Effective Microfinance Requires Mentoring from Grassroots (2024)

By Smita Ram

In the autumn of 2010, the micro-finance crisis bubble burst in Andhra Pradesh.

What was previously a clear, practicable solution to alleviate poverty by offering micro-credit to the poorest sections of the society to build sustainable livelihoods suddenly became taboo.

There were many reasons for the crisis. Unethical lending practices, poor governance, competition between state-sponsored self-help groups (SHGs) and private microfinance institutions (MFIs) in a market saturated with credit led to micro-finance pushing people into a debt trap driving farmer suicides up the roof.

As the co-founder of a peer-to-peer lending platform that provided crowd-sourced micro-loans to rural entrepreneurs that was just in its second year of operations, the notoriety could have affected us. We seriously thought www.rangde.org would come to an end.
But we had an edge over the MFIs and the banks. We were not a system driven by brute numbers. We were built on the principles of benevolence and a robust mechanism.

In Andhra Pradesh, checks on credit-worthiness before lending was rare nor were the borrowers trained on how to utilise the funds. In the heady euphoria of initial success, the focus shifted from the original vision of social inclusion to the bottom line. Even today, the focus of most financial institutions is on creating profitable processes than ensuring loans create livelihoods for the bottom segment.

In my experience of working with rural communities, I have realised that lending money is only one part of the solution. When people have little or no experience in dealing with the financial system, mentoring often plays a more important role than the money itself.

Mentoring can take on many forms such as teaching basic financial concepts, helping with business ideation, offering support and forging market linkages. Mentoring works best when the teachers are people the beneficiaries trust - all 37 of our partners across India have their roots in social development instead of micro-financial operations.

These organisations help borrowers estimate their need for funds, gauge their ability to repay loans and provide them with direction for future business expansion. Since a majority of loans made to small rural businesses entail high risk, investing non-financial resources in their development makes a big difference. Over two years, we put this hypothesis to the test as well.

Working with National Bank for Agriculture and Rural Development (NABARD) from 2014 to 2016, we carried out a study on two borrower groups - one was provided with training in basic business processes, book maintenance, and other relevant professional training while the other group was only provided money. The study was carried out in three states, and the results were emphatic.

Borrowers provided with training consistently posted a higher amount of earnings and were able to better manage their finances. Mentoring borrowers did not need significant investment. It just required intent. It required someone like Nagurao, a social worker who has been working on development in drought-hit Yavatmal over the past fifteen years, realising that Malabai Laxman Mujmule, a young disabled women, needed something as simple as a cell phone for her grocery store. Now, she is able to order material, follow up on overdue payments and contact suppliers with ease ensuring she can bring home a decent income and support her elderly mother.

A conventional MFI would have considered the money they lent Malabai a "bad asset" after seeing erratic repayments and little signs of progress completely failing to address underlying issues. And whatcis even better is that we found that other women learnt through association in the community even if they were not explicitly provided the same training.

For any financial inclusion scheme in rural areas to work, just giving loans is not enough. The worrying rise of non-performing loans shows that we need to move away from a simplistic approach.

A selfish desire to see the money put to good use should be combined with an altruistic intent to see borrowers succeed. Otherwise, we risk the prospect of experiencing another crisis in the coming years.

(Smita Ram is Co-Founder & CEO, Rang De)

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