Challenges faced by Microfinance Microfinance Institutions
Milton Friedman once said that "the poor stay poor, not because they're lazy, but because they have no access to capital." Till date, a huge section of population remains outside the formal banking system. Microfinance institutions are the only ones equipped to reach the 'unbankable' or 'unbanked' masses, and make financial services accessible to them.
Requirements and challenges faced by Microfinance institutions:-
Microfinance institutions serving retail customers have to face quite a specific set of challenges, hich cannot be addressed ith solutions meant for commercial banks. These challenges challenges include! •
Cost of outreach - reaching the unbanked populations of the orld means
servicing small loan amounts and servicing remote and sparsely populated areas of
the planet, hich can be dangerously unprofitable ithout high rates of process automation and mobile delivery.
•
Lack of scalability - smaller microfinance systems often struggle to
preserve the profitability and performance in these markets, as F's e#perience high groth rates that result from getting the service delivery right. This results in tharting the groth of these organizations.
•
Quality of SHs !Self Hel" rou"s# - $ue to the fast groth of the %&(
)ank *inkage +rogramme, the quality of MFs has come under stress. This is due to various reasons such as! The intrusive involvement of government departments in promoting
o
groups $iminishing skill sets on part of the MFs members in managing their
o
groups. o
hanging group dynamics.
•
eogra"hic $actors - -round /0 of MFs agree that the eographic
factors make it difficult to communicate ith clients of far(flung areas hich create a problem in groth and e#pansion of the organization. •
%i&erse business models - %upporting the very ide range of features and
lending activities is difficult and requires a considerable amount of cost and efforts. •
High 'ransaction Cost - &igh transaction cost is a big challenge for
microfinance institution. The volume of transactions is very small, hereas the fi#ed cost of those transactions is very high. •
()C and security challenges * The customers serviced by Microfinance
instructions are usually the ones having none or very limited official identification or able to provide tangible security, this makes it e#tremely difficult for institutions to offer any banking services. •
Limited budgets * Making provisions for large upfront investments is not
possible for most of the MFs hich limits their capability to purchase orld(class banking solutions that can help them fulfil their requirements and support their groth targets. 1o doubt, microfinance institutions have shon impressive groth and have been instrumental in the cause of financial inclusion, but a lot remains to be achieved. Solutions for Microfinance sector
1elito's Finraft Microfinance %olution is an integrated banking softare solution for microfinance institutions 2MFs3, active in both group and individual microfinance lending. t provides MFs ith orld(class banking capabilities that usually are only accessible to larger commercial banks ith significant T budgets. ts -gency4$oor%tep )anking feature helps agents to do various banking activities on the field such as ustomer 5n()oarding, transactions, collecting daily deposits, 6M collections hich ere earlier limited to branch netorks. 5ther modules like %elf(&elp group help in managing the complete lifecycles of %&'s.
The 7eserve )ank of ndia conducted the first survey of rural indebtedness i.e. -ll ndia 7ural redit %urvey in 89:;. The survey revealed the truth that landlords andother informal moneylenders met more than 9/0 of rural credit needs. The banks share as only about 80 in total rural household debt. The ratio kept on lo until 89;8 hen it as <.:0.&oever the cooperative banks played a vital role to increase the share of formal sources of credit in rural areas up to <90. The %ituation -ssessment %urvey 21%%5, 9.= million farmer households in the country, >: percent 2;?/ million3 householdsere small and marginal farmers and more than half 2?8.: percent3 of the total households
ere
non(indebted.
