The Year That Was For Indian Microfinance

The year 2006 has been unique for the microfinance sector.

Dr Muhammad Yunus and Grameen Bank were awarded the Nobel Peace Prize. Time magazine named Dr Vikram Akula, founder of SKS as one of “The People Who Shape Our World”. These awards/recognitions reflect, once again, the expectations that the world has from microfinance and the extent to which microfinance has fulfilled these expectations.

In the Indian context, 2006 was an intriguing year for microfinance. The years preceding 2006 had witnessed a rapid growth in the portfolios of Indian MFIs. This had been made possible by an increasing “market” view of microfinance – the idea that the “bottom of the pyramid” indeed constitutes a worthy clientele gained wider acceptance.

While these years had been characterized by exuberance and confidence, there was also a line of thought that advised caution – the institutional capacities of many MFIs may not have kept pace with the rapid scaling up of their portfolios. Also, the business of microfinance had drawn an occasional criticism for being exploitative.

Things appeared to be taking a turn for the worse towards the start of the Financial Year 2006. There were public complaints of misbehavior and malpractices against two of the largest microfinance institutions (MFIs) operating in Andhra Pradesh. It was reported that incriminating evidence of questionable practices such as blank papers bearing client signatures had been uncovered.

Andhra Pradesh has led the growth of microfinance in India by far. It was only natural that the sector as a whole in India was affected. There were suggestions that the MFI channel was too costly for the poor and that interest rates need to be regulated. The need to put a uniform regulatory mechanism in place was felt. However, these events in Andhra Pradesh complicated matters even more.

At this juncture, microfinance practitioners in India faced quite a few questions that had no easy answers.

1. Is there deterioration in the loan assets as an MFI grows?
2. Is it acceptable for an MFI to have a profit motive?
3. Does a profit motive necessarily degenerate into exploitative tendencies?
4. Is it possible that profit motive could give rise to a healthy competition among MFIs to provide better services to the poor?
5. What is the perception regarding the interest rates charged by microfinance institutions?
6. What would be reasonable interest rate?
7. Is there a need to regulate these interest rates?
8. What is the perception regarding MFIs being dependable lenders who provide friendly services with minimal transaction costs for the poor and hence need to charge a higher rate of interest?
9. Can entrepreneurs consider microfinance a market worthy pursuit?
10. Why do MFIs find it difficult to standardize their operations?
11. Is the cost of technological up-gradation justified given that it leads to gains in operating efficiencies?
12. How well prepared are MFIs to take to modern technology?
13. Are there infrastructural bottlenecks that they need to contend with?
14. Will MFIs find it difficult and costly to borrow form banks in the future?
15. Will MFIs be able to build the required processes and systems as they grow?
    

The uncertain environment meant that banks were more guarded in the manner they transacted with MFIs. While innovations such as the “Partnership Model” had earlier helped many MFIs to overcome capital constraints and scale up, these were now criticized for lacking adequate checks and balances to ensure that their practice was as per their design.

Challenging as it may have been, the year 2006 has given us many key-takeaways, some of which I have listed below.

1. Customer Satisfaction is a core value. The advantage that MFIs enjoy over traditional sources of financial services is their ability to service their clientele better. The overall experience that clients have with the MFI is NOT impersonal, and their satisfaction is also a function of the way they perceive they are valued by the MFI. This represents an opportunity for MFIs to measure and manage “client-delight”.
2. Managing Public Relations is critical for MFIs to succeed in the long run. Barring a few exceptions, MFIs have not been great communicators. As a result they have been vulnerable to adverse publicity. Given the many benefits that microfinance operations tend to provide to the society, there exists a great a potential to leverage this through creatively designed campaigns.
3. Pareto principle operates in microfinance. It is essential for MFIs to realize that the fundamental aspects of credit control and monitoring key operational indicators cannot be sacrificed for complicated products that are impossible to deliver.

Thankfully the microfinance sector in India seems to be rebounding with great energy. One hopes that the sector will live up to its potential and contribute its bit in realizing the fortune that lies at the “bottom of the pyramid” to quote Prof C K Prahalad.