You often hear MFI borrowers go missing after taking loans. Have you ever experienced such an incident? It actually happens a lot, and if you have a microfinance organisation, you must have encountered it as well.
But why does that happen? Is there anything that could prevent this kind of damage?
Of course, there is. The simplest solution is borrower evaluation. If you can ensure a background check of the borrower, your MFI wouldn’t have to lose any money.
But before we know how important borrower evaluation is, we must know why loan fraud happens in MFI operations.
Why Loan Fraud and Repayment Dealy Happens in MFIs
Among many other challenges of microfinance operations, loan fraud is a very common issue. But there are certain reasons why MFIs encounter loan fraud.
Microcredit companies deal with unprivileged and poor people. Besides, this huge portion of the population is often unaware of many financial facilities. They don’t even know the consequences of loan fraud.
On the other hand, unlike formal banks, the microfinance model runs without any security. So, it exposes your microfinance organisation to certain risks.
Furthermore, more than half the borrowers in developing nations are over-indebted. It means the borrowers take loans from several MFIs simultaneously, making it difficult to pay them off on time. And those borrowers cannot pay off; they tend to run away from one place to another.
In addition, some take loans without the intention of paying them off because they know that they can run away. So, after they receive the amount, MFIs cannot find the borrower and retain the money. And this is a kind of damage most MFIs have to face.
Repayment issue is another situation MFIs usually deal with. Though this is apparently less damaging than loan fraud, delayed repayment causes greater damage if you analyse the overall impacts.
People often say that how would they know if someone will run after they receive the loan. They are right because it is not possible to learn someone’s intention.
But still, there are ways to reduce this kind of damage with proper borrower evaluation.
How Borrower Evaluation is Important for MFIs
If you want to keep your business running and profitable, there is no alternative to borrower evaluation. It is the only way you can manage to reduce loan fraud and delay repayments. Moreover, you can save your MFI from loss.
Helps in Risk Assessment
Borrower evaluation is an integral part of risk assessment, and if you fail in this process, it can have a huge negative impact on your business.
Almost everything is connected to the borrowers, whatever risk is associated with MFI operation. Therefore, you must focus on this aspect of your business first.
Remember, for a successful business ahead; you must not compromise with risk assessment. Even most successful financial service providers foresee upcoming risks with extensive review.
Good Customers Means Good Business
There is a proverb, “Better an empty shade than bad cattle.”
It is true because bad cattle cause damages which is irreversible. Moreover, the damage of the bad cattle brings more losses than profits in the long run.
Therefore, for your MFI, good customers are important. So, don’t forget, if you end up with bad customers, all aspects of your business will be affected.
But the question is, how would you get good customers?
Well, you can find good borrowers with an advanced borrower evaluation. For example, if you check a borrower’s background and MFI records, you can easily determine the prospect.
And this is very important before you disburse any loan to any person. Otherwise, you may encounter another loan fraud or troubled repayment. And we hope you don’t want that to happen.
Borrower Evaluation Improves Loan Repayments
Suppose you have lent money to a customer, but you don’t get the instalment on time. What will happen?
There are many issues linked to delayed repayment. Let us tell you in detail.
Timely repayment is required in every MFI because other upcoming loans depend on that. It means that if you get the repayment delayed, you cannot pay loans to other people on time. And most MFIs around the world often face this situation due to their limited fund.
On the other hand, delayed repayment causes delayed loan disbursement. This anomaly causes financial loss for your MFI. Moreover, it also causes your organisation’s reputation. As a result, you lose customer satisfaction, thus damaging the good customer base.
However, if you are a little careful about customer selection, you can prevent delayed repayment. Thus, you can help your MFI to thrive.
Improves Loan Management
Good management is the key to success, be it your loan to customers or your loan from financial organisations. But for efficient loan management, you need to have good borrowers.
For example, if you have taken loans from other financial organisations, you are a borrower now. If you want to keep a good relationship with your lender, you have to make repayments on time.