Further, out of the total :=.:
million
indebtedhouseholds, percent3 households had availed financial servicesfrom informal sources. The 1%%5 survey of farmer households for 9.= million households do not access credit either from institutional and noninstitutional sources. Further, only <; per cent of the total farm households areindebted to formal sources@ in other ords ;/ per cent of the farmhouses do nothave access to formal credit sources. )anking data reveal that credit e#clusion is severe in 8=9 districts of the country. n these districts, only 8/ per cent or less out of 8// persons have access to credit from the fact that the e#clusion is large, there is also a ide variation across regions, social groups and asset holdings. The poorer the group, the greater is the e#clusion 27angaraAan,
rates cannot be afforded by the core poor given their lack of complementary inputs. n other ords, despite having a smaller amount of capital, marginal returns to the core poor may be loer than for the happier poor. The high interest rates ill bring the result of either not taking up the Micro financial services or if taking it up then get into financial difficulties.osts are highly variable in rural areas. $epending upon the nature of the relationship beteen borroer and lender, interest rates range from interest free loans to high interest rates loans. 7elationships range from relatively equitable relations. n some cases omen may be charged higher interest rates than men and4or offered other less beneficial conditions hich may also include se#ual harassment and highly e#ploitative arrangements for domestic service.n mutual relationships interest rates on loans may be very high in order to earn more money. n this manner, limited reach to affordable Micro financial services such as savings, loan and remittance by the large portion of rural population is believed to be acting as a restriction to the groth stimulus in these sectors. -ccess to affordable Micro financial services develop living status and empoers the underprivileged people to take charge of their lives. The empoerment so gained ill assist social and political stability. Be cannot say that micro financial services have ability to provide better services than conventional banking services and carry out the needs of the dontrodden people. The important factor is that e#ternal Micro financial services should Aoin hand to the running
system of lending and4or borroing money in rural areas instead of eAecting or displanting them. %everal ays are there for motivating and inspiring informal Micro financial services orking ith informal sector providers to boost their capital, enhancing efficacy and e#panding contacts to poor people for the improvement of services they provide and cut the prevailing high interest rates. n this ay the poor people especially omen ho require the fund to run their business and household activities in an efficient manner ill be benefitted more. The above stated system of money lending and borroing hoever problems of degree of savings security and various types of their deposits. )ut private micro financial service providers generally offer good levels of security. %econd thing is accessibility to very poor or especially dontrodden people. -ccess of Micro financial servicesto these people is not satisfactory. ore poor have very less approach to the services. Third is Fle#ibility of funds. enerally money lenders provide fle#ible services but other sources of funds may be less fle#ible. Fourthly,pervasive corruption is a concern for the empoerment of poor people. The society ill ith this type of problem cannot stand in a progressive mood. t is a serious problem in the societyhere different types of patronage and bribery are e#torted to get access to funds sanctioned for poverty alleviation.$iverse discrimination is also there distinctively against omen and dontrodden people. Fifth is carelessness and inefficiency in delivery of these services. *oans and other
services are transferred at the rong time and granted only for specific purposes. The last problemfrom the angle of donors is sustainability.Micro financial services have been very often subsidized and payments of loan installmentshave generally been very lo.t is a problem of the costs of delivery to very poor people. The banking industry has shon tremendous groth in volume and comple#ity during the last fe decades. $espite making significant improvements in all the areas relating to financial viability, profitability and competitiveness, there are concerns that banks have not been able to include vast segment of the population, especially the underprivileged sections of the society, into the fold of basic banking services 2Thorat,
Role+ $unctions and ,orking Mechanism of $inancial Institutions ICICI ank
Cs microfinance portfolio has been increasing at an impressive speed. From 8/,/// microfinance clients in billion 2D%E<<; million3. - fe years ago, these clients had never been served by a formal lending institution. There is an increasing shift in the microfinance sector from grant(giving to investment in the form of debt or equity, and believes grant money should be limited to the creation of facilitative infrastructure. Be need to stop sending government and funding agencies the signal that microfinance is not a commercially viable system‖, says 1achiket Mor, 6#ecutive $irector of )ank. -s a result of banks entering the game, the sector has changed rapidly. There is no dearth of funds today, as banks are looking into MFs favorably, unlike a fe years ago‖, says +admaAa 7eddy, the 65 of one of )ankCs maAor MF partners, %pandana.
