The Collection Methodologies in Group Lending
This Note describes and compares three most commonly practised installment collection methods in group lending. It highlights opportunities for MFIs to partner with banks as banking correspondents (BCs) in order to make installment collection more efficient and client responsive.
Installment collection extends for the entire duration of the loan cycle and is the most critical driver of costs. Factors like the MFI’s mission, location, risk appetite, client segment and strategy determines the choice of collection methodology. The paper states that:
- Cost variation across the three models is not significantly different in the short term;
- Some MFIs have shifted to a technology-driven system that is expected to bring down costs and save time;
- BC model will involve practical difficulties for MFIs, as they will have to coordinate with the bank and manage BC agents as well;
- BC model will not preclude the need for the MFI to maintain regular client interface.
The paper concludes that MFIs will have to devise ways to ensure continuity in their interface with clients, independent of the collection mechanism used. Banking is based on trust and technology can never replace person-to-person contact.
