Microfinance Practice: RE: [MFP] Understanding default rates in MFI's group loans and Village Savings and Loans Associations

Dear Srinivasan,

This is an insightful commentary. The most important statement was “When external funds increase in proportion and high variability in size of loans to different members within the group is seen, default rates will tend to increase.” This has been our experience.

On a closely related issue, Paul Rippey did an important study in Niger, in which he correlated sources of capital to member retention. He found the following:

1 Groups that use only their own savings to capitalise a loan portfolio increased their membership by an average of 4.5

2 Groups that borrowed externally and had a bad experience lost an average of 8.7 members

3 Groups that borrowed externally and had a good experience lost an average of 2.9 members

The average group in Niger has about 20 members

I speculate that the poorer members vote with their feet and leave the groups when they see external liquidity distorting saving/loan ratios (and thus increasing risk) and realise that most of the inflowing capital goes to the better off members – but is explicitly guaranteed by the collective to the external lender.

Hugh

From: MicrofinancePractice@yahoogroups.com [mailto:MicrofinancePractice@yahoogroups.com]
Sent: 29 June 2015 19:22
To: MicrofinancePractice@yahoogroups.com
Subject: Re: [MFP] Understanding default rates in MFI's group loans and Village Savings and Loans Associations

Richard

We can calculate the APR on any loan. When we compare, we should see the context of the loan. Interest on a very short duration loan will invariably seem exploitative when annualised. The customer probably borrows from the group because it is cost effective compared to other sources of loan and in the context of opportunity which will be funded with the loan. In the Indian context, Self-Help Groups members charged between 28 to 40% APR on their loans to members. The alternative was to go to a money lender at around 60 to 100% APR. Within the groups, the excess of income over expenditure arising from the loans was added to the group corpus and in fact strengthened the member financial position.

On default rates, in India, the MFIs report PAR 30 days at less than 1% (March 2014). Banks report Non Performing Assets of 6.8% (March 2014) on their loans to SHGs (which are the closest to VSLAs). The default rates within the groups - member loan repayment rates to the group are even lower. My view is that the difference between MFIs and banks is explained by the frequency of customer contact and rigour of monitoring. As long as savings of members with the VSLA are substantial and external funds - such as from MFIs and banks - form only a minor part of the overall funds of the group, credit discipline will be intact. When external funds increase in proportion and high variability in size of loans to different members within the group is seen, default rates will tend to increase. These again are my impressions.

Regards

Srinivasan

On Jun 29, 2015, at 4:22 AM, richard chongo rigochongo@yahoo.co.uk [MicrofinancePractice] <MicrofinancePractice@yahoogroups.com> wrote:

Dear all,

Last week as I worked with NGOs working with VSLAs linking them to micro-finance banks, a thought crossed my mind on how these VSLAs manage their loans.

I have noticed that the interest rates for loans that members charge each other is very high, maybe between 200% and 500% higher, than the rates that MFIs charge. However, my rough sight shows that the repayment rate in VSLAs is far much better than in group lending in MFIs.

Is there any research or information that analyses the default rates in VSLAs in comparison to MFIs group lending? I would love to see if my assumption is correct and what issues surround the better repayment record in VSLAs. Is it because the VSLA members are motivated that it is their money they are growing and they will share the funds at the end of the period?

Best regards,

Richard Chongo
Social Performance Manager
Opportunity Bank Malawi