Risks and Challenges in Individual Lending
This note reviews risks associated with individual lending (IL) products offered in India, and recommends strategies to mitigate them.
Many Indian MFIs have developed and expanded their IL portfolios as a natural progression from group lending and to meet client demand for larger loans. They face risks pertaining to poor product design and weak underwriting process. Further there are risks inherent in their preference for collateral-based lending. The pressure for growth has led some MFIs to lend to clients who have completed only one loan cycle and have no substantive credit history. Finally, MFIs have to depend on branch managers to conduct the loan approval and appraisal.
Growth-oriented MFIs must understand that IL products have some inherent requirements. In order to mitigate risks associated with IL, MFIs should:
- Design products and terms around client needs;
- Design loans that allow for emergencies;
- Get the loans approved by a loan committee;
- Invest in their human resource capacities,
- Include risk mitigation, monitoring and action in their delinquency management processes.
