Contents 1 Introduction 2 2 Governance and institutional linkages 6 3 Operational strategy 16 4 Products and delivery 26 5 Management Information Systems 46 6 Internal control for risk management 58 7 Financial management and accounting policies 68 8 Human resource management 78 9 Conclusion – what next? 88 Annexes 90 Abbreviations & glossary 92
1 Introduction – why “best practices”? 1.1 FINANCIAL SERVICES FOR THE POOR... branches or village level societies. Financial services to the poor are also available from the village or (town) neighbourhood-level agents of As elsewhere in the world, informal financial services have always been NBFCs. The RRBs, in particular, were established specifically to meet an integral part of the traditional economy of India.1 Even semi-formal the credit requirements of the poor – small and marginal farmers, land- and formal financial services, through agricultural cooperatives and less workers, artisans and small entrepreneurs and should, therefore, banks, are within physical reach (less than 5 km) of perhaps 99% of the have emerged as a major source of microfinance. Over 140,000 institu- population of the country. A vast network of commercial banks, cooper- tional outlets serving the rural sector and the poor implies the availabil- ative banks and regional rural banks (RRBs) as well as other financial ity of one outlet for every 5,600 persons – in theory, a very favourable institutions provide such services. Other financial institutions include ratio for catering to the financial needs of the poor. non-bank finance companies (NBFCs), insurance companies, provident funds and mutual funds. There are more than 160,000 retail credit out- lets in the cooperative and banking sectors, augmented by another 1.2 ARE HINDERED BY THE PROBLEM OF ACCESS 37,000 NBFCs. These include around 60,000 branches of 27 public sector commercial banks and 196 RRBs and another 4,700 branches of For many years, bankers and senior government officers were fond of 55 smaller private banks providing financial services in India. There are describing the Government of India’s main poverty alleviation pro- also a growing number of foreign banks operating but their reach, gramme, the Integrated Rural Development Programme (IRDP), as through some 200 branches, is limited to the main cities.2 “the world’s largest microfinance programme”. And so it was. It involved the commercial banks in giving loans of less than Rs 15,000 to Formal financial services are, in theory, available to low income families poor people and, in nearly 20 years, resulted in financial assistance of mainly through 33,000 rural and 14,000 sub-urban branches of the Rs 250 billion to 55 million families.3 The problem with the IRDP was major banks and RRBs and 94,000 cooperative outlets – either bank that its design incorporated a substantial element of subsidy (25–50% of each family’s project cost) and this resulted in extensive malpractices 1 See Ghate, P 1992. Informal Finance. Oxford: Oxford University Press and Rutherford, S ., and misutilisation of funds. This situation led bankers too to see the and Arora, SS, City Savers, New Delhi: DFID, 1997 amongst other sources of information IRDP loan as a politically motivated handout and they largely failed to on ROSCAs, Chit Funds and other informal means of obtaining finance. follow up with borrowers. The net result was repayment rates estimated 2 Reserve Bank of India, Report on Currency and Finance, 1997–98. at 25–33%. Not surprisingly, the two decades of IRDP experience – in 3 This suggests that virtually all the 60 million or so poor families were covered by the the 1980s and 1990s – affected the credibility of micro-borrowers in IRDP. Alas, this was not the case as the numbers include many cases of repeat assistance the view of bankers and, ultimately, hindered access of the poor to (deliberate) and perhaps even more cases of unjustified selection of ‘beneficiaries’. banking services.
