The micro-finance universe in India is
expanding rapidly - both in terms of numbers and volumes of funding. It has
penetrated the under-served and unserved sections of the economy and its
socio-economic contribution is quite apparent. Regulators have begun to sit up
and take notice of this growing source of development and have begun supporting
it by putting in place robust and transparent policy frameworks.
There is another interesting facet of the micro-finance
industry in India today – from a largely ‘not-for-profit’ sector, it has
evolved into a sector with modest returns which, when cumulated over the large
base of prospects, makes the sector completely sustainable. This opportunity
has attracted various multi-national lenders, non-banking finance companies and
private equity firms. In addition to people skills, technology has enabled companies
to bringing down operational costs, enabling greater customisation and
enhancing penetration. And, going forward too, lenders in the MFI space will
have to find the right blend of technology and human interface,while providing financial
solutions to their clients. Effectively, technology has contributedto putting
in place systems and processes that maximise the target borrowers and minimise
the risk.
Nevertheless, as with any other business
involving lending, risks do persist. In fact, the very source of growth – the
rise in the number of clients – theoretically raises the risk. The RBI raising
the cap on indebtedness to a borrower from INR 50,000 to INR 100,000 in 2015
also triggered the potential for greater risk. Most of all, the very premise of
micro-finance - serving vulnerable segments of society - increase the
underlying risk of lending. Ironically, all these factors are the very reasons
why the micro-finance segment is considered a great opportunity. So, in a
nutshell, while risk is an integral part of micro-finance lending, adopting
tried and tested best practices to minimise or at least gauge the risks
involved, enable lenders to take calculated risks.
According to a report by EY,‘Evolving
landscape of microfinance institutions in India’ – (July 2016), over the years,
microfinance companies have devised innovative risk management strategies such
as group lending, turning to innovative ways to garner funds, etc. These
organisations have forged linkages with informal community savings groups to
fill credit gaps left by formal financing bodies, raised funds from large
corporations, tapped into crowd funding, etc. Technology, such as the use of
mobile devices, biometrics, personal digital assistants, etc., has also been
used to transform the microfinance space by helping to reduce costs, improve
efficiency and increase outreach. Combinations of solutions have been used in
various situations, depending on the unique exigencies. However, based on
successfully implemented MFI models from around the world, some of the leading
best practices for flexible risk management systems that have emerged include:
Decentralization:
Developing a culture, which encourages internal controls that delegate adequate
authority to loan officers, enables them to be responsive to client needs. This
requires establishing a culture of trust between the management, financial
intermediaries and borrowers. If instituted, it helps reduce cost of internal
controls.
Effective support system:
In addition to an effective support system of information technology and sound
MIS, risk-monitoring activities must also be supported by systems that provide
senior managers and directors with timely and accurate reports on the financial
condition, operating performance and risk exposure of the institution. These
risk monitoring and MIS activities should be consistent with MFI’s operations.
Culture of training: To
build a competent and loyal employee base, a culture of providing regular
training becomes crucial. It improves efficiency and helps reduce costs.
Openness and client centred
approach: A client-centred approach helps design
products according to the needs of the customer. This approach facilitates the
management of financial/ cash flow risks more effectively as resources can be
allocated on components that help maximize profits.