The Grameen Credit Score framework proposed in the recent budget will help improve the lending discipline of microfinance institutions and enhance the creditworthiness of rural borrowers. The onus of developing this framework will primarily rest with public sector banks.
The MFIs play a pivotal role in providing financial services to underserved populations, empowering these individuals and, thereby, contributing to economic growth. The sector has expanded remarkably over the years, with a substantial borrower base and loan portfolio.
The MFIs play a pivotal role in providing financial services to underserved populations, empowering these individuals and, thereby, contributing to economic growth. The sector has expanded remarkably over the years, with a substantial borrower base and loan portfolio.
However, the sector has faced numerous challenges, including an erosion in repayment discipline and declining credit responsibility. Fewer borrowers have been attending centre meetings in recent times, leading to more door-to-door collections. Moreover, borrower over-leveraging, socio-political disruptions, and operational hurdles, employee attrition are putting pressure on the sector.
In a bid to mitigate the risks, industry self-regulatory organisations have come up with guidelines. At the same time, the proposed framework is also expected to help.
Majority of microfinance loans are disbursed through the joint-liability-group lending model, wherein a group of customers undertake loans and agree to repay the loans if fellow group members face difficulties in making repayments.
However, the Grameen Credit Score framework is specifically meant for self-help groups. These are informal groups of individuals who come together to achieve a common goal, related to economic empowerment and social development. Given the significant overlap in membership between the SHGs and JLGs in the microfinance sector, this framework is expected to benefit both structures.
Implications Extend Beyond SHGs
The specific ways in which the Grameen Credit Score framework will help rural borrowers are as follows:
Unlocking Opportunities
Since a significant majority of the SHG members are women, the introduction of individual credit scores will enable them to access credit with greater ease, catalysing the growth of local businesses and fostering a culture of entrepreneurship in rural areas.
Enhanced Credit Discipline
The Grameen Credit Score aims to promote better credit discipline by providing a structured assessment of the credit profiles of borrowers. This initiative is expected to restore lending discipline within the microfinance sector, benefiting both the SHGs and JLGs.
Improved Access To Credit
By recognising the collective credit behaviour of groups, the framework enables financial institutions to assess creditworthiness more effectively, even for individuals without formal credit histories. This improvement facilitates increased access to credit for rural borrowers in the SHGs and JLGs.
Digital Trail
The framework aims to establish a digital trail of financial transactions, enabling banks to make more informed credit decisions. This will help mitigate the risk of delinquent loans and promote credit responsibility.
By establishing a digital credit evaluation framework, it will fill prevailing voids in the system, which often marginalises SHG members. Furthermore, it will enable them to access their credit score, review their borrowing limits and obtain tailored recommendations for optimising their credit standing and customising offerings.
Portfolio Quality
With the structured evaluation of credit profiles, the MFIs may have the tools to make more informed lending decisions and reduce the proportion of the at-risk portfolio.
With access to detailed credit scoring information, the MFIs can develop more effective collection strategies, focusing efforts on higher-risk borrowers. This targeted approach enhances collection efficiency and may lead to improved recovery rates.
Additionally, the rural development ministry's initiatives, such as the Saras Collection and partnerships with e-commerce platforms, will provide new avenues for the SHGs to access national markets and increase income, thereby enhancing their creditworthiness. The distribution of property cards under the Svamitva scheme is expected to stimulate credit demand in rural areas, further increasing demand for microfinance.
Effective execution of this initiative relies on precise information gathering, transparent governance and robust technological frameworks. Nevertheless, this has the capacity to revolutionise the rural financial ecosystem, promoting innovative ventures and equitable economic expansion.
By promoting transparency and accountability, the framework will enable the MFIs to play a more effective role in promoting financial inclusion and safeguarding the well-being of borrowers — striking a delicate balance between the two to ensure sustainable growth of the industry.
Binaifer Jehani is the business head, risk solutions – assessments & social sector consulting at Crisil Intelligence. Abbas Master is an associate director, risk solutions assessments & social sector consulting at Crisil Intelligence.
Disclaimer: The views expressed here are those of the authors and do not necessarily represent the views of NDTV Profit or its editorial team.
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