In February 2011, based on evaluations of proposals from several partners across India, the Unitus Microfinance Innovations Grant Fund awarded Swadhaar a grant of $50,000 for Swadhaar’s proposal on ‘Streamlining Individual Lending Evaluations’. The entries were assessed based on innovation, impact, ability to successfully implement the proposal and influence of the proposed innovation or study on the organization's and microfinance industry's strategic direction. The grant was an excellent opportunity for Swadhaar to dedicate high quality resources towards a detailed analysis of our Individual Loan portfolio and also build a complete database of client information for future analysis.
As MFIs move from standardized group lending towards individual lending, they need a scalable and efficient model of capacity-based individual lending. However, the current delivery of individual loans remains time and resource-intensive because, as a non-collaterised loan, the Individual Business Loan (IBL) product is given after a detailed evaluation of an individual client’s willingness and capacity to repay. Through this project, Swadhaar aims to address some of individual lending’s challenges in areas such as streamlining and scalability of IBL evaluations, risk mitigation measures, and building efficiencies in credit processes and staff training.
Based on collation of client business and household data gathered over the last 4 years and analysis of this information with respect to the clients’ repayment behavior, Swadhaar identified 4 areas of IBL client evaluations where efficiencies could be brought in:
1. Products Tailored for Different Business Types:
Micro-enterprises in the target customer segment can be classified into six distinct business types. Products can be tailored to these business types based on a few important but simple product parameters. This would help loan officers quickly identify the category in which the business falls and tailor his/her sales speech and product offering to the client’s needs. Simpler products are also easier for clients to grasp.
2. Standardization of Key Metric in Client Evaluation:
Sales margins can be standardized based on business type and vary within a limited range based on business scale and location. Household expenses for food, clothing, transportation, health, utilities and education can be standardized based on location and number of household members. Standardization will significantly reduce the time and skill required in data collection for these two metrics, thus reducing the company’s cost on evaluations, recruitment and training.
3. Business Growth Indicators:
Key growth indicators can be identified for clients’ businesses that show a significant change over several loan cycles. Indicators such as ‘monthly sales’ and ‘net business income’ show a continuous increase for repeat clients, while ‘inventory levels’ and ‘current assets’ show more variation over successive loan cycles. Analyzing these indicators can help understand the growth of client’s businesses and the impact of the IBL on the business.
4. Credit Scoring Model:
A scoring model can help to categorize clients based on their socioeconomic characteristics and/or past performance. Based on the client score, the company could decide on the product type, loan term, priority of visit and level of service to offer a client. Swadhaar’s client data over several cycles was deemed insufficient to validate a credit score for client selection at this point. However, Swadhaar has tested and implemented a scoring model for renewal clients
You will find below a copy of the final project report and the two supporting annexures: