Structuring Loan Products for Financial Inclusion-Do Larger Loans Benefit the Poor Better?

Abstract

Loan products for the financially excluded population have traditionally been state led initiatives. Most of the loans are granted as part of a scheme. and are handed out to a select section of beneficiaries. These "directed credit"' programs assumed that the rural poor were unable to save or to afford market rates of interest, and therefore need loans at subsidized rates to build capital (llannig and Jansen,20 10). In India, the largest directed credit programmer was disbursed during the 1980s and the 1990s. Integrated Rural Development Program (IRDP) which was often described as the world's largest microfinance programmed. (Sa-Dhan,2006). Loans were given with a dismal repayment rate of around 25-33%. Such programs are characterized by the absence of customization to suit the needs of the borrowers. and do not benefit the lenders as well. Loans given to the poor are usually homogenous with no variations in loan size, tenure or repayment terms, thus making the impact of the loan questionable. This paper attempts to study whether the size of loan determines the impact on the borrowers. The study was conducted across several parts of Maharashtra on around 500 borrowers. The result of the study shows a positive correlation between the loan amount and the impact on the borrower in terms of increased income generation. Other contributing factors were number of years for which they had been borrowing and the value of assets purchased on receipt of loan. The study concludes that loan products can be customized for the poor and income generation loans benefit the customers more if the amount of loan is larger. This study will help lenders to structure their loan products to maximize impact for the borrowers and increase chances of providing value added, fee-based services for the lender.