MICROFINANCE BEST PRACTICESSimilarly, the entire network of primary cooperatives and RRBs in the Initially, many NGO microfinance institutions (MFIs) were funded bycountry – both sets of institutions established to meet the needs of the donor support in the form of revolving funds and operating grants. Inrural sector in general and the poor in particular – has proved a colossal recent years,6 development finance institutions such as NABARD,failure. Saddled with the burden of directed credit and a restrictive SIDBI and micro-finance promotion organisations such as theinterest rate regime, the financial position of the RRBs deteriorated Rashtriya Mahila Kosh (RMK – the National Women’s Fund) have alsoquickly while the cooperatives suffered from the malaise of mismanage- started to provide bulk loans to MFIs. This has resulted in the MFIsment, privileged leadership and corruption born of excessive state becoming intermediaries between the largely public sector develop-patronage and protection.4 ment finance institutions and retail borrowers consisting of groups of poor people or individual borrowers living in rural areas or urban slums. In another model, NABARD refinances commercial bank loans1.3 SO THE SEMI-FORMAL NGO SECTOR HAS STEPPED IN... to self help groups (SHGs) in order to facilitate relationships between the banks and poor borrowers.Over the past 20–25 years, the resultant vacuum in the financial systemhas started to be filled, initially with the pioneering efforts of organisa- Though the (mainly) NGO micro-finance sector has made a start in pro-tions such as the SEWA Bank (Ahmedabad) and Working Women’s viding “user friendly” formal financial services to the poor its outreach isForum (Madras) but, more vigorously during the 1990s, by theentrance of significant numbers of non-government organizations FIGURE 1.1 – CHANNELS OF DELIVERY OF MICRO-FINANCIAL SERVICES IN INDIA(NGOs) into microfinance. Current estimates of the number of NGOsengaged in mobilising savings and providing micro-loan services to thepoor lie in the range of 800–1,000 organisations.5 The semi-formal BANKS SHG LINKING APEX OR COMMERCIALchannels through which the bulk of micro-financial services currentlyreach the poor are illustrated in Figure 1.1. IRDP-TYPE4 See Sinha, 2000, India Country Study in Asian Development Bank 2000. The Role NGO/MFIS SELF HELP GROUPS of Central Banks in Microfinance in Asia and the Pacific, ADB: Manila.5 This number includes all registered societies, trusts, a few NBFCs and “new generation” cooperatives – independent of government intervention – acting as financial JOINT LIABILITY MEMBERS/CLIENTS intermediaries. It specifically excludes unregistered self help groups that are usually GROUPS BORROWERS established and facilitated by the NGOs; and it also excludes conventional cooperatives.6 Roughly since 1994 Introduction – why “best practices”? 3
Introduction – why “best practices”?still miniscule in comparison with the need. A compilation of support to NGOs and MFIs and their consequent difficulties in assessing ade-provided by major institutions to microfinance in India shows that the quately the latter’s implementation capabilities.cumulative disbursement of bulk loans to MFIs by domestic financialinstitutions did not exceed Rs3.5 billion (US$72 million) by March2001 with an outreach to less than 2 million families – at best less than 1.4 ...AND MUCH INNOVATION HAS TAKEN PLACE5% of the poor in India. Even allowing for a significant volume of donorgrants, the total coverage is likely to be under 3 million families. Nevertheless, in recent years, microfinance has been among the fastest growing poverty focussed development activities in India. This hasThis includes the NABARD-refinanced scheme for linking self-help come about with an increasing realisation that, in order to be successfulgroups (SHGs) directly with banks. Progress and outreach in the both in outreach and sustainability, microfinance must move out of thescheme amounts to Rs 4.8 billion (US$99 million) disbursed and cov- traditional low equilibrium, welfare mode of much NGO activity andering, at most, 1.5 million families.7 become a professional service. A number of the leading microfinance institutions in India have started to move out of the established mouldsAt the same time, the involvement of commercial banks in microfi- of activity based on the Bangladesh Grameen Bank model, cooperativenance is negligible both in relation to the current volume of microfi- credit societies and self-help group (SHG)-based financial services. As anance and (even more so) to their broader engagement in rural areas.8 result, there has been a considerable amount of innovation not only in the design of financial products/services and delivery systems employedDirect finance to MFIs is limited by continuing widespread scepticism by MFIs,9 but also in other operational practices includingabout the credibility of micro-borrowers and, by extension, of MFIs. • Institutional arrangementsThe problem is compounded by the lack of exposure of most bankers • Governance • Management information systems7 Authors’ estimate for the number of families. The information available on this • Financial management and accounting systems programme does not cover amounts outstanding or the number of SHGs with • Internal control and external audit outstanding loans. • Human resource management and staff incentive systems.8 Bankers’ attitudes which limit commercial bank exposure to microfinance are extensively discussed in Goodwin-Groen, Ruth, The Role of Commercial Banks in Not all the innovation has been successful, but M-CRIL’s rating experi- Microfinance: Asia Pacific Region. Brisbane, Australia: Foundation for Development ence shows that significant progress in the evolution of “best practices” Cooperation, 1998. has been achieved in the past 3–5 years. The more progressive MFIs9 Some of which were documented in the work of M-CRIL’s parent company EDA Rural have become successful partly through the development and adoption Systems in 1999 – EDA, 2000. Innovations in Microfinance Products and of systems that are not only appropriate to their own particular condi- Delivery Systems in India. Dhaka: SANMFI. tions but also to the practice of microfinance in general.
