Difference in Client Response to Micro-Lending – Few observations

By Aryasilpa Adhikari, IFMR Capital

The post focuses on the specific differences in client’s response to various aspects and attributes of micro-lending principles and practice, in rural and urban areas. It is based on observations* from the field visits done as part of our regular monitoring visits.

The complete oeuvre of micro-finance was conceptualised and framed by Prof. Yunus with the strong premise of “Poor are Bankable”. This was designed with a strong sense of imbedded social collateral (in place of conventional collateral), group discipline and small but frequent repayments. This was started with a belief that when poor are provided with timely credit, they try their best to make productive use of it. In practice it was ensured that the principles are followed in day-to-day operations of Grameen Bank. When the micro-lending model was replicated in India, the micro-finance service providers started operations in rural area (which had very similar socio-economic texture as it was in Bangladesh) and religiously practiced the principles preached by Prof. Yunus.

Processes and procedures aligned to the premises and principles of micro-credit were developed and practised in full rigour. Checks and balances were slowly built into the operation that has resulted in a matured micro-finance industry. Operations are now largely standardised across different players in the industry – client data sharing with credit bureaus (HighMark & Equifax) is a norm now; the industry has MFIN as an SRO, which actively engages with various stakeholders within the industry and the RBI as the regulatory body for NBFC-MFIs that defines the larger regulatory and compliance framework for them. Post-Andhra Pradesh crisis (October 2010), the industry has rebounded lucratively and as of today promises, significant growth opportunities, both in terms of attractive investment opportunities for investors and financial sustainability and the ability to realise the social dream of achieving financial inclusion and institutional outreach.

The target customer segment of the micro-finance service provider over the last few years has gradually moved towards low-income households in urban areas. The service providers have tried to replicate the process and procedures as they used to do in the rural context. However, the response of the urban client to the process and procedure is not the same as it was by rural clients. The group dynamics is not as prominent in urban set-up as it is in the rural set-up. The nature of peer pressure and repayment in case of group guarantee invocation varies across rural and urban area. The appetite for higher ticket size loan, the loan use pattern and the underlying mechanism and dynamics that govern the loan utilisation are significantly different.

The following table highlights some of the difference in response, to the premises and principles of providing micro-credit. These are based on some of the observations gathered during visits to client locations of NBFC MFIs.




Rural Set up


Urban Set-up

Importance of group


Clients perceive affiliation to group (which is also an indicator of socio-economic status) as crucial to their access to credit. In the absence of group, the client has hardly any access to reliable, affordable formal credit due to poor penetration of formal financial institutions in rural areas.


Clients perceive “groups” as a means to an accessible loan; Micro-credit in urban set-up is easier for clients to access because of the absence of collateral and ease of repayment – staffs collects the instalment at doorstep. In the absence of group, clients can still approach banks for loan although this is less accessible.

Discipline (in terms of attendance, group register maintenance)


Clients perceive presence in centre meeting an important task and manage their time for daily chores in a way, which allows them to attend meetings. Attendance is on an average 90-100%. Practices that reinforce group bonding such as reciting group pledge etc. is routinely followed. Group documents are properly maintained.

Attending centre meeting is not the key priority of the clients (as most of the clients work outside their house). Centre attendance may be as low as 25-30% in some locations. Reciting group promises is barely done, which in a way is indicative of how strong is the group adherence.
Repayment and Invocation of Group guarantee (GG)


While repayment responsibility is largely of the woman (the borrower), the repayment is largely funded by supply of repayment instalment from household’s occupation as a whole.

In the event of earning member’s unwillingness/inability to supply the requisite funds, women borrower substitute funds from their ‘expenditure-saving’ activities, daily subsistence resources and resort to distressed consumption. In case, of GG invocation, the shared instalment of the defaulting member is actually paid from collective household income of other group members.


Since most of the borrowers in urban set-up are employed – either self-employed or offer service, repayment of instalment of defaulting member, in case of GG invocation, is largely met by the woman herself through her own individual income.

Peer pressure


The key driver of default avoidance is stress generated by peer group pressure to avoid default on loans by any of their members with the prime objective to maintain group’s future creditworthiness. As member assign social status in adhering to specific groups, rarely do members consider moving to new groups.


The key driver of default avoidance is client’s concern about individual credit worthiness (calculated in terms of DPD (Days past due) count Highmark report); peer group pressure does not play as important role as it assumes in rural set-up. Clients find alternative groups and usually have floating loyalty towards group membership.

