Sustainable microfinance requires sound client relationship management

While the microfinance sector has grown at a rapid pace, concerns have been raised about the qualitative aspects of this growth. There have been a few instances in Andhra Pradesh, Karnataka and Uttar Pradesh which have led to questions being asked on microfinance business models and their ability to sustain client relationships in the long run. The areas that have been particularly in focus are client over-indebtedness, coping strategies in case of crisis, transparency in loan pricing and overall client protection. There has been a lot of deliberation on how MFIs should deal with these issues, it is difficult to say whether MFIs have been effective in addressing them.

MFIs have to cope with the growth expectations that lenders and investors have of them and operate in an increasingly competitive environment. In addition, the nature of credit operations requires regular follow-up with clients in order to ensure prompt repayments. At times, this is construed to be coercive and leaves MFIs vulnerable to accusations of malpractices.

Practicing client protection principles requires MFIs to treat every client interaction as a relationship exercise. MFIs need to view this as an opportunity to build a sustainable and sound business.