Data audits have since revealed that accuracy levels have improved from less than 20 per cent to 80 per cent currently.

Expanding operations

Thiagarajan says that the building blocks are in place to expand operations now, a decade after the company was launched.

Loans outstanding were at about ₹400 crore at the end of fiscal 2015 and this was given to over 3 lakh borrowers. This is expected to go up to ₹600 crore this year.

Madura Micro Finance has also started expanding its operations outside Tamil Nadu where it has over 170 branches. Thirty branches were opened outside the State recently in Karnataka, Maharashtra and Kerala.

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