Friday, September 10, 2004

Centralised knowledge base helps in mitigating overall business risks in the economy

SERASA, established in 1968, is the largest information data base on credit, economic-financial and social data from Latin America, particularly Brazil.

The important institutional characteristics of SERASA are:
• Model of cooperation with competitiveness;
• Ownership rests with 83 financial institutions;
• Has data available on all the companies legally established in Brazil - about 8.6 millions;
• Networks with different institutions to continuously upgrade the data-base;

SERASA offers diverse products:
• Credit Bureau Serasa - Credit data on over 100 million people at national level;
• Business Behavior Report - System of commercial information which covers payment habits, commitments and defaults with banks;
• Credit and Analysis Report - In order to support credit and business decisions;
• Other services customized for specific client groups.

Strengthening microfinance in India

India’s microfinance market presents a great opportunity to the financial sector due to its large underserved population seeking financial services. It is estimated that the annual demand of microcredit loans (which are characterized by high repayment rates) is nearly equal to Rs 50,000 Crore. Over the past 10 years a significant number of NGOs have entered microfinance with an objective of taking financial services to the poor. The number of such initiatives is estimated to range between 600-800. Initially many NGO microfinance programs were funded by donor support in the form of revolving funds and operating grants. In recent years, these initiatives have been supported by developmental financial institutions such as NABARD, SIDBI and microfinance promotion agencies such as RMK, which have provided bulk loans and capacity building grants. Lately commercial banks (with ICICI bank taking lead) have also partnered with NGOs and MFIs to provide microfinancial services.

The gap that exist between the demand for microfinance services and supply of such services remains huge despite a new thrust in the policy of banks and development financial institutions to channelise funds into the micro finance sector. Against an estimated annual demand of Rs 50,000 Crore per year, the supply is estimated to be not more than Rs2000crores.

While, successful microfinance initiatives such as Share Microfin Limited, SKS Micro Finance, Spandana, Basix, Cashpor, SHG linkages of some banks etc have demonstrated that it is possible to provide sustainable and profitable financial intermediation services to the poor, however these examples that have managed to grow at a fast pace and have been able to reach sustainability and finance growth are limited in number.

The successes of these initiatives have established that the practice of group based microfinance can lead to the creation of high quality assets, even in the absence of physical collateral, in the financial sector, provided:
• High quality is ensured for microfinance groups so that there is a strong group feeling which leads to a credible “social-collateral”;
• Groups are trained well and are capable of ensuring financial discipline;
• Continuous monitoring, follow-up and reporting is ensured.

Mainstream financial institutions have mostly partnered with NGOs/MFIs to provide financial services to the poor. As stated above banks and Development Financial Institutions have either lended to the NGOs/MFIs to on-lend to the poor or have taken their help for linking up with SHGs. A number of financial NGOs have come up with the objective of facilitating the flow of banking sector funds to the poorer sections of the society. While this has increased outreach and access of financial services, however, most of these initiatives are unregulated entities, with limited institutional capacities to undertake financial services.

On the other hand a few microfinance institutions such as SHARE, Spandana and SKS have witnessed phenomenal growth of nearly 100% in the past two years. While this provides evidence of the sector’s growth potential, it also raises some important questions. Most of the MFIs that have shown high growth are located in south Indian states of Andhra Pradesh and Tamil Nadu. There has been an increase in competition for commercial sector funds as well as competition for clients among MFIs operating in the same geographical areas.

The risks in such a scenario are manifold:
• Misutilisation of funds meant for microfinance;
• Creation of bad assets due to ineffective screening and monitoring;
• Risk of frauds;
• Compromise on the quality of JLGs/SHGs;
• Covariant and systematic risks arising from geographic concentration;
• Opportunistic behavior by NGOs/SHGs – borrowing from one institution to repay another and hiding delinquency.

Any of these risks can seriously hamper the credibility of the nascent microfinance industry in India. Thus, the question that the sector faces today is – How can microfinance in India be bolstered? Within this context exploring the following alternatives become imperative:

1. Creating a set of shared performance indicators for monitoring of MFIs and SHGs, so that the overall risk in the sector is brought down
A possible solution could be having a set of performance indicators for MFIs and SHGs in the public domain. This could be facilitated through the formation of a collective microfinance information center, which has indicative data on the performance of MFIs/NGOs and even SHGs accounts with banks and other financial institutions. Such an initiative could substantially improve the risk profile of the microfinance sector, and also help banks/financial institutions in appropriately pricing their loans. The experience of SERASA, Brazil is an enlightening example of a credit information exchange.

