Invest in customers to get a good nights sleep

By Santhanam S

Oh Gandhiji! What did you say about a ‘Customer’? 

Mahatma Gandhi in a speech in South Africa in 1890 reportedly said:

 “A customer is the most important visitor on our premises. He is not dependent on us. We are dependent on him. He is not an interruption of our work. He is the purpose of it. He is not an outsider of our business. He is part of it. We are not doing him a favour by serving him. He is doing us a favour by giving us the opportunity to do so.”[1]

As an ex-employee of a leading bank in India, I knew that in 1970′s, this message of Gandhiji  with his photograph  used to be on display at a visible position in a number of bank branches. But, over the years, this message has gone out of fashion and hence the photo and the message (Perhaps, as part of celebrations of Gandhiji’s birth centenary, this message would have been on display and withdrawn when the use was over).

When the modern  micro-finance began its journey at the beginning of the last decade of the last century, thanks to the SHG Bank Linkage Programme and the regulator’s support, micro-finance institutions (MFIs) really provided a good workable meaning to the term ‘customer’ or ‘client’.

We have seen often times that  the customers / clients were also referred to as ‘beneficiaries’ of micro-finance.  The use of this term ‘beneficiary’  was liberally used during the Integrated Rural Development Programme (IRDP) / Swarnajayanti Gram Swarojgar Yojana (SGSY) days.  But, I used to  wonder whether it is proper to refer the users of micro-finance only as  ‘beneficiaries’. Those who provide micro-finance services are also in a way, or I would say in a larger way,  ‘beneficiaries’  than the users of micro-finance, as evidences show that the promoters of MFIs  would have otherwise ended up in other occupations which they would have found as  less challenging or less paying or less self-satisfying.

However, for the limited purpose of our discussion, we will confine our review of the term ‘customer/ client/ beneficiary’  to those  using the services of micro-finance and how it was understood, viewed and treated then and over time.

During those best of times, we have often heard terms like ‘nurturing our clients’, ‘hand-holding support’,  ‘reaching out’, ‘fostering’, ‘bringing up’ etc.,  used by the micro-finance practitioners while describing their way of treating their customers/ clients.   But, somewhere in the beginning of this century, the micro-finance practitioners  started drifting  and the message of Gandhiji was also forgotten.  Now, we are searching for a definition for the term ‘client’ or ‘customer’.

Some empirical analysis

Recent discussions on micro-finance policy and regulation in India   have  tended to centre on the extent to which small borrowers (clients)  understand their loans and the financial liability implications for them.  Lack  of  awareness can lead to over indebtedness and greater economic vulnerability for the very clients that microfinance seeks  to help. These concerns were first brought to the forefront in India, thanks to the  battle lines drawn  between MFIs and the district administration in Andhra Pradesh(AP).   MFIs in the State were accused of predatory lending, overburdening poor and illiterate women with loans which they may not have been able to repay and using coercive collection practices to ensure repayment.

In this context, I tried to look at some of the  initiatives/ efforts made in the recent past in understanding the client/ customer for whom the micro-finance is supposed to provide services.

How do the clients understand their loans?

One interesting study was  done by the IFMR- Centre for Micro Finance (IFMR-CMF)  on  ‘How do the clients understand  their loans?’  which has attempted to look at some of the aspects  from the perspective of clients (demand side look).   In that respect,  this study  is something different from various studies  which have used Randomised Control Trials (RCT) and other methodologies to find sustainability, impact assessment and other aspects of micro-finance programmes which looked at the issues from the supplier’s perspective.  The IFMR-CMF  study  has tried to look at  what clients knew and what clients did not know about their loan contracts.   Three important aspects of loan process  covered in it included  (i) awareness about the amount of loan, (ii) duration of loan,  and (iii) understanding of repayment programme of loans taken.  The findings are interesting. These are tabulated here and given:

Table -1: What and When to repay a loan?

Right Answer (% of respondents)Wrong Answer
What is the amount of Loan?96%4%
What is the duration of your loan?92%8%




Source: Study Report

Table -2: What is the weekly instalment that a client must pay on a particular loan?

As written in theloan contract Adjusting forsavingsWithin 10% ofweekly amount
Right Answer41%57%83%
Wrong Answer53%37%11%
Does Not Know3%3%3%





Source: Study Report

As for the understanding of the amount of loan and the duration of the loan, the responses ranged from 92 % to 96%.   As for the aspect relating to the amount  to be repaid  was concerned,  it was clear that a lot of ground is yet to be covered as less than 50% of the clients only were reported to have understood  the contractual obligations.  Maybe this aspect is more critical than other two aspects as a clear understanding of  the amount of loans to be repaid  would alone help improve  repayment performance of loans.  It is quite surprising that despite such  poor understanding of the repayment schedule of loans by the client, the MFIs were claiming  95% to 99% repayment of their loans.  Perhaps, the clients were repaying the loans as demanded by the MFIs and not as understood by them which may be tacitly called repayment under duress.

