Micro Finance Company

Lending Process by Microfinance Company

Microfinance institutions are the oldest financial institutions in the world but as per the time they are adopting the changes and have started adopting various credit models. Microfinance services are provided with different methods in India. A total of 14 models are existing in India. They include the following:

• Associations
• Bank guarantee
• Community Banking
• Co-operatives
• Credit Unions
• Grameen Group
• Individual intermediaries
• Small Business
• Village Banking

In actuality, these models are lightly associated with each other and most of the good and sustainable microfinance institutions have features of two or more models in their activities.

The basic methodology adopted by the commercial microfinance company in India was innovated by Grameen Bank and later improvised by several players. This methodology involves the following elements:

• Identify the potential customer
• Organize the potential customers into groups, so that they can address the issue of information asymmetry and lack of collaterals by transferring what could be an individual liability into a group liability and hold the group morally responsible for repayment – through a process of the public oath.
• Have standardized products, standardized operating systems and enforce discipline; ensure that the exceptions were dealt with severely

A different institution in the formal and informal sector has successfully tried these models. Though these models have their own specific strengths and weakness which have demonstrated to provide financial services to the unorganized sector. Most of the Microfinance institution offers credit on a solidarity group lending basis without collateral

Association or Group Model

An association is formed by the poor in the target community to microfinance services (micro savings, microcredit, microinsurance etc.) to themselves. It can be formed by the youth, or women also they can form around political/religious/cultural issues; can create support structures for microenterprises and other work-based issues. It gathers capital and intermediates between banks, MFIs and its members. Example: Self Help Groups. It is defined as a legal body that has certain advantages such as collection of fees, insurance, tax breaks and other protective measures.

Group method primarily involves a group of individuals, which becomes the basic unit of operation for the MFIs. As MFIs has to deliver collateral-free loans, group methodologies help in creating social collateral (peer pressure) that can effectively substitute physical collateral. The group becomes a basic unit with which MFIs deal. The group approaches delegate the entire financial process to the group rather than to the financial institutions. All financial activities like savings getting loans, repayment of loans and record keeping are managed at the group level.

In this method, 10-20 members are organized to form a group. These group members make regular savings of fixed amount in a common fund. The amount and frequency of savings are mutually decided by the group members. After the successful working of such a group for some months, the group is linked to a financial institution for getting credit. The financial institution’s issue loan in the name of the group and whole group is considered responsible for repayment. The amount of loan depends upon the total accumulated amount of saving of the group. The group itself selects its members before acquiring a loan. Loans are granted to selected member(s) of the group first and then to the rest of the members. Most of the Microfinance Institution requires a percentage of the loan that is supposed to be saved in advance, which points out the ability to make regular payments and serve as collateral. Group members themselves decide about the criteria of dividing the loan among the group members. With this loan, the whole group may jointly start a micro-enterprise or the members may start their individual businesses. An individual may also use his loan for consumptive purpose or meet other priority needs.

Group members are jointly responsible for the repayment of each other’s loans and usually meet weekly to collect repayments. To ensure repayment, peer pressure and joint liability work very well. The entire group will be disqualified and 117 will not be eligible for further loans, even if one member of the group becomes a defaulter. The creditworthiness of the borrower is therefore determined by the members rather than by the MFI.1 These types of group-based credit delivery methods help to empower the group members because they remain involved in various group activities. They visit the bank, market and hold group meetings which help them to increase self-confidence.