Microfinance in India has come a long way in the last one decade. It has witnessed it all:  spectacular growth, astronomical valuation, easy debt & equity funding, mission drift, excessive lending, serious reputational risk followed by the crippling crisis. Ujjivan researched the underlying reasons of the crisis in search for lessons & directions for the future. The conclusions were:

1. Uncontrolled growth of the business without adequate safe guards led over lending and wide spread frauds through benami /ghost lending.
2. Controlling over lending or over borrowing required not only higher degree of disciplines from lenders: MFIs but also higher degree of awareness of the borrowers in terms of dangers of over borrowing or selling their loans to fraudulent ring leaders.
3. Coercive collection behaviour had its roots in the joint liability for the larger sized loans in higher loan cycles. This led to aggressive behaviour by the group members, sometimes aided & abetted by MFI field staff which sometimes led to suicides.

100% Credit Bureau checks for loan approvals
To address the problem of over extension of credit and indebtedness of the customers, Ujjivan participated in the initiative of setting up a Credit Bureau for microfinance industry well before the Andhra crisis last year. Ujjivan has signed with all three credit bureaus: Highmark, CIBIL & Equifax.

Every month Ujjivan provides its customer data to all three credit bureaus to facilitate critical information-based decision making for loan approvals for entire the industry. This was after conducting an extended pilot with the credit bureaus over the past few months in terms of required data structure.  In line with the Credit Bureau requirement Ujjivan has modified its customer data collection to capture the seven mandatory fields required for positive identification of customers through the Credit Bureau checks.
The seven mandatory customer data elements which are shared with the Credit Bureau include:

• Customer’s Name
• Date of Birth
• Spouse’s Name
• Father’s Name
• Mother’s Name
• Full Address
• Pin Code

After ironing out a few technical issues, strengthening the backend systems, and streamlining processes, Ujjivan has now begun end-to-end customer information checks with credit bureau databases. Furthermore, using the services of multiple Credit Bureaus builds in redundancies, strengthens the credit risk management of client acquisition process and protects portfolio quality. This provided information of over-indebtedness and default records of applicants in the branches, helping Ujjivan take appropriate decisions.
A credit bureau helps distinguish between good (low risk) and bad (high risk) borrowers by looking at their professions, skills, loan, and repayment histories. The effort encourages MFIs to join hands instead of compete, so the industry as a whole can limit default rates, check multiple borrowing and meet its social and financial objectives while ensuring  institutional sustainability.
An increasing number of MFIs using credit bureau information for credit approvals will help improve the portfolio quality of the entire industry, as the message goes out to customers with delinquent credit history that they will not have access to credit from any organized institutional sources. MFIs and banks not using credit bureau data for credit approvals, in the long run, will be victims of adverse customer selection.

• Sharing information on customer histories minimize the risks of lending and help maintain the healthy portfolio quality, ensuring institutional survival
• Credit bureau consultation helps reduce transaction costs and increase institutional efficiency by rapidly identifying clients with poor repayment histories.

Financial literacy on debt management: ‘Sankalp & Diksha’

Ujjivan believes that the problems of over indebtedness of customers or over extension of credit by MFIs can only be resolved jointly by the customers and microfinance lenders. Transforming this thought to action, it introduced Sankalp, fictionalised short film based on real life stories, to build awareness on the dangers of ghost lending and over borrowing. It also introduces the concept of the Credit Bureau. This video educational film is available in 12 languages. Over 650,000 Ujjivan customers have already seen the film. The impact is tremendous. Most customers told us that we should have shown this earlier! We have now incorporated this as a part of our customer group training. This video is also being distributed free of cost to other MFIs.

In follow up to this film, Ujjivan launched Diksha, a financial literacy training program on debt management. The in-depth training helps customers manage debt prudently within their financial capacity and investment needs. Customers are taught numerical skills using a calculator, gain insights into their family’s cash flows with the help of a financial dairy, arrive at a prudent debt service capacity, understand the pros & cons of different types of debt, and learn the importance of savings and financial planning.

Changing with the needs of times; ‘Mera Loan’

Ujjivan pilots "Mera Loan" using a revised group lending model. It is an adaptation of the Grameen-II model of 2001. The fundamental pillar – social pressure through group guarantee, turned out to be a huge burden on customers in the later years. Ujjivan’s study of distressed customers in higher loan cycles revealed that it is the group which creates tremendous pressure on a defaulting member. This is because it is very difficult for the group to take on the additional burden of servicing loans of defaulting members when the loan sizes are large. This creates tension within the group, aggressive behaviour, and humiliation in front of society for the defaulter. This sometimes leads the defaulting customers to take recourse to drastic measures such as suicides and lot of good customers dropping out.

To address this issue, in the ‘Mera Loan’ program, group guarantee is limited only to the group ensuring that member customers attend centre meetings and assisting in case the customers absconds or deliberately default. The financial liability of defaulting customer is not borne by other group members. Customers are responsible for their own repayments. The loan is offered to customers in the 3rd loan cycle and above with good credit history. 

The pilot kicked off in 12 branches in urban and semi-urban locations around the country and the response was encouraging. Customers who availed of the loan under this model were extremely delighted as there is no peer pressure to repay on behalf of others and since it also actively involves their family members. (The spouse is required to guarantee ‘Mera loan’, though not mandatory.) The customer’s family can now take an informed decision about their borrowing limits in accordance with their earning capacity. This initiative is also expected to curtail bad practices of benami loans. It is expected that this could be a stepping stone for customers moving up the ladder to Individual Loans.

Epilogue
The crisis brought up important lessons and we hope that by implementing these pro-active measures we will be able to build a healthy and responsible organization and industry.