MICROFINANCE BEST PRACTICESThe objective of this document is to identify and disseminate informa- rience in rating Indian MFIs and on the willingness of institutions to betion about some of the key “best practices” that have come to be included in the study. Thus, the practices documented here constitute aadopted by the more successful institutions in Indian microfinance. selection of the best practices employed by the sector at present. Inclusion in this document implies that M-CRIL considers the prac-The aim is to provide this information to a wide cross-section of stake- tices adopted to be worth consideration by other institutions engagedholders, in the microfinance sector in India and elsewhere, to facilitate in similar activities. Exclusion is not a reflection on the quality of anthe adoption of better practices by the sector as a whole. It is predicated MFI’s operations. Some MFIs following similar practices have beenon the assumption that greater professionalism is an essential pre-requi- excluded to avoid duplication. In a few cases, exclusion could be ansite to the substantial expansion of outreach and achievement of sus- indication of an MFI’s unwillingness to be included in this study ortainability in the delivery of microfinance services. M-CRIL’s lack of knowledge of specific practices.Towards this end, a selection of information on “best practices” and Inevitably, in an exercise of this type the results are illustrative rathersystems collected from nine of the leading microfinance institutions in than definitive. M-CRIL commends the report to the reader as aIndia has been compiled and presented in this document in a simple, contribution to the growth and development of sustainablereadable format. The selection of practices is based on M-CRIL’s expe- microfinance. 5
2 Governance and Institutional Linkages 2.1 INTRODUCTION how an organisation is governed and managed. Institutional linkages are the unique systems and arrangements that help an organisation 2.1.1 DEFINITION AND OVERVIEW operate, evolve and grow in an efficient manner. These range from the formal subsidiary-parent relationships and contractual agreements for A governance system can be defined as “what manages the relationship the provision of certain services, to an informal understanding on of an institution with its stakeholders or, more broadly, its relationship to cooperation between several entities. In cases where the institutional society” 10. linkages are well defined and developed, they have a direct bearing on how the organisation is governed and how it functions. The governance system determines how institutions are directed and controlled. It specifies the distribution of rights and responsibilities A study of these linkages also becomes important because an organisa- among different participants in the institution, such as, the governing tion’s core competence in separate operational activities may provide it board, managers, shareholders and other stakeholders, and spells out with a relative competitive advantage, but they can be imitated over the rules and procedures for making decisions on corporate affairs. By time. However, core competencies that emanate from institutional doing this, it also provides the structure through which institutional linkages are less likely to be imitated. objectives are set and the means of attaining those objectives and mon- itoring performance. For the purpose of this study, governance systems in the Indian micro- finance sector have been studied in two distinct but closely interlinked How an organisation functions and the relationships it builds with its components. These are stakeholders and the community at large are direct outcomes of its gov- • institutional linkages ernance system. Further, the aim of an effective governance system is to • role of the board. ensure that the organisation is prudently managed to provide optimum benefit to its stakeholders. 2.1.2 SECTOR PROFILE The governing board is the strategic apex of an organisation and is, INSTITUTIONAL LINKAGES therefore, the primary determinant of its governance system. The board composition, the framework it sets for itself and the way it functions Many MFIs have evolved either as offshoots of older development form the basis of the governance system. organisations or are the result of projects being formalized into an Institutional linkages constitute another important factor that affects 10 Adapted from an article that appeared in the Financial Times, 1997
