Cash Flow Analysis of Client’s Household for Availing a Microfinance Loan: A Study in Two Districts of Odisha

Abstract

One of the prime reasons for the outcome of over-indebtedness is inability of financial institutions to estimate the borrowing capacity of a household. This study was conducted within this context of imprecise assessment of income and cash-flows. The study focuses on the two districts of Odisha, i.e. Khordha and Ganjam, the districts where the highest cases of over-indebtedness were reported within the states. The sample size for the study was 300 respondents (150 in each district), interviewed using a questionnaire-survey. The surveys were conducted with clients who have at least one active loan from an MFI. In addition to questionnaire-surveys, qualitative interviews were conducted with MFIs in order to get a better understanding of how their cash-flow estimation processes work. To calculate the cash flow, the variables like income, consumption, savings & information related to sources of loans is being used. MFIs usually access credit bureau data to get information on outstanding loans of the clients.

The workings and the operations of NBFCs are regulated by RBI and other regulatory bodies like Sa-Dhan and MFIN (Microfinance Institutions Network). Guidelines were set up to avoid over indebtedness on the side of the clients and to ensure responsible lending from the side of the NBFCs. The data was tested against each guideline mentioned by the RBI and found some interesting results. These included 66% of the households having an annual household income of over the limit prescribed for borrowings from an MFI. 5.18% of the sample clients had total indebtedness of more than ₹1,00, 000. This shows that the RBI guideline which puts a cap of ₹1,00,000 on the total indebtedness of a client is not being followed in the case of these households. Additionally, 13.15% of the clients in our sample were repaying more than 2 MFI loans at the same time, even while the prescribed limit is of 2 MFI loans. Despite the fact that all the MFIs follow some or the other method of estimating cash-flow of potential client households, problems related to over-indebtedness and default still exist.The study recommends that in order to develop a robust cash-flow analysis tool, concerted efforts needs to be put in by various stakeholders in the sector. Firstly, a proper client protection mechanism needs to be set up by each MFI in order to ensure that issues faced by the clients in relation to repayment, MFI products, behavior of the loan officer and customer service is adequately captured and addressed. This can be ensured through Interactive Voice Response (IVR) calls from the credit bureau. Secondly, the credit bureau can also come up with a memo which is updated every quarter with the latest information on clients’ financial situation, outstanding loans etc., aggregated at a block or district level. This would give MFIs and other lenders a proper understanding of the loan situation in specific regions.

Keywords: Cash-flow, Credit Bureau, Household income, Indebtedness and MFI