Srinivasan,
Of course the big difference with Savings Groups (VSLAs) is that the profit from loans is distributed to the members according to how much each has saved. Savings Groups often charge a high interest rates on loans (5% or 10% per month in Africa but often 2% per month in Cambodia or elsewhere where the groups compete with MFIs). Charging 5% or 10% a month simplifies record keeping but it also maximizes the yearly payout of savings, interest payments and fines that increase the size of the payout at the end of a yearlong cycle. Members often receive back 40% more than they saved when the money is distributed.
Jeff
Jeffrey Ashe
jaashe@aol.com
-----Original Message-----
From: Narasimhan srinivasan shrin54@yahoo.co.in [MicrofinancePractice] <MicrofinancePractice@yahoogroups.com>
To: MicrofinancePractice <MicrofinancePractice@yahoogroups.com>
Sent: Mon, Jun 29, 2015 12:22 pm
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
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 correc t 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
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