I just came back from India where I visited some current clients and prospects, mostly from the Microfinance space. The industry in India is evolving quickly, and I have hard time catching up even if I try to visit the country once every two months. One constant thing however is the Joint Liability Group (JLG) meetings, whereby a group of five women guarantee each others’ loans. They are quite similar from one institution to another but I find it important to visit and attend, as it can reveal some interesting insights about the organisation and the capabilities of the company. Of course, as an investor, you are often brought to the most sophisticated branches (and meetings) so keep this in mind when drawing your conclusions. Below are the most important points to watch:
– the attendance: JLG meetings tell you much about the involvement and commitment of the clients. If the loan officer expects 25 persons and only 10 show up, that is a big warning signal to take note of. That usually means that clients are not educated enough about the required repayment schedule (and discipline), or they are not really interested in staying committed to the existing and coming loans. An MFI that cannot ensure well attended meetings can be seen as unable to engage with its clients and to retain them: a bad signal.
– the size: the size of a group gives you sense on the overall business and productivity in that area. An over-crowded group might mean that the market is there but that the loan officer is pushed to get a large number of clients, often overwhelming for the staff as well as for the group. A small size is not negative per se, but might raise questions about the attractiveness of the market and the efficiency of the organisation.
– the composition of the group: you can ask the loan officer to translate the questions to the group, to better understand their motives, issues etc. You can ask simple questions such as : “how many of you are with this MFI for more than two years?”, “how many have loans from other MFIs?”, ” how many are using the current loan for education or housing purposed?”. Clients raise hands and you just have to count, allowing you to get an idea ( 50% are new clients, 30% use it for business purpose etc.)
– the logistics: A JLG meeting is also an opportunity to see how the MFI is collecting money. Is it using sophisticated procedures (smart cards, tablets) or is relying on an old school notebook? Are clients getting proper receipts? Is the meeting well-run and efficient?
– the loan officer: It is usually the only time you will directly interact with a loan officer. Take advantage of it! Ask him about how long he has been with the MFI, his main challenge, the type of (or lack of) support he is getting from his management etc. Look at how he behaves with the clients. Does he ask them to bring in more clients? Does he cross sells other products? Does he properly address their questions?
I usually leave the group visit for the middle or the end of my due diligence. It is kind of an “acid-test” of all the comments and claims heard from the CEO, the CFO and the senior management. Do not dismiss it, thinking that you have seen it all or that you know how the group lending functions. Take the time to attend at least one, and I hope this post will help you identify some more inputs for your investment decision!