The Urban Market Potential
By Rachel Bergenfield | Rachel was an intern at the CMF this summer. She is currently an international relations student at Tufts University.

Though nearly 30% of the Indian population lives in urban areas, only 5% of all microcredit in India goes to the urban poor ¹. However, the potential of urban microfinance is huge; the urban population is expected to increase to 50% of the total population by 2030. The Centre for Micro Finance conducted several cases studies on urban MFIs. The case studies revealed that the urban market poses different demands and challenges compared to the rural sector, which probably contributes to the sectors' slower growth. One of the main challenges to urban microfinance is the more transient nature of the urban poor population.

This is a problem in group-lending models in which, essentially, friendship and community membership substitute collateral, while knowledge of the community substitutes for a formal credit rating system. Women in a self-help or Grameen-model group in a small rural village have probably known each other for years, sharing a culture and community. They may spend much of their days together as they are homemakers or employed out of their homes. Since group members share liability to the bank or the MFI and have to, in some way, pay for group members who default on their loans, the entire group suffers if one member does not repay. A defaulter lets down her friends and tarnishes her reputation, putting her "collateral" at risk. Furthermore, many microfinance practitioners consider this social pressure to be one of the strongest mechanisms for encouraging repayment. The group also decides who will be admitted into the groups to receive loans by using their intimate knowledge of each other, collected over lifetimes of living in a close community together. Since urban communities tend to have a more transient population than rural villages have, there is usually less homogeneity of culture in urban communities. Because of this feature, the urban population may also exhibit less of a feeling of community. In such a setting, friendship and community membership are not sufficient substitutes for collateral, as group members probably have less loyalty to the group. Even when there is a strong feeling of community, many urban women do not work only out of their homes, but they instead might work as maids or factory workers.

This would prevent them from having the same degree of knowledge of their friends and community members as most rural women do. Without that level of involvement in each other's lives, the women's knowledge of each other may be an insufficient substitute for a credit rating system used to create groups. Furthermore, in transient populations, women may not live together for long enough periods of time to have adequate information on other community members. Even if all of these conditions were somehow met, urban women may also have less time for group meetings than rural women do as a larger number of them work outside of their homes. The group-lending model is clearly less appropriate in the urban market than it is in the rural market. Given the characteristics of the population—its transient nature and the greater likelihood of women having employment that is not based out of their homes—the need for individual lending may arise very quickly in urban markets. Traditionally, the problem with individual lending is that there is no way to judge the borrower's risk (unless one is a "graduated" group borrower). As this may be the case in the urban market anyway, a credit bureau is needed. Recently, Nachiket Mor, Deputy Managing Director of ICICI Bank told the Economic Times that, in terms of building the urban microfinance sector, "the first step would involve entailing a uniform identification number with a national identity card," which should lead to the creation of a credit bureau.

Bad borrowers would be easily identified as in the formal banking sector, and microfinance could grow more rapidly in urban areas where the group-lending model seems to meet varied success. It would also be feasible for MFIs across the sector to offer individual loans, allowing the best borrowers not to be held back by their groups, which happens when receiving smaller loans and waiting longer periods of time for the loans than is desirable. A credit bureau would also benefit the rural market. Even in a rural setting where a woman has known a friend for years, she may not have the relevant information to accurately judge how likely her friend is to repay a loan or how responsible of a saver her friend is. The benefits outside of the sector would be tremendous as well. Establishing a credit bureau should be a top priority and seen as an opportunity to strengthen the sector. The urban poor are also different from the rural poor in their financial needs. There are more salaried employees amongst the urban poor than the rural poor. Traditionally, microcredit has been for businesses purposes for self-employed women. This excludes poor, salaried women who might still need a supplement to their meager income to make housing repairs, send children to school, or even to get vocational training. More flexible loan products are needed. This would require a serious restructuring of financial products and marketing strategies for many MFIs. Some progressive MFIs have introduced loan products with this greatly needed flexibility in order to better suit the urban environment.

Ujjivan, a new MFI targeting the poor in Bangalore slums—and one of the MFIs that CMF conducted a case study on—offers a loan specifically for families needs. This is an important product for salaried clients, as it can be used for needs such as education, weddings, or for paying existing debt to money lenders. The MFI also offers a business loan; but, noting the difference of type of employment in urban areas, this loan can be used for more indirect business purposes such as vocational training after just two loan cycles. Ujjivan's unique products and structuring according to the specific needs of the urban poor has attracted international support from the Michael and Susan Dell Foundation and Unitus Enterprise Limited. Hopefully, the needs of the urban poor will provide the extra incentive to improve the sector as a whole. The creation of a credit bureau, greater flexibility in loan products, according to the needs of the clients, would benefit investors, practitioners and borrowers. Reaching the Other 100 Million Poor in India: Case Studies in Urban Microfinance is a series of case studies conducted by the CMF with six prominent MFIs operating in urban areas. The studies sought to identify innovative practices among these institutions, examine the array of financial services offered to the urban poor, and discuss the challenges and opportunities that remain in urban microfinance. They provide an in-depth look at each MFI and at how these MFIs integrate a strategic approach to business and economic development going forward. The authors wish to thank Ujjivan, SEWA Bank, Working Women’s Forum (WWF), Indian Bank’s Microsate Branch, Village Welfare Society (VWS), and Sharada’s Women’s Association for Weaker Sections (SWAWS) for their kind cooperation and participation in this study, and CARE India for publishing these case studies.

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