Appetite for higher ticket size loan


Clients asking for higher ticket size loan are guided by their understanding of how well they can utilise the loan (either for consumptive or productive purpose). Very often, customers do mention that they do not want to take loan unless they foresee a real need for cash. Clients do understand that higher ticket size loan translates to higher instalment amount, which may or may not be, under their loan servicing ability.


Urban clients have relatively higher appetite for higher ticket size loan. This is based on the client’s understanding of certainty and regularity of her domestic cash flows and the potential increase in income, which she perceives because of the productive usage of offered loan.

It may be necessary for micro-credit service providers catering to urban customer segment to identify, understand and appreciate these differences and design products, processes, procedures and practices based on an in-depth understanding of urban-client behaviour. It will benefit both the service providers and clients equally, as suitably designed micro-credit/finance service delivery will ensure increased acceptability and enhanced efficiency within the service provider as well as more effective risk management practices.

* – These observations are based on interactions with around 200 rural customers in the rural areas of Uttar Pradesh, Madhya Pradesh, Gujarat and 140 urban clients from cities like Mumbai, Pune and Bhopal.


Importance of Site Selection in Model Incubation

By Surabhi Mall, IFMR Rural Finance

This is the third post in our blog series on KGFS Model Incubation. The objective of the series is to methodically conceptualize an approach to build the branch network while incubating a new KGFS entity or expanding to contiguous districts. The posts focus on themes that range from district selection to identification of branch locations and optimization of the distribution network.

The previous blog post of the series discussed the costs and benefits involved in mapping the service area based on the extent of detail sought. Having mapped the area, the next step is to identify an ideal location to set up the branch premise. This post elucidates the factors, importance and possible implications of this activity.

Site selection has long been acknowledged as the key to success for several businesses. Management texts are replete with examples of how a great site selection methodology could be the difference between a successful and unsuccessful business. These businesses are diverse – chains of fast food stores, coffee shops, convenience stores, ATMs among others. Most will argue that such businesses are typically characterised as those wherein the customer convenience is of utmost priority; the client has multiple options to choose from and make impulse purchases by voting quickly with their feet! This post however argues that these are just as important for a rural financier who is often operating in an environment with low(er) competition, serving a not-so-demanding customer with a product like credit that is often demanded but rarely available in the form, quantity and manner as may be desired by them.

What are the location-specific factors & how do they impact business at a branch?

There are several factors at play when it comes to site-selection of any business. These include location demographics, operational feasibility, and competition among others. However, different firms perceive the nexus between these factors differently. For example, while most would agree and avoid positioning the business next to the competitors’ from the threat of market cannibalization, the two most successful fast food joints – McDonalds and Burger King are almost always located next to each other. Similarly, gas stations are often located across the street from each other, rather than being spread out. This behaviour is not irrational, rather coherent and well substantiated by game theory models.

In the KGFS context, site selection activity aids our goal of being customer-centric. Given the service area of every branch is defined with the objective of providing customised products and services, site selection furthers this foundation by putting forth ‘customer convenience’ and ‘access’ as non-negotiable. This is achieved by identifying locations within the village set-up that are natural convergence points and thereby are most likely to be suitable access points for the customers. By positioning the branch in the realm of customer’s day to day activities, it also offers them greater flexibility to manage their daily chores and financial consultations in parallel. For example, a shop owner will find it easy to visit the KGFS branch for a repayment at the lean-hour of business if the branch is proximate to the market area. Unlike a retail business set-up that targets ‘eligible customers’ in its area, KGFS aspires to be relevant to all the customers. This commands great degree of detail to the activities, events and choices they have. A prudently chosen branch premise directly fosters this, thereby enabling high degree of customisation to meet every customer’s need and preference.

Simultaneously, this activity facilitates business decision-making. Like a retail business, setting up a KGFS branch involves hard costs such as construction, equipment, furniture and soft costs such as training and personnel relocation. Site selection aids the ability to justify these costs by projecting revenues as accurately as possible in the given location. By mapping infrastructure and access-related attributes in the area, one gets granular details on estimated footfall at the branch at different points in time, indicative level of proximity and expected market penetration across service villages. This influences decision-making on the scale of investment in the branch infrastructure (e.g. thin branch vs normal branch). It gives insights on questions such as “where to hold KGFS Awareness Meetings (KAMs) to on-board new customers?” If the branch is positioned in high traffic areas, such as next to the bus stop, a school or the panchayat office, it is likely to be more ‘visible’, have more ‘walk-ins’ by inquisitive visitors and add to the KGFS brand recall among villagers. In fact, detailed mapping opens up opportunities for better customisation. For example, by knowing the medical institutions and schools in the area, KGFS branch can be aware of stakeholders it can collaborate with for products such as health insurance and education loan. Finally, if a proposed site scores low of existing financial access and infrastructure, this approach enables discussions to look beyond operational hurdles – such as low population density, poor transport connectivity – if the demand and revenue projections for that location rationalize the associated costs of doing business there.