Pavala Vaddi – Is it a better way to make the client understand implications?

Another interesting aspect covered under the study was understanding of the interest rate charged on the loans availed by the clients.  One set of clients were given the amount of weekly repayment of a specific amount of loan while the other set of clients were given the interest rate that will be charged for the same quantity of loan repayable under similar conditions.  The framework used is given below:

Table-3: Whether absolute amount or percentage-

which is better understood?

Lender 1Lender 2
Loan AmountRs. 8,000Rs. 8,000
Duration50 weeks50 weeks
RepaymentAmount:Rs. 188 weekly
Interest Rate:24% annually flat
Which Lender would you prefer?

Source: Study Report

According to the study findings, these results indicated  that respondents were using their intuition and some level of guesswork to arrive at the correct answers. Thus, it became  difficult for  the study to  generalise exactly how respondents arrived at the correct response.  However, it was  observed  that individuals with  very low literacy levels and arithmetic skills were able to choose the cheaper loan 75% of the time. Perhaps, we can attribute this aspect  to the higher level of intuitive capability of Indians over use of logic by westerners in decision making in general and the poor in particular.

In this connection, it may be interesting to know  about  the subsidy scheme of Government of Andhra Pradesh called ‘Pavala Vaddi’ scheme.  Here, the discussion is not to analyse and look at the merits and demerits of the scheme, but, the rationale in using the term ‘Pavala Vaddi’.  It   means  an interest rate of 3% per annum or to put it more specifically 25 paise per Rs.100 per month, a local parlance understood by the users of informal credit system particularly from the private money lenders.  In that respect, the Government of AP has used the local parlance to make the people  understand the scheme very clearly.  As an extension of this scheme, the Government of AP  also announced another scheme called  ‘Vaddi Leni Runnam’  meaning interest subvention.  We may find parallels to these terms or similar terms used in other languages in various regions of India to make the local people understand the terms better.

Perhaps,  professionally run MFIs should take a leaf out of the innovativeness of the Government of AP in christening their products in such a manner that these are understood in the simplest form.    Demystifying the scheme contents, removing all legal jargons and reducing the number of pages of documents to be signed by the prospective client borrower before availing his/ her loan from an MFI is the most important principle to be followed by MFIs.

How much time do you invest with your client at the beginning?

A little over a decade ago, I associated myself with a study team to look at  the regulatory framework of MFIs in Bolivia including BancoSol.  When the team met a borrower of an MFI there, she informed that as part of the organisation’s effort to keep their clients aware of all their commitments towards a loan taken, the MFI would spend about half an hour to one hour explaining each and every term of the contract and also provide a copy of the repayment schedule with due dates of payment.  This practice had helped to improve the understanding of the client about his/ her obligations towards the loan taken from the MFI.  The MFI also considered this one hour spent with the client as an investment made and not the time expended.  I hardly find this type of practice with their prospective clients being followed by any MFI in India. Both under the Grameen pattern of lending and the SHG pattern of lending, the MFIs  tend to leave almost the total responsibility  of  client education to the wisdom of the group to run their affairs using terms like ‘group cohesiveness’, ‘group dynamics’ and other terms.

In a way, it appears that they have out-sourced their basic responsibility of educating the client borrowers about their institution.  An hour ignored at the beginning, perhaps,  has forced  the MFIs to spend sleepless nights later in reaching out to their clients in getting their loans back.

CGAP for Client Protection

With the trauma emerging out of the strained customer relationship being experienced by many MFIs across the world, the CGAP has been spearheading the Client Protection Principles for microfinance  so that the clients are not taken for a ride by the MFIs, networks, funders, and practitioners. It expects that good sense would prevail on the MFIs which actively adopt these principles and those adopting them will  have a competitive advantage—not just with clients but with investors, donors, governments, and policy makers.

What are the Client Protection Principles?

There are six core principles enunciated under the  Client Protection measures. These are ,

  • Avoidance of Over-Indebtedness.  The MFIs should do some due diligence and ensure that the prospective clients are not going to be over-burdened by availing loan from the MFI concerned.  In other words, it should not lead to over-indebtedness and concomitant  consequences.
  • Transparent and Responsible Pricing. As mentioned in the previous paragraph, the way MFIs in Bolivia had gone about investing time with the prospective clients before releasing their loans in explaining all aspects of the pricing, terms  and conditions of financial products (including interest charges, insurance premiums, all fees, etc.) in a transparent  way and also in  an understandable way  to clients should be followed.
  • Appropriate Collections Practices. Debt collection practices of providers will not be abusive or coercive.
  • Ethical Staff Behavior. It is related to the principle of ‘Appropriate collection practices’ and needs no further elaboration.
  • Mechanisms for Redress of Grievances. The clients should have recourse to make complaints and share their problems with the MFI concerned and seek redressal.
  • Privacy of Client Data. The privacy of individual client data will be respected in accordance with the laws and regulations of individual jurisdictions, and such data cannot be used for other purposes without the express permission of the client (while recognizing that providers of financial services can play an important role in helping clients achieve the benefits of establishing credit histories).

