MFIs in India: Need social impact monitoring

"The pandemic has necessitated the need to re-look at the tenets of MFI lending" - Jagriti Bhattacharyya

Baron Li and Eldric Lem

03 Nov 2020

"But, in their quest for growth and profitability, the social objective of MFIs—to bring in improvement in the lives of the marginalised sections of the society—seems to have been gradually eroding."

The Microfinance industry in India witnessed unprecedented growth over the last few decades. The model had its genesis as a poverty alleviation tool, focused on economic and social upliftment of the marginalised sections through lending of small amounts of money without any collateral to women for income-generating activities.
Over the years, the sector has incorporated several changes in its operating model, including digital interventions across the lending value chain; these have enabled MFIs not only to reach a greater number of clients and thereby grow at a much faster pace, but also to do so in an efficient manner by streamlining processes and reducing turnaround times.

But, in their quest for growth and profitability, the social objective of MFIs—to bring in improvement in the lives of the marginalised sections of the society—seems to have been gradually eroding. Anecdotal evidence suggests that many credulous customers find themselves in the vicious debt trap of having to take another loan to pay off the first, and the cycle continues. In order to achieve both economic and social good, improvements should be made to the Microfinancing system.

Recommendations

- MFIs should ensure that the ‘stated purpose of the loan’ that is often asked from customers at the loan-application stage is verified at the end of the tenure of the loan, to ascertain whether the loan amount has brought in any meaningful improvement in their lives
- In an industry dominated by cash, field officers should be prudent enough to include income from all sources
- All microfinance institutions should monitor their impact on the society by means of a ‘social impact scorecard’

Conclusion

Covid-19 has impacted the MFI sector, with collections having taken an initial hit and disbursals yet to observe any meaningful thrust. Caught between the devil and the deep blue sea, institutions need to focus on creating a sustainable and scalable Microfinance model with a mandate that is unequivocal about both economic and social good.

Original Article:

London School of Economics and Political Science
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©2020 by LSESU Microfinance Society