Transparency:

How do clients understand their loan contracts?

Justin Oliver
Centre for Micro Finance – IFMR Research
Sa-Dhan – FICCI Conference
17 March 2010
 Introduction
• Loan Contract Information Study:
– Understand how MFI clients understand
their loan contract and
– What it means for an MFI client to be
informed.
• This study DOES NOT merely assess
whether or not an MFI client knows the
terms of his loan
– How does a poor person understand his
loan and what does that mean for policy
and the need for transparency?
 Methodology
 Conducted over two phases
 Phase 1: Randomly survey 299 first-time borrowers in 2 different locations,
north and south India
 Phase 2: Randomly surveyed 40 first time borrowers in 1 location, central
India
 What Clients Know
If someone in your group/centre is not able to make the payment, do you
What is the amount of your loan? feel obligated to pay their weekly instalment?
(% of respondents) (% of respondents)
Yes, I feel obligated 38%
Right Answer 96%
Yes, as others will also do so in my difficult times 45%
Wrong Answer 4% Yes, I feel obligated to, but only if others in my
group/centre feel the same way 7%
What is the duration of your loan? Yes, I don’t want to, but I have to since it's part of my
loan agreement 3%
(% of respondents) Yes, I should according to the loan agreement. But I
won't since its not my loan 2%
Right Answer 92% No, it's not my loan and I don’t have to 3%
Wrong Answer 8% Does Not Know 2%

 Loan Amount
What is the weekly instalment that you must pay on this loan?  Duration of the Loan
(% of respondents)
 Weekly Repayment
As written in the Adjusting for security Within 10% of Amount
loan contract fund in South weekly amount
 Joint Liability
Right Answer 41% 57% 83%
Wrong Answer 53% 37% 11%
Does Not Know 3% 3% 3%
Blank 3% 3% 3%
 What Clients Do Not Know
Annualised Interest Rate, as reported by respondents Annualised Interest per Rs. 1,000 of loan, as reported by
respondents
100 100
% in
80 80
Frequency

Interest

Frequency
North - Interest in
60 60 in North-
18% South- Rs.
40 % in South- 40 150 Rs. 180

20 15% 20
0 0

5
6
9
12
15
17.5

33
60
84
100
125
140
150
175
188
196
200
250
700
-999
-444

10

17
20
23
25
30
50

120

400
1500
1.2

1.5

10
12
14
-999
-444
1

1.25

1.75
2
2.3
2.5
3
5
6

15
21
46
Rate of Interest (%) Interest per Rs. 1,000 of loan

What is the total interest payment that you are

required to pay over the time of this loan?
 Interest Rate
(% of respondents)  As a %
Right Answer 11%
Within 10% of the Right Answer 39%  As an Amount
Wrong Answer 50%
Tried but does not know
Did not try and does not know
18%
20%
 Total Interest over
Blank 1% the time of loan
Client Perspectives on Loan Practices
Coercive Collection Practices
Most Popular 2nd Most Popular
S. No. Hypothetical Scenario Given To Respondents Response (%) Response (%)
I In case Lakshmi is not able to pay her loan and the centre Yes Its Alright Its wrong and he
manager insists on holding the meeting outside her house. (42%) should not do so
What do you think about the centre manager's action? (29%)
II If Lakshmi doesn't repay her loan in your group, do you think Yes Its Alright Its wrong and he
it is appropriate to extend the meeting for 30 minutes to (42%) should not do so
enforce repayment? (32%)
III If Lakshmi doesn't repay their loan in your group, do you think Its wrong and he Yes, Its Alright
its appropriate to extend the meeting for three hours to should not do so (33%)
enforce repayment? (36%)
IV Let's say that Lakshmi is not able to repay her loan. Would it Yes, Its Alright Its wrong and he
be okay for the MFI to take any of her assets such as for (53%) should not do so
instance, any cows she owns, her house, her land or the (22%)
machinery she uses for work?
 Client Understanding of Loans