In the next and concluding post of the series we focus on the nexus between site selection of an individual branch and the larger branch network in the geography and observation techniques to optimise this.


Battle of Economic Ideas – Part III

By Ravi Saraogi, IFMR Investments

This is the third and final post in our blog series on the Battle of Economic Ideas. You can read the first post here, and the second post here.

In the first post, we traced the emergence of a rational and modern society during the Age of Enlightenment (1650s-1780s). The subsequent era of the Classical Liberals (1750s to 1880s) witnessed the birth of modern economics through the works of Adam Smith. In the second post, we provided an overview of the Marxian and Keynesian backlash (1850s to 1970s) that challenged the ideas of Classical Liberals. Continuing from where we left, this post provides an overview of the neo-liberal era (when a diluted version of Classical Liberalism was reincarnated), and comments on the current crossroads in economic ideas.

Neo-liberalism: 1970s to 2007

Post the publication of Keynes’ magnum opus The General Theory of Employment, Interest and Money in 1936, the world had taken a decisive turn towards Keynesian economics. The Great Depression in the US, which started in 1929, led to a clamour for the government to play a more active role in controlling business cycles. Keynes’ ideas provided an outlet to this pent up demand by providing a framework for the government to regulate aggregate demand in an economy and temper business cycles. This trend of increasing government role in economic affairs of a country was exacerbated by the Second World War (1939-1945). War efforts necessitated central economic planning not only for the operation of the war, but also for post-war reconstruction.

So great was the turn towards central planning that Keynes’ principal intellectual opponent, F.A. Hayek, published his renowned book The Road to Serfdom in 1944, warning that the increasing role of the government in economic affairs can lead to severe erosion of political liberty. In the book, commenting on the increasing role of the government in England’s economy, Hayek wrote, “It is one of the saddest spectacles of our time to see a great democratic movement support a policy which must lead to the destruction of democracy and which meanwhile can benefit only a minority of the masses who support it.”[1] The book’s lasting contribution was to highlight the reciprocal relationship between economic freedom and political freedom, and why one cannot exist without the other. Hayek warned that erosion of economic liberty also leads to erosion of political liberty and hence paves the way for a despotic government.

In 1947, alarmed at the continued rise of Keynesian ideas, Hayek invited 36 scholars (economists, historians, philosophers) to meet at Mont Pelerin, near Montreux, Switzerland, to “discuss the state and the possible fate of liberalism (in its classical sense)[2] in thinking and practice.” The meeting led to the establishment of the Mont Pelerin Society. Members of the Mont Pelerin Society, “Though not necessarily sharing a common interpretation, either of causes or consequences, they see danger in the expansion of government, not least in state welfare, in the power of trade unions and business monopoly, and in the continuing threat and reality of inflation.”[3]

The neo-liberal counter-revolution against Keynesian ideas can be traced back to the establishment of the Mont Pelerin Society. The members of this Society, though divergent in their many other views, shared a common concern that the increase in government power could lead to the rise of authoritarian governments. The experience of Germany, Italy and Russia, where increasing role of the government in economic policymaking gradually led to the complete jettisoning of political freedom made the group wary of the government. While democracy in Germany and Italy was crushed under the fascist regime of Hitler and Mussolini, socialism under Lenin (and his successor Stalin) led to the autocratic regime of the Soviet Union.

Neo-liberalism seeks to carve out a middle-way between Keynesian and Classical Liberal ideas. Most neo-liberals see a larger role for the government in the economy than Classical Liberals, but not as large as that advocated by Keynesians. Between this spectrum, a wide variety of neo-liberals are dispersed, some very close to Classical Liberals, while others relatively closer to Keynesians.

Though the Mont Pelerin Society was successful in bringing together diverse thinkers who were broadly sympathetic to the Classical Liberal ideas of the 18th and 19th century, it was only after the 1970s that Keynesian ideas showed a retreat. The event which single-handedly propelled the neo-liberal counter-revolution against Keynesianism was the stagflation of the 1970s in the major developed nations of the world.

The term stagflation was coined by Iain Macleod, the spokesman on economic issues for UK’s Conservative Party. In 1965, he said, “We now have the worst of both worlds—not just inflation on the one side or stagnation on the other, but both of them together. We have a sort of “stagflation” situation. And history, in modern terms, is indeed being made.”[4] The reason he said history is being made is that standard Keynesian models were not consistent with the phenomenon of rising unemployment and inflation at the same time. With the onset of stagflation, the conventional inverse relationship between inflation and unemployment (characterized by what economists call the Philips Curve) under Keynesian models broke down.