But how would you repay your lender on time?
Depending on your borrowers, you would need to have money on time to repay. But imagine, if you don’t get repayments on time, it will be tough on you.
On the other hand, there are many more borrowers waiting for loans. So, you also have to lend them on time.
Now think, your loan management skill and methods are very good. But if you don’t have the money on time, would your management skill and method help? It wouldn’t.
But in this situation, only if you choose the right borrowers you can manage your loans properly. And that comes with proper borrower evaluation.
Borrower Evaluation Boosts Your Profit
Due to the high risk of operations, many MFIs fail to make a profit. But what are the reasons?
MFIs fail because of the lack of risk assessment, loan management, and customer evaluation. Also, most MFI’s fail to profit because they are still running their operation manually.
But a big reason for low profit is loan fraud. So, if you can prevent loan fraud and delayed repayment, your MFI will be more profitable.
And all these are facilitated by customers. Therefore, if you had a better borrower evaluation, you could cut your losses and make more profit.
Now that we know the importance of borrower evaluation, we need to know what to evaluate in the first place.
Criteria of Borrower Evaluation
There are several things to consider while evaluating a borrower to find good borrowers. Though it is not easy, there are ways to conduct the evaluation more easily. And we will talk after this section. So, let’s jump right into the criteria of borrower evaluation.
Borrower Background Check
The very first criteria of borrower evaluation are background checks. In particular, you need to know about the borrower’s identity and family background. In these details, don’t forget to check if those people are from the place that they are claiming. Besides, it would help if you also ensure the borrower has been living in the place for a long time.
Check Loan History
As we have told earlier, more than 50% of borrowers have multiple loans simultaneously. Therefore, you need to determine if the person currently has any other MFIs. It is a major indicator of the borrower’s potential as a customer.
Check Repayment History
Repayment history checkup might be the most important criteria in borrower evaluation you should pay attention to. It decides your business prospect with the borrower.
So, you need a deep knowledge of the borrower’s repayment history with previous MFIs or loans. If you find out he creates trouble making repayments on time, you must not go with the borrower.
Financial And Employment History
Though microfinance loans are for poor and unprivileged people, we need to know about the borrower’s financial condition and income source.
Unfortunately, many people don’t want to work as hard as possible. And when they get the money from MFIs, they sit back and enjoy it until it is finished. So, this type of people is very hard to deal with.
Check for Recommendation
The recommendation process can verify a person’s social and financial integrity, and it is a very important matter to evaluate in the process. So, while checking on other criteria, make sure a few people recommend the borrower for a loan.
Do all these criteria feel a little bit critical to you? It is quite normal to feel intimidated because this is a long journey. But don’t worry, there is always a solution.
Adopt Technology for Borrower Evaluation
Collecting information is a hassle, but evaluating them is complex. In other words, when your MFI runs on the manual process, you need to check every detail manually. And it consumes time and workforce.
On the other hand, if you are giving a loan to an existing borrower, it causes you the same trouble. It means you need to go through the documents and the present repayment history again. It doesn’t sound very pleasant.
Don’t worry; technology can help you make things effortless for your MFI. In the last couple of decades, Fintech in Microfinance has improved. Besides, the MFI operation has changed significantly.
In addition to advanced microfinance features, MFI solutions can do the unthinkable, including borrower evaluation. You need to access data for the borrower once in the beginning, and software can evaluate your borrower and generate a report.
On the other hand, you don’t need to gather the information again for an existing borrower evaluation. In fact, you don’t even need to check the repayment history because your system already has the information. So, depending on the borrower evaluation report, you can make your decision.
In short, borrower evaluation is very important for your MFI. If you want to profit and avoid loan fraud, you must thoroughly conduct a borrower evaluation. And in the process, a comprehensive microfinance solution can help make your organisation’s decision quickly and increase profitability.
