Interest rates on micro loans will fall further: Udeesh Ullas, Muthoot Microfin

In the absence of a proper banking system and loan disbursement mechanism in the interior regions, microfinance has become a lifeline to boost entrepreneurship in rural India. Micro-loans provided by Non-Banking Financial Companies (NBFCs) not only help people in rural areas to start their own businesses, but also help them break free from the clutches of local lenders.

Muthoot Microfin COO Udeesh Ullas talks to Financial Express Online about how microfinance addresses issues such as financial inclusion and the integration of rural women into mainstream economic activities.

  1. How have microloans changed and impacted people’s lives?

Microfinance has been a boon to underserved and disadvantaged communities in remote rural areas of the country that did not have access to formal credit facilities. Over the past two decades, microfinance has penetrated these corners widely and offered easily accessible credit at reasonable interest rates. Microfinance has taken up two major challenges facing our country, namely financial inclusion and the integration of rural women into mainstream economic activities.

Microfinance has empowered millions of women by supporting their entrepreneurial endeavors and helping them achieve financial independence. It has further empowered women to have decision-making abilities and to be in charge of their lives. Microfinance has helped rural households and micro-enterprises to thrive, low-income households to stabilize their incomes and save for future needs; and in times of crisis, helped them to cope and rebuild.

  1. Is it easy or difficult to get a micro loan from Muthoot Microfin or in the industry?

Microfinance loans are the most easily accessible formal credit facility for rural households to support their small businesses without the need for any collateral to be pledged. Although formal banking has spread widely in rural areas, penetration in deep rural areas and especially among women is quite limited due to cumbersome procedures, requirement of collateral, proof of income and related formalities. Microfinance makes it easier for them to obtain timely and needed financial assistance with minimal documentation. At Muthoot Microfin, we provide collateral free loans following a simple and easy process with minimal documentation and at reasonable interest rates. Moreover, we offer the service directly at the doorstep of the customers, which allows them to avail a microfinance loan in a very convenient and easy way.

  1. What kind of interest rates are currently running in the industry; would you like them to change?

Currently, the industry operates in the interest band of approximately 19-25% (decreasing), which is risk-adjusted pricing for unsecured loans. RBI has also imposed strict guidelines on credit underwriting and pricing of microfinance loans. Before the emergence of microfinance, local lenders charged exorbitant interest rates of around 70 to 100%.

Improving overall macroeconomic conditions and the use of innovative technologies will help MFIs further reduce interest rates by at least 2-3% from what they currently charge. Technology and digitization will enable more specific and scientific credit assessments, leading to a better credit profile for customers and ultimately lower cost of lending to creditworthy customers.

  1. Where do you think the industry would evolve the most in the near future?

The sector is changing rapidly and I think the next major development will be the digitization of microfinance, especially in the “reimbursement” mode. Microfinance repayments are still largely collected in person by loan officers. After the demonetization, we converted 100% of the disbursements to a bank account, but the bulk of the collection still remains in cash.

In fact, this change is already in effect and gaining momentum, when the pandemic and related lockdown occurred, employee movement was restricted and cash receipts were severely disrupted. So we took a serious look at the alternatives and realized that digital was the way to go. We developed a customer application called “Mahila Mitra” and asked customers to install it on their smartphones or those of their family members. Currently, more than 1 million active customers have this app installed on their phones. We offered them several options such as UPI, BBPS, card payments, web portal, WhatsApp pay, etc. to make their repayments.

To promote digital cashback, we ran big campaigns and offered cashback to customers. It really helped and in 3 months the digital collection grew 5x, and now 25% of the total collection is received digitally. Our goal is to increase this percentage to 50% by the end of the fiscal year.

  1. How do you ensure the proper use and repayment of loans?

Before disbursing loans to clients, we give them three days of training, a process called “full group training”. One of the objectives of this session is to sensitize them on the proper use of the loan amount. All loans are issued for stated purposes only and as part of our operational process, Loan Utilization Verification (LUC) is conducted in the field by supervisory staff within 30 days of disbursement.

In case of repayment of loans, the installments are collected during a central meeting, during which the calendar of meetings is pre-fixed in consensus with all the members of the group. As it operates on a joint and several liability model, remittances from all clients are collected by the center manager at the center meeting and remitted to the loan officer. If a client of the group is in default, the members of the group share and pay on behalf of the member in distress.

  1. Are there any other unique benefits someone should approach you for a micro loan for?

As part of the Muthoot Pappachan group, we can offer several products to our clients (through different group companies) to meet their lifecycle needs, whether it is microfinance loans, loans cars, home loans, gold loans, savings, insurance, money transfer, etc. , which a typical microfinance institution cannot do. We use state-of-the-art technology to deliver a superior customer experience, such as paperless operations, door-to-door service, seamless transactions, and fast loan approvals.

In addition to the wide range of financial offerings products, we provide our clients with professional training, business acumen and financial literacy courses. Additionally, we conduct community outreach activities, which is an ongoing process that is tightly integrated and aligned with the organization’s business and societal goals. Vocational training programs aim to help rural women achieve better living standards by improving their employability skills.

In addition, we have set up e-clinics in our branches to provide our customers with accessible and affordable basic health care. Our clients can also benefit from the #RestartIndia campaign led by Muthoot Pappachan Group, which aims to offer advice and assistance to small businesses to restart their business after the lockdown and the pandemic.

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