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“We need to revisit our relationship with microfinance clients”-N Srinivasan

Microfinance Focus — Tue, 20 Jul 2010 12:38:08 +0000

By Asma Azmi,

Microfinance Focus, July 20, 2010: Mr. N Srinivasan, author of the series of the books ‘Microfinance in India: State of the Sector Report 2008’ is a development economist and a career development banker. He served National Bank for Agriculture and Rural Development (NABARD) for over two decades of which the last six years was in the capacity of Chief General Manager.

N Srinivasan

After leaving the bank, he is pursuing a career as a freelancer and has been a consultant to World Bank, IFAD, UNDP, UNOPS, GTZ, Frankfurt School, Sir Ratan Tata Trust, Access Development Services and Government of India. A postgraduate in economics from Madurai Kamaraj University, he also has a certificate in training and development from the University of Manchester.

In a talk delivered at Grameen Financial Services, Bangalore, Mr. Srinivasan delved into the current state of Indian microfinance sectors and some of the inadequacies that have crept into the system since it began its journey. He pointed out that the assumptions with which microfinance institutions began their journey got lost somewhere in the process of achieving growth targets causing a deviation from the original mission.

“The ability to establish values that are so central to microfinance depends on how the last person is trained and the process need to be designed in such a way that those who are dealing with the clients are conscious of the MFIs mission and not just chasing the targets”, he said.

Expressing his concern over the increasing commercial investment in microfinance, Mr. Srinivasan said, “With the growing commercial investment there is a conflict between the original values of the microfinance organization and expectations of a diversified range of investors. The challenge is to mitigate their expectations with the realities of a socially driven business”. “The desire to grow fast and expand in different geographies have created problems for promoters who still want to retain their values but are in need of large equities”, he added.

Competition, in his view has brought a change in the dynamics of microfinance institutions in a large number of locations. Aspirations of the borrowers have increased and the chances for setting in of good financial behaviour on their part is extinguishing. We are thus seeing a growing default rate.

He feels the processes that MFIs have today, do not capture adequately the ability of a customer to service a loan. An enquiry into why the customer wants a larger loan and will he be able to generate enough income from it is to be made. The present system of acquiring a customer and taking a credit decision possibly needs to undergo a change in his opinion.

Multiple borrowing has also made weekly meetings an imposition on borrowers and many places have reported regular payments without borrowers actually attending these meetings. Awareness about the customers and familiarity with them is thus fading away. He points out that a deep involvement with the customer, knowing what the customer is doing for a livelihood probably itself is a risk mitigant and we need to have some sensivity towards our clients.

Speaking on the socially performing aspect of microfinance institutions, he said, “We cannot have multiple bottom lines and look at them simultaneously, there are priorities attached to each one of these. Impacting socially is about having all our processes directed towards serving the real poor. We need to make sure that we are giving a chance to the real needy person to borrow from us. The process we have like weekly meetings, imposing of security on group members, the recovery methods etc. they all have certain exclusionary impact on the borrowers and need to be reworked upon”.

“No player in the financial sector has 100% recovery rate and if one does have zero default then most of the times it is by unfair means and against human behaviour. We should have enough information about people who voluntarily default and people who are not able to pay because of reasons beyond control. We need to create fall back mechanisms to reschedule loans and recovery for hard-hit customers” he added.

Emphasising on the importance of understanding microfinance clients, Prof. Srinivasan said, “We need to revisit the strength of our relationship with our customers. We need to invest in our grievances systems. We should not wait for grievances to come in, rather must find it before hand and bring changes in our systems. There is a need to invest more in understanding the real demand in whichever location we go and do an assessment of what the customer wants. We must diversify our offerings according to the need and requirements of the customers.”

Given the intense competition the industry is witnessing, some of the future challenges he highlighted include, multiplicity of suppliers and borrowers, availability of equity, carrying capacity of regions and alignment technology with the accounting systems of microfinance institutions. He felt that though MFIs have come a long way in becoming transparent, there is still scope for transparency to improve in larger MFIs. He also stressed upon the fact that local politicians should be kept in the loop and good rapport should be established with them for preventing a Kolar like situation to happen again.Related Posts:

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How to assess the real strength of a microfinance institution?