.artnershi" Models
- model of microfinance has emerged in recent years in hich a microfinance institution 2MF3 borros from banks and on(lends to clients@ fe MFs have been able to gro beyond a certain point. Dnder this model, MFs are unable to provide risk capital in large quantities, hich limits the advances from banks. n addition, the risk is being entirely borne by the MF, hich limits its risk(taking. 'he M$I as Collection /gent
To address these constraints, )ank initiated a partnership model in
-nother ay to enter into partnership ith MFs is to securitize microfinance portfolios. n 0 of the receivables under the portfolio, by ay of a lien on fi#ed
deposit. This deal frees up equity capital, alloing %&-76 to scale up its lending. 5n the other hand, it allos )ank to reach ne markets. -nd by trading this high quality asset in capital markets, the bank can hedge its on risks. eyond Microcredit
Microfinance does not only mean microcredit, and does not limit itself to lending. Cs %ocial nitiative roup, along ith the Borld )ank and *ombard, the insurance company set up by and anada *ombard, have developed ndiaCs first inde#based insurance product. This insurance policy compensates the insured against the likelihood of diminished agricultural output4yield resulting from a shortfall in the anticipated normal rainfall ithin the district, subAect to a ma#imum of the sum insured. The insurance policy is linked to a rainfall inde#.
'echnology
5ne of the main challenges to the groth of the microfinance sector is accessibility. The ndian conte#t, in hich ;/0 of the population lives in rural areas, requires ne, inventive channels of delivery. The use of technologies such as kiosks and smart cards ill considerably reduce transaction costs hile improving access. The )ank technology team is developing a series of innovative products that can help reduce transaction costs considerably. For e#ample, it is piloting the usage of smart cards ith %ea )ank in -hmedabad. To ma#imize the benefits of these innovations, the development of a high quality shared banking technology platform hich can be used by MFs as ell as by cooperatives banks and regional rural banks is needed. is strongly encouraging such an effort to take place. Bipro and nfosys, (Fle#, =infotech, some of the best ndian information technology companies specialized in financial services, and others, are in the process of developing e#actly such a platform. -t a
recent technology orkshop at the nstitute for Financial Management 7esearch in hennai, the )ank -lternate hannels Team presented the benefits of investing in a common technology platform similar to those used in mainstream banking to some of the most promising MFs.
'he Centre for Microfinance Research
bank has created the entre for Microfinance 7esearch 2MF73 at the nstitute for Financial Management 7esearch 2FM73 in hennai. Through research, research(based advocacy, high level training and strategy building, it aims to systematically establish the links beteen increased access to financial services and the participation of poor people in the larger economy. The MF7 7esearch Dnit supports initiatives aimed at understanding and analyzing the folloing issues! impact of access to financial services@ contract and product designs@ constraints to household productivity@ combination of microfinance and other development interventions@ evidence of credit constraints@ costs and profitability of microfinance organizations@ impact of MF policies and strategies@ peopleCs behavior and psychology ith respect to financial services@ economics of micro(enterprises@ and the effect of regulations. Finally, the MF7 recognizes that hile MFs aim to meet the credit needs of poor households, there are other missing markets and constraints facing households, such as healthcare, infrastructure, and gaps in knoledge. These have implications in terms of the scale and profitability of client enterprises and efficiency of household budget allocation, hich in turn impacts household ell(being. The MF7 Microfinance %trategy Dnit ill address these issues through a series of orkshops hich ill bring together MF practitioners and sectoral e#perts 2in energy, ater, roads, health, etc3. The latter ill bring to the table knoledge of
best practices in their specific areas, and each consultation orkshop ill result in long(term collaboration beteen ith MFs for implementing specific pilots
andhan
)andhan is orking toards the tin obAective of poverty alleviation and omen empoerment. t started as a apacity )uilding nstitution 2)3 in 1ovember ; crores among almost ; lakh poor omen. *oan outstanding stands at 7s. <<8 crores. The repayment rate is recorded at 99.990. )andhan has staff strength of more than <8=/ employees.
