Costs of MFI loans less than SHGs and Banks’ loans

Written by Patrick Fisher October 14, 2011 0 comment

Microfinance Focus, October 12, 2011: Contradicting the widespread impression about high cost of MFI loans, findings of a study show that costs of borrowing loans from microfinance institutions are less compared to loans from SHGs and Banks.

Conducted by NCAER-CMCR (National Council for Applied Economic Research-Centre for Macro Consumer Research, India) and funded by MFIN (Microfinance Institutions Network), the report ‘Assessing the Effectiveness of Small Borrowing in India’ was released by Union Minister for Rural Development, Sri Jairam Ramesh in New Delhi on Monday.

According to the report findings, the cost of borrowing (weighted) for a single loan is highest for Banks (Rs. 1, 286 – Rs. 3, 481), followed by Self Help Groups (Rs. 104 – Rs. 750) and Microfinance Institutions (Rs. 54 – Rs. 278).

While the interest rate for MFI loans is much higher than that of formal sources and SHGs, the difference between the total costs of SHG and MFI loans becomes negligible if other costs are taken into consideration and the gap between formal and MFI loans narrows.

Other costs include wage loss due to time spent in getting the loan approved, cost of travel, money spent on food, etc. while travelling to the source of loan, charges paid for preparation of documents, additional charges (like stamp duty), payment of bribes and other charges (Insurance).

The report further highlights that a vast majority of MFI borrowers (87%) are unaware of the interest rate payable. However, borrowers of microfinance institutions do not end up paying higher interest rates due to lack of knowledge of interest rate. This is not the case with SHG loans where the borrowers who do not know about the chargeable interest actually end up paying more, the report claims.

The survey has not found any concrete evidence to show that MFIs contribute to indebtedness of the borrowers. Considering the loan size per unit household income as a measure of the household’s indebtedness, it was found that the indebtedness coefficients were much lower for the MFIs compared to the informal loans. Indebtedness is thus much more closely associated with informal loans than MFI ones.

Moreover, the survey discovered that only about 11 percent of the borrowers had multiple loans of which 21 percent involved a loan from MFIs. This means, the multiple loans attributable to MFIs is only about 2 percent of all the loans.

The report reveals that the MFI loans – ranging from 16,000 to Rs 20,000 – are used mainly for asset creation and the borrowers are mainly women. The highest percentage of MFIs loans was in fact used for business promotion (45%) and only 3 percent was used for paying off existing debt.

The study by NCAER-CMCR, done on a pan India basis, based on a sample of over 10, 000 small borrowers across five clusters (Kolkata, Lucknow, Chennai, Hyderabad, Jaipur) was conducted under the leadership of Dr. Rajat Kathuria, Prof. IMI and Consultant ICRIER.