2. Building a network of mentor institutions for the MFI sector which can help the smaller MFIs in evolving the right processes and systemsMany microfinance initiatives start as neighborhood entities which are efficient in their operations. However, as their clientele increases, so does the demand on their internal technological, technical and managerial capacities. In the absence of required systems, these entities find it hard to control the portfolio. This often results in a steady decline in the quality of the microifinance portfolio and impedes sustainability. Having a network of mentors can help these institutions in increasing their institutional capacities to serve a larger clientele and benefit from the economies of scale.

3. Investing into the microfinance sector to develop appropriate delivery structures through an incubation fundSome banks have also taken initiatives to partner with MFIs and SHGs in developing innovative credit delivery mechanisms for the poor. In the present context the banking sector seems constrained by a lack of appropriate delivery structures. However, the number of MFIs which have achieved a reasonable scale of operations, and which have evolved sufficient systems to utilize banking sector funds are few. In the present scenario It is important to develop more delivery structures to provide financial services to the underserved parts. Start up microfinance initiatives have found it increasingly difficult to develop capacity, and identify resources so that they reach sustainability. A fund that provides risk capital for such initiatives to reach an economic size of operations, can lead to an increased provision of financial services to underserved areas.

Indian Microfinance Market: Some Snippets

• The present outreach of all microfinance initiatives in India in terms of cumulative clientele (households) is estimated at 28 million (2.8 Crore) households.
o Cumulative reach of MFIs is close to 12.5 million (1.25 Crore) poor households;
o The NABARD microfinance programme is estimated to reach 16 million (1.6 Crore) households in March 2004;
• Cumulative disbursement under all microfinance programs is estimated at around Rs5000 Crores, (disbursement under NABARD’s programme alone was over Rs 3,500 Crore (on March 2004);
• Annual outstanding of all microfinance initiatives in India is estimated as being around Rs1240 Crores for the financial year ending March, 2003;
• Vyas committee’s interim report finds that the number of new SHGs formed has been growing by nearly 20% annually;
• If a compounded annual growth rate of 20% over the next five years is achieved, the cumulative clientele that has actually accessed financial services through MFIs would exceed 30 million (3 Crore) households by the year 2009
• If another 30 million (3 Crore) retail clients (households) can be reached by the banking network, a significant proportion of the poor population would have access to institutional finance.

Experience of Bolivia in microfinance

The Bolivian microfinance sector started sending distress signals in 1999. Delinquency had begun to rise, and there was discontent among microfinance clients. Small Debtors’ Associations were formed in various parts of the country. The leaders of these associations promised borrowers waiver of their debts – principal and interests. These associations organized increasingly violent demonstration and protest marches directed against financial entities, including MFIs, banks and consumer credit entities, and accused them of abusive and humiliating practices against borrowers. What went wrong?

The sector had undergone a period of rapid growth during the decade of the 90’s. Microfinance Institutions (MFIs) in terms of number of clients, size of their portfolio and level of outreach had grown at an accelerated pace, reaching a boom between 1997 and 1998. This period had been characterized by a commercial vision with regulation, profitability, and competition being the key elements. The choices available with microfinance clients had increased. On the one hand, some commercial banks included microcredit products in the services they offered, and on the other hand, consumer credit Private Financial Funds (PFFs) started providing credit services to micro entrepreneurs.

Microfinance providers, faced with several competitors with the entry of new stakeholders into the microfinance industry came under increasing pressure to grow and be even more profitable to meet the expectations of their shareholders. The pressure to disburse credits, to grow and be profitable, lead to inadequate evaluation of client’s repayment capacity and to an inappropriate risk evaluation. As a result, the gradual rating credit principle was adversely affected, decreasing control of the behavior of the client and his/her real repayment capacity. Furthermore, in some cases the amounts of the loans were increased in a percentage that was much higher than the client’s indebtedness capacity and the “zero tolerance” rule regarding arrears was abandoned. To maintain their market participation and fulfill their growth projections, many MFIs set forth unrealistic disbursement objectives, further increasing the pressure on credit officers. At that time, many of these institutions had greater access to sources of refinancing, which encouraged less caution in the disbursement of loans.

As a result the quality of assets generated in the microfinance sector steadily declined. Between 1995 and 2001, the level of arrears increased for all the players in the microfinance sector. The Banks and Financial Entities Superintendence (BFES) Financial Bulletin reported that banks and institutions serving the microfinance market had an average ROA of -0.4% in 2001-2002, as against 0.6% in 1995-96. Most alarmingly, the number of clients decreased by 18% between 1998 and 2001.

The image of the microfinance sector in Bolivia was also damaged by the protests and claims of debtors associations. The accusations against financial institutions, and the perception that interest rates were too high, led to a “satanization” of the sector, overlooking its contribution to the economic development of the country in recent years.