MICROFINANCE BEST PRACTICESorganisation. A large number of such institutions have been started by used for their benefit. From this phenomenon, some interesting exper-people with prior experience in the development sector. There are still iments have developed. The Indian Association of Savings and Creditothers, though fewer, who have emerged to deal exclusively with the (IASC) – a partnership between an NGO and a housing finance com-credit needs of a particular area/community. This varied evolution has pany – is one prominent example.led to the many formal/informal institutional linkages that MFIs havewith their parent organisations. THE ROLE OF THE BOARDThis link between parent NGOs and MFIs is also reflected in the In Indian MFIs, typically, the members of the board comprise the pro-methodology and use of resources. A large number of MFIs use the moters, a few local academics or social workers and some representa-group model for providing financial services and, often, these financial tion from the executive in the form of the Chief Executive Officerservices are extended to groups promoted by the parent for some other (CEO). Some MFI boards also have member representatives.development activity. The MFIs also use the parents’ resources to pro-mote financial services, identify areas with potential for expansion and, Given that many MFIs have evolved from social development pro-sometimes, even cover operating costs. grammes, more often than not, the composition tends to be skewed towards people with a social development outlook. While such a repre-Given the human, financial and knowledge resource constraints as well sentation is important, the composition of the board is often imbal-as the nature of work, developmental organisations in India have partly anced with limited financial and technical skills available amongstdeveloped formal/informal networks amongst themselves for sharing board members.resources and participating in joint dialogue with the formal sector.The linkages that have developed are often used by the MFIs for lever- The MFI board’s expected role has been to lay down the framework foraging resources. For example, Swayam Krishi Sangam (SKS) during its operations, meet regularly to review performance and decide on keyinitiation, informally networked with Cashpor Financial & Technical issues. However, the fulfilment of this objective has, so far, been lim-Services (CFTS) to gain microfinance exposure and, later, to share MIS ited. Usually, the operations run on the basis of a loosely defined frame-resources. Sa-Dhan, an association of MFIs, working in the areas of work that is firmed up when specific issues emerge.policy, standards setting and capacity building is another illustration ofa formal apex network being promoted to facilitate, amongst other On policy issues, the boards of many organisations are known to take athings, such interaction. ‘developmental’ view that is almost exclusively focused on the short- term interests of their clients while not taking into account the longer-The older NGOs (or other parent organisations) have also been able to term sustainability of the organisation. This results in the creation ofbuild relationships with the formal sector during the course of their institutions that do not perform efficiently or sustainably, and, in thework. These relationships are often inherited by the offshoot MFIs and medium to long run, tend to stagnate or close down. Therefore, from a Governance and Institutional Linkages… 7
Governance and Institutional Linkages…broader perspective, such inputs by MFI boards do not serve either financial service provision (such as Non Banking Finance Companiesclient or organisational interests in the long term as they prevent the that are regulated by the Reserve Bank of India) and a realisation thatcreation of MFIs that can balance client and institutional objectives the complexities of managing operations and finances are facilitatedwhile increasing outreach. greatly by a board with the requisite technical and financial skills. As a result, boards are now becoming increasingly active and laying downAnother factor that contributes to the lack of sufficient inputs from the guidelines with respect to managerial functions. Overall, there is aboard arises from the low level of interest in MFI operations that many gradual shift in the focus of board members towards sustainable devel-board members display. In the overall operations, except for the CEO opment rather than just altruistic lending. The following sections illus-and in some cases the Executive Secretary/Chairman, the other mem- trate different forms of institutional linkages and how the governancebers often have very limited interest and involvement. structure can represent such linkages effectively.However, this situation in governance is evolving and a number ofMFIs are now putting in place governing boards that have a balance of 2.2 ILLUSTRATIONS OF BEST PRACTICE:social development and financial management skills. This trend has INSTITUTIONAL LINKAGESarisen out of increasing pressure to make