The exact reason for the global stagflation of the 1970s is still debateable. The broad reasons highlighted for this phenomenon are supply-side shocks, increase in money supply and structural rigidities. Leaving aside the supply-side shock theory, it is easy to see that the other two reasons fit squarely in the neo-liberal narrative of minimal government by laying the blame for stagflation at the doorsteps of the government.

All the above three theories have support in evidence. The role of the supply-side shock was played by the 1973 oil crisis when Organization of Petroleum Exporting Countries (OPEC) curtailed oil supply. Increasing money supply was a result of central banks pursuing expansionary monetary policy in the light of anaemic growth, while the blame for structural rigidities was placed on the increasing government regulation of the economy post the Second World War.

The sluggish growth in the developed world in the 1970s, combined with high inflation, led to widespread disillusionment with government’s handling of economic affairs. No longer was the government viewed as the panacea to all economic evils. The failure of government policies like increased regulation, wage and price controls, and expansionary monetary policy to overcome stagflation gave a shot in the arm to the neo-liberals to try and reincarnate the Classical Liberal ideas of minimum government.

Milton Friedman, the winner of the Nobel Prize in Economic Sciences in 1976, had an important role to play in the neo-liberal movement. Friedman, the founder of the Monetarism school of economic thought, sought to remove the discretionary power of the government in controlling money supply. Friedman said, “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output. … A steady rate of monetary growth at a moderate level can provide a framework under which a country can have little inflation and much growth. It will not produce perfect stability; it will not produce heaven on earth; but it can make an important contribution to a stable economic society.”[5] Such monetarist views were an indictment of the Keynesian view that markets could be unstable and required active demand management. On the contrary, the monetarist view suggested that markets are inherently stable and discretionary fiscal, and more importantly, monetary policies result in business cycles. Accordingly, the cure lies in a stable and predictable money supply that is increased by a fixed percentage every year.

The monetarist view of inflation (i.e., that high inflation during the 1970s was a result of increase in money supply) was put into practise by Paul Volker, who was the Chairman of the Federal Reserve from 1979 to 1987. Volker pursued a contractionary monetary policy which ended the reign of high inflation by the end of 1980s – a problem which had plagued the US for the previous two decades.

Among political leaders, if Franklin D. Roosevelt was the Keynesian hero who challenged Classical Liberalism, Margaret Thatcher in the UK and Ronald Reagan in the US deserve the titles of neo-liberal crusaders. Thatcher had read Hayek’s book, The Road to Serfdom, when she was an undergraduate at Oxford. Hayek’s work made a lasting impression on Thatcher and as Prime Minister of UK from 1979 to 1990, she presided over a substantial roll back of the government’s role in the economy through large-scale privatization and cut back in social spending. Similar policies were adopted by Ronald Reagan, who was the President of the United States from 1981 to 1989. Reagan had once remarked, “The nine most terrifying words in the English language are: I’m from the Government, and I’m here to help.”[6]

The neo-liberal counter revolution got a further boost from the dissolution of the Soviet Union in 1991. The collapse of the bastion of socialism discredited central government planning. The dissolution of the Soviet Union also led to the pouring out of “real” information on the erstwhile country. As was discovered later, much of the socio-economic “achievements” of the Soviet Union turned out to be fabricated cold-war propaganda.

Post the fall of the Soviet Union, the neo-liberal counter revolution transformed to the neo-liberal orthodoxy. The dominant economic policies in the 1990s, sometimes labelled as the “Washington Consensus” (due to support from both the World Bank and the IMF), was a mix of deregulation, privatization and removal of international trade barriers.

Current scenario: 2007 onwards

In 2003, in a Presidential Address delivered at the 115th meeting of the American Economic Association, Robert E. Lucas, Jr., (recipient of the Nobel Prize in Economic Sciences in 1995) said, “Macroeconomics was born as a distinct field in the 1940s, as a part of the intellectual response to the Great Depression. The term then referred to the body of knowledge and expertise that we hoped would prevent the recurrence of that economic disaster. My thesis in this lecture is that macroeconomics in this original sense has succeeded: Its central problem of depression prevention has been solved, for all practical purposes, and has in fact been solved for many decades.”[7]