Microfinance Focus — Sat, 22 Aug 2009 09:55:27 +0000

David MacDougall, Director of Risk Management, BlueOrchard

Microfinance Focus, Aug. 22, 2009: There have been startling losses in microfinance institutions that have wandered too far from their original microfinance mission due to fierce competition or of profit-minded management, writes David MacDougall, Director of Risk Management at Swiss microfinance fund manager BlueOrchard.

Servicing traditional microfinance clients is expensive because loan sizes are small and the number of people required to service clients. But it was caried out with a goal and motivation. When competition deters the MFI from charging higher interest rates and absorb losses more frequently, it leads to higher loses, explained MacDougall in an article written for the August issue of Microfinance Focus magazine.

“I’ll admit that I have my own spreadsheet full of ratios; however, I principally use them to gauge trends. Often the levels they indicate have limited meaning, and analysts must understand when they do and when they don’t. A key consideration is whether the institution is mission-driven, rather than profit-driven. Many MFIs are non-profits or at least not profit-maximizers. They often charge just enough to cover their expenses and build the portfolio,” he wrote.

MacDougall, who was formerly an Executive Director of the ASA Foundation, a microfinance organisation in Bangladesh that focuses on providing technical assistance, said ASA’s operational self-sustainability dropped from 240% in 2006 to 185% in 2007. “Far from being an indicator of weakness, this reduction was the result of the management’s decision that it was making more than enough to meet its growth needs. So it lowered lending rates,” he noted.

RISKS AND REWARDS
There are many forms of support available to MFIs which they are unable to maximize, he said. A broad array of aid agencies and philanthropic investors are ready to help institutions that can make a difference in under-privileged communities. Such institutions often tend to take care and mitigate the risk factor in their portfolio, which investors should assess.

But in case of an MFI that failed to fully hedge its foreign exchange risk, the crisis turned this error into an emergency for the MFI. With a large portion of its equity gone, lenders could have accelerated the loans and forced the MFI into bankruptcy. The situation forced lenders and networks to look for ways to find ways to get the MFI through the rough patch because its record of providing services to a large number of very poor women was excellent, said the director of risk management at Blue Orchard.

NOT IN SPREADSHEET
Finally, the MFI’s key strength – its management – will surely not be found in a spreadsheet. Managing a MFI requires leaders with a rare combination of skills. Amongst other things, they must have a thorough understanding of their immediate environment while keeping sight of the wider financial context, and they must be quick to adapt to any changes. They have to train staff to the peculiar business of microfinance and reaching out to clients who may have only the most limited understanding of managing their finances, said MacDougall.
At the same time such leaders must communicate transparently with aid agencies and philanthropic or commercial funders. “In brief, those looking to gauge the viability of MFIs must set aside their sophisticated models and focus instead on understanding the activities, context and management of a MFI. They must acknowledge that strengths in these areas can see a MFI successfully through troubled times and lead it to flourish,” he commented.

A spreadsheet with numerous ratios and graphs serves as the standard tool. Unfortunately, such efforts can lead to erroneous conclusions because their focus isn’t wide enough. The answer isn’t in the spreadsheet. The fundamental strengths of MFIs lie in the nature of their business itself. International enthusiasm for microfinance was inspired by the fact that MFIs offer an essential service where main-stream banks will not provide it: they grant credits, the possibility to save money and other financial services to those previously excluded.
While MFIs face a host of challenges, their socio-economic mission endows them with special advantages. “We should expect MFIs to succeed where they continue to operate in underserved markets. Analysts should therefore examine whether an MFI’s mission and programs focus on traditional microfinance or not,” advised the author who was a consultant at Deutsche Bank working on microfinance and other innovative socially responsible investments before joining BlueOrchard.

(Disclaimer : The opinions expressed in this report are based on an article by the author and they do not necessarily reflect BlueOrchard’s views.)