 Clients  Clients don’t

understand understand

 Amounts  Interest Rates

 Weekly  Total Payments over
repayment the time of the loan
 Default leads to
adverse
consequences
Phase 2: Choosing the Cheaper Loan
Numeric Ability
Word Problem Word Problem Word Problem Word Problem
Math Question 3+9 3*5 8000/10 4500*18 5500+1800 600/10 100 – 47 10% of 4500
% Correct
81% 73% 17% 3% 31% 20% 57% 19%
Responses
% Choosing
3% 10% 69% 92% 45% 64% 24% 70%
'Does Not Know'

Loan Comparisons % of respondents who

S. No.
Frame I Frame II answered accurately
1 Rate Flat Monthly Rate Flat Monthly 93%
2 Rate Flat Monthly Rate Flat Annually 50%
3 Amount Weekly Amount Monthly 90%
4 Amount Weekly Amount Monthly 28%
5 Rate Annually Declining Rate Annually Flat 73%
6 Rate Monthly Flat Rate Monthly Declining 53%
7 Rate Monthly Flat Rate Declining Monthly 85%
8 Rate Flat Monthly Rate Declining Annual 43%
9 Amount Weekly Rate Annually Flat 68%
10 Amount Weekly Rate Annual 28%
11 Amount Weekly Rate Annual 70%
12 Rate Declining Annual Rate Flat Annual 65%
Note: Highlighted pairs were answered correctly by at least half the respondents
 What does this mean?

 Currently, interest rates and what they mean are a

mystery to people!

 Changing how MFI’s report interest rates is unlikely

to affect how people choose loans (in the short
term)

 Despite poor mathematics skills, people are

reasonably savvy about comparing loans

 Top-down regulation with an interest rate cap is

unlikely to be meaningful to the poor
 Recommendations
 Absolutely need a common standard for people to compare
loans in long term – MF Transparency

 But, also need a measure that people understand

 Need to develop the skill/ knowledge for people to

compare MFI terms and moneylender terms too

 Need more research on how people understand their loans

and the frames in which loans are compared and
understood

 Need to communicate clearly what collection practices are

ok, and what are never acceptable.
Thank You
Impact of a short financial literacy &
Business Training Module with SEWA
 Do MFI clients benefit from additional
business training?
 Does training with a friend matter?
Impact of a short financial literacy &
Business Training Module with SEWA
 Based on two current 5-day SEWA Bank courses
 Financial literacy
 Business skills training
 Streamlined: Reduced 2 SEWA trainings to 4 hours over 2 days
 Curriculum design
 Interviewed women who had attended SEWA training
modules within the last year
 Selected the elements of the SEWA trainings they:
 Remembered
 Found the most useful
 Implemented in the short run
 Retained in the long run.
 Peer training
 Half the study participants were invited to bring a friend
 Sample Profile
 Clients are actively saving or borrowing.
 Business owners, piece-rate workers, or self-
employed.
 Between the ages 18 and 65; average age is
34.
 72% literate.
 Results
 Training with a peer does not show significant impact on the
likelihood of attendance
 Business training had a strongly significant effect on the
likelihood of taking out a new SEWA loan on women who
attended training
 No significant effect on the likelihood of taking out a new non-
SEWA loan
 Women who attended the business training were 5.04% more
likely to take out a new SEWA loan for the purpose of home
repair
 Business training did not have a significant effect on the
likelihood of taking out a new SEWA loan for business purposes
 Business training did not significantly effect the business
income or the total individual income of the participants.
 Results - Savings
 Women who attended business training were 9.9 percent more
likely to have a SEWA pension bank scheme.
 There was no significant effect of business training on the
number of savings accounts held by women who attended the
training.
 Business training had no significant effect on the frequency of
savings deposits.
 No effect of business training on the amount of savings
deposited either into a formal savings account or through a
vishi contribution
 Business training had no significant effect on the likelihood of
setting aside money each month from individual business
earnings for either business or for building a house.
 Women who attended business training were 10.3 percent more
likely to set aside individual business earnings each month
 Results – Overall Confidence
 Women who attended the business training were 6.9 percent
more likely to report feeling confident in countering problems
that arise in their work lives and 8.4 percent more likely to do
so if they attended without a peer.
 There was no significant effect of business training on overall
confidence, although women who attended training without a
peer were 7.5 percent more likely to report overall confidence,
feeling confident in countering problems that arise in their day-
to-day lives.