1"erational Methodology
)andhan follos a group formation, individual lending approach. - group of 8/(
J *andless and asset less omen J Family of ? members ith monthly income less than 7s. <,?// in rural and 7s. =,?// in urban
J Those ho do not on more than ?/ decimal 284
The first loan is beteen 7s. 8,/// K 7s. ;,/// for the rural areas and beteen 7s. 8,/// K 7s. 8/,/// for the urban areas. -fter the repayment, they are entitled to receive a subsequent loan hich is 7s 8,/// ( ?,/// more than the previous loan. Ser&ice Charge
)andhan charges a service charge of 8<.?/0 flat on loan amount. )andhan initially charged 8;.?/0. &oever from 8st Huly
The various features of the monitoring system are! J - = tier monitoring system K 7egion, $ivision and &ead 5ffice J 6asy reporting system ith a prescribed checklist format J -ccountability at all levels post monitoring phase J ross( checking at all the levels J The management team of )andhan spends 9/.//0 of time at the field Liability structure for Loans
Bhen a member ants to Aoin )andhan, she at first has to get inducted into a group. -fter she gets inducted into the group, the entire group proposes her name for a loan in the 7esolution )ook. To members of the group along ith the memberCs husband have to sign as guarantors in her loan application form. f she fails to pay her eekly installment, the group inserts peer pressure on her. The sole purpose of the above structure is simply to create peer pressure.
rameen ank
The rameen Model hich as pioneered by +rof Muhammed Lunus of rameen )ank is perhaps the most ell knon, admired and practised model in the orld. The model involves the folloing elements. I &omogeneous affinity group of five I 6ight groups form a entre I entre meets every eek I 7egular savings by all members I *oan proposals approved at entre meeting I *oan disbursed directly to individuals I -ll loans repaid in ?/ instalments The rameen model follos a fairly regimented routine. t is very cost intensive as it involves building capacity of the groups and the customers passing a test before the lending could start. The group members tend to be selected or at least strongly vetted by the bank. 5ne of the reasons for the high cost is that staff members can conduct only to meetings a day and thus are occupied for only a fe hours, usually early morning or late in the evening. They ere used additionally for accounting ork, but that can no be done more cost effectively using computers. The model is also rather meeting intensive hich is fine as long as the members have no alternative use for their time but can be a problem as members go up the income ladder. The greatness of the rameen model is in the simplicity of design of products and delivery. The process of delivery is scalable and the model could be replicated idely. The focus on the poorest, hich is a value attribute of rameen, has also made the model a favourite among the donor community. &oever, the rameen model
orks only under certain assumptions. -s all the loans are only for enterprise promotion, it assumes that all the poor ant to be self(employed. The repayment of loans starts the eek after the loan is disbursed K the inherent assumption being that the borroers can service their loan from the e#(ante income.
S(S Microfinance
Many companies say they protect the interests of their customers. Gery fe actually sit in dirt ith them, using stones, floers, sticks, and chalk poder to figure out if they ill be able to repay a E
They collect standard repayments in round numbers of
learned in the field during the eek. They have shortened the training time for a loan officer to < months though the average time taken by other industry players is :( months. =. 3se 'echnology to reduce costs and limit errors- t could not find the softare that suited its requirements, so it they built their on simple and user friendly applications that a computer(illiterate loan officer ith a 8 |
nstead of asking illiterate villagers to describe their seasonal pattern of cash flos, they encourage them to use colored chalk poder and floers to map out the village on the ground and tell here the poorest people lived, hat kind of financial products they needed, hich areas ere lorded over by hich loan sharks, etc. They set peopleCs tiny eekly repayments as lo as E8 per eek and health and hole life insurance premiums to be E8/ a year and
ts payoff comes from high volumes. They are groing at
.