But, despite these principles in place for quite some time now, we hear often times the violation of these principles either in totality or partially by most of the MFIs thus adversely affecting  the clients/ borrowers particularly in managing their cash flow and repayment of loans to the MFI concerned. (http://www.cgap.org/p/site/c/template.rc/1.26.4943/)

Off-the hat eight steps

There are some important factors for determining  whether MFIs show better customer-care or not.  Therefore,  MFIs  keeping the CGAP’s client protection principles in view, can do some introspection.

  1. Should understand their customers and prospects in each region (as a number of MFIs are operating from more than one region in India).   The problem of AP was compounded due to the over-crowding of MFIs in one state without doing their  homework whether they could convert business prospects to loyal customers. A few exceptions like Ujjivan (an MFI based out of Karnataka and not operating in AP- an informed and consciously taken decision by the promoter Mr Ghosh) are there who did not get trapped into the AP Crisis syndrome.
  2. Should look at their Mission statement. They should answer some of these questions.  Does the mission and objectives (short/mid/long) contain a customer focus?  As mentioned above, they should do a thorough study to find out whether  it is  easy to convert prospects into customers.  If this is not done, they will hold customers who may not be loyal to the MFI concerned in the long run.
  3. Should know whether they understand the customer’s needs and wants. If so, they should also know as to how they will handle changing customer needs and wants.
  4. Should know whether  the customers are satisfied with the availability and accessibility of the business’s products and services. This is particularly important as we find mushroom growth of MFIs lifting the business models under Grameen approach, JLGs, SHGs etc.,  without understanding the core principles behind each of them. In other words, they appear to have been guided by inflated excel sheet financial projections and lure of getting soft funds from investors both at national and international levels business opportunity – a mirage in reality and misguided mission statements.
  5. Should understand their clients/ customers then they should know whether the  customers find it comfortable to talk the business  with the MFI concerned and use its services. It is also important to know if the MFIs are working on a learning mode which would help them to serve the customer better. On the other hand, if the customers find themselves in a situation educating the MFI concerned each time they get in contact with them, then it will frustrate their hopes.
  6. Since the MFIs are in the business of providing services, they should take extra care to have sufficient personnel to provide the services when the customers need them.  For this, they should be  knowledgeable about the customer and the products/services that the customer is looking for.  They should demonstrate  warmth and be courteous to the customers.
  7. The process of providing services should be simple, well thought out, and meet the needs of the customer.  As emphasized earlier,  there  is need for sufficient visibility into the day-to-day operations so that appropriate changes can be made to meet the changing customer needs.  It should also have sufficient problem resolution procedures in place to handle any problems in a timely and customer satisfying fashion.
  8. Technology  is a double edged sword. More often it is mistaken that it can replace human resources and provide all the solutions. Having said that, technology should be used to capture  market information  for  analysis and synthesization.  It should help in customer communications.

Coda?  Summation

Once,  a technical expert went to a fruit market and observed something like this to  a vendor selling apples: ‘The effects of drospophilla melanogaster proteins on the enzyme activity of polyphenol oxidase from malus pumila.’   All that the expert observed was ‘the effects of browning of apples’ which he could have said straight.   An expert always wants to mystify the communication so that he alone can be called upon to clarify his own technical observations.   Perhaps, the sickness of using hyperboles or terms which are not commonly understood has caught me also!  That is why, in the first instance, I used the term ‘Coda’  as a sub-heading of this paragraph, which simply means ‘Summation’ . To make it simple and in tune with the theme of this paper,  I have struck it and replaced it with the term ‘Summation’.

So, the first and foremost  message is use of simple terms which are customer-friendly so that they will feel more comfortable to deal with the MFI. It is necessary to make most of the communications  between the MFI and the client/ borrower  in a simple and understandable way.  They should also invest considerable time in making the terms of transaction very clear and in a manner comprehensible by their clients.   If these are understood and implemented, it will help in improved relationship and appreciation of the problems of the poor clients and above all, most of the ills of MFIs can be prevented.

[1] Of course, when we google for the citation of the quote, it does not throw any information attributing it to Gandhiji.  But, there is a reference to a similar expression in http://www.llbean.com/customerService/. I have still attributed it to Gandhiji as no denial to this effect has come from Gandhi Ashram, Ahmedabad. Here, emphasis is on the import of the quote.

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