Microfinance Focus, August 25, 2011: Mr. Aniruddha M. Godbole, a business analyst with a financial software company in Bangalore ( India) shared with Microfinance Focus that Microfinance Institutions (MFIs) could learn from the traditional moneylenders how to be more effective in lending to the poor. Some of the points he brings up include the need for a market research survey of money lending practices and the need for MFIs to develop new products.

A suggestion shared by Mr. Godbole is that the microfinance industry in India can learn from a possible nation-wide survey of money lending practices. The key purpose of such a survey is to understand the main competitor, the moneylender, better and to learn from good practices that some moneylenders employ. Among other things such a survey would help us understand the variations in tenors, repayment frequency, collaterals, nature of the loans, nature of interest rates and other factors that suit different borrowers. Currently no such survey data exists. Mr. Godbole recommends that such a survey would be best undertaken by a non-government professional research agency, with the survey being funded by an industry association.

Mr. Godbole highlights one major failure in the MFI sector in India, namely, the failure to develop new products for addressing the customers' needs. To further explain his point he gives an example of an innovative product created by disbursing gold denominated loans along with a gold collateral. The credit risk is transformed into a market risk and thus the interest rate offered to the borrower can be substantially reduced. The lender can address its asset-liability mismatches by creating gold denominated liabilities. The microfinance industry in India needs to come up with such robust innovations in order to be effective lenders to the poor.

An observation made by Mr. Godbole is that the “public perception of the moneylender is often considered 'evil' and implicitly the MFIs are perceived as potential replacements to moneylenders. And when customers notice that for-profit MFIs are charging interest rates like that of some moneylenders the MFIs themselves get a negative image like that of the moneylender. An effective communication strategy may involve the industry association informing the public that not all moneylenders are bad and that MFIs are not for the main purpose of replacing moneylenders and that MFIs' main purpose is to simply serve customers better.”

Mr. Godbole has previously worked with A.V. Rajwade & Co., Mumbai, and in the Treasury Department of Indian Bank, Chennai. He has written many articles on microfinance.