This optimistic view was also echoed by Olivier J. Blanchard, the chief economist at the IMF. In his 2008 paper, The Sate of Macro, he concluded that the “state of macro is good” and that there is substantial convergence among different macroeconomic ideas. Blanchard wrote, “For a long while after the explosion of macroeconomics in the 1970s, the field looked like a battlefield. Over time however, largely because facts do not go away, a largely shared vision both of fluctuations and of methodology has emerged.”[8]

So, do we live in a world where economists have broadly a homogenous view of macroeconomics? Not really. Keynes’ ideas are far from dead and not everybody is a neo-liberal. Paul Krugman (who won the Nobel Prize in Economic Sciences in 2008), wrote in 2009, that “Until the Great Depression, most economists clung to a vision of capitalism as a perfect or nearly perfect system. That vision wasn’t sustainable in the face of mass unemployment, but as memories of the Depression faded, economists fell back in love with the old, idealized vision of an economy in which rational individuals interact in perfect markets, this time gussied up with fancy equations.”[9] Krugman is foremost amongst several economists who have advocated for a revival of Keynesian ideas. The global financial crisis has also led to the re-emergence of Marxian theories that capitalism will always be cursed with crises (what is commonly referred to as ‘crisis theories’).

The spate of crises in the twenty first century- the dot come bust, the US subprime crisis and the Euro crisis, have brought the differences in economic ideology right to the forefront. Reminiscent of Winston Churchill’s remark, “Never let a good crisis go to waste”, economists of all hue have been sharpening their argumentative knifes and dishing out varying policy prescriptions.

Undoubtedly, the global economic turmoil has led to a sharp polarization of economic ideas and it is difficult to forecast whether a new consensus is building. Perhaps we should not be surprised. As the evolution of economic ideas over the last 300 years has shown, one thing has been elusive – unity among economists. The battle of economic ideas is far from over.

As part of the Spark Spring Edition, a series of internal knowledge management sessions that we regularly host, Ravi had talked about this topic in greater depth. Below is the video & the presentation from his talk:

[1] Hayek, F.A., 1944, The Road to Serfdom

[2] It is important to note that the word “liberal” has been used here not in the American sense (which is interpreted as support of expansion in government powers) but in the European or classical sense which stands for minimal government.

[3] https://www.montpelerin.org/montpelerin/home.html

[4] Macleod Iain, speech to the House of Commons on 17 November 1965, House of Commons’ Official Record, 17 November 1965, page 1165

[5] Friedman, Milton, 1970, The Counter-Revolution in Monetary Theory

[6] http://www.reaganfoundation.org/reagan-quotes-detail.aspx?tx=2079

[7] Lucas, Robert E Jr., 2003, Macroeconomic Priorities, Presidential Address delivered at the 115th meeting of the American Economic Association, January 4, 2003, Washington, DC http://pages.stern.nyu.edu/~dbackus/Taxes/Lucas%20priorities%20AER%2003.pdf

[8] Blanchard, Oliver J, 2008, The State of Macro, NBER Working Paper No. 14259, http://www.nber.org/papers/w14259

[9] Krugman, Paul, 2009, How did Economists get it so wrong, The New York Times, http://www.nytimes.com/2009/09/06/magazine/06Economic-t.html?pagewanted=all


The IFMR Trust Group Annual Update 2015: Enabling Access to Finance

The IFMR Trust Group has, since 2008, reached over 11 million financially excluded individuals across 24 states and 356 districts in India through its group companies, IFMR Finance Foundation, IFMR Rural Finance, and IFMR Holdings (IFMR Rural Channels and Services (IRCS), IFMR Capital, and Investment Adviser and IFMR Investment Managers – collectively referred to as IFMR Investments). With its focus on both retail and wholesale financial services, the group currently offers its retail rural customers with over 15 products and services, including customized loan, savings, investment, payment, and insurance products suitably designed to meet the needs of rural customers. Through its capital markets platforms, the group works with 5 asset classes in the financial inclusion space. With an objective of building a holistic financial inclusion platform, the group works with all levels of stakeholders, including investors, originators, and end-use customers.

The last year saw the Group achieve important milestones – we crossed the 10 million customer mark while our balance sheet also crossed INR 10 billion. Through our three-pillared strategy of high-quality origination, risk transmission, and risk aggregation, our customer outreach is growing exponentially, while our financial strength works to demonstrate the merit in our approach.

This success is rooted in the support and good wishes of our partners and investors, the hard work and dedication of our team that is now over 1,000 strong, and most importantly, the faith of our customers, who we strive to serve in our mission of complete financial inclusion.

In the short video below Sucharita Mukherjee, CEO, IFMR Holdings, talks about our journey so far with two stories from our work:


Pudhuaaru KGFS Turns 7 – The journey so far

(In case you are unable to view the infograph please click here.)