operations sustainable, con-vert to more commercial and legally appropriate forms for undertaking 2.2.1 INDIAN ASSOCIATION OF SAVINGS AND CREDIT (IASC)FIGURE 2.1 – LINKAGES IN THE IASC MODEL OF MICROFINANCE DELIVERY IASC, an MFI based in the Nagercoil district of Tamil Nadu, has estab- lished unique backward and forward linkages with its parent organisa- PWDS HDFC tions and clients (Figure 2.1). The Palmyra Workers Development – GOODWILL – PROFESSIONAL FINANCIAL SKILLS Society (PWDS), a prominent local NGO and the Housing Development Finance Corporation (HDFC), India’s premier housing finance company have jointly promoted IASC. The MFI is a company IASC registered under Section 25 of the Indian Companies’ Act, 1956. IASC capacity building was started to provide credit services in its operational area at the south- ern tip of the Deccan peninsula. NGO microfinance services promotion The association of PWDS and HDFC dates back to 1986, when the former applied to HDFC for a housing loan for its members. HDFC GROUPS was impressed by the work done by PWDS but both the organisations agreed that providing credit services required totally different skills that
MICROFINANCE BEST PRACTICESwere beyond the mandate of PWDS. Thus began IASC, a unique their expectations from IASC without one taking precedence over theexperiment of corporate and social partnership in India. other or trying to skew IASC’s objectives towards its own.From both its parents, IASC has derived significant synergies in differ- The association with HDFC and the representation of HDFC on theent aspects of its operations. IASC benefits from the goodwill created board has given a fillip to a professional work culture within IASC andby PWDS and also uses its experience to understand the local market. also enabled the organisation to access HDFC’s excellent financial sup-From HDFC, it has obtained loan funds and skills required for the pro- port services, including the services (audit and advisory) of a charteredfessional management of a credit programme. accountant. On the other hand PWDS’ objective of sculpting IASC into a social development organisation has also been achieved as IASCThe support of these two established organisations has helped IASC has used the goodwill and experience of PWDS to build its client base.manage its external environment and has provided it with the freedomand self-assurance to experiment with a low cost business model. Overall, the marriage of corporate and social sector institutions has resulted in a unique structure focused on the provision of financial ser-In its credit operations, IASC relies on building and managing linkages vices for sustainable development. This has been discussed further inwith local NGOs. These linkages are the foundations of its operational the following sub-sections.strategy. The company is only the credit provider and does not formgroups. It is the NGOs that promote the groups and provide them with 2.2.2 SIFFSthe management skills necessary to undertake financial services fortheir members. IASC thus circumvents the need to develop group pro- The South Indian Federation of Fishermen Societies (SIFFS), locatedmotion skills and incur expenses on this activity. Instead it can focus on in the South Indian state of Kerala, is based on the three-tier commod-its core competence as a financial service provider. ity co-operative model pioneered in India by the famously successful National Dairy Development Board. SIFFS is the apex federation (seeBy working with groups that have been formed by NGOs, IASC Figure 2.2) of district federations of fishermen’s Primary Co-operativereduces its costs and the risks associated with lending to new clients. Societies (PCS). The ownership is from the bottom up – fishermenHowever, to maintain operational flexibility and retain a relationship own the primary societies, which own the district federations. The dis-with the NGO as a linkage partner rather than a channel for delivery, trict federations in turn own the apex federation. Effectively, SIFFS is aIASC takes on the responsibility of loan monitoring and recovery. producer-member owned institution.This structure is an example of how an institution, jointly promoted by The PCS provides credit to members and facilitate fish sales bytwo organisations, with different but converging skills, can be estab- appointing auctioneers to undertake fish auctions on their behalf. Thelished and governed. Both the promoters have a system of expressing auctioneers are responsibile for collecting payments due from traders. Governance and Institutional Linkages… 9
Governance and Institutional Linkages… … 2.2 The PCS pays its members, deducting savings contribution and any cacy and liaison work on a large scale. When the local markets strength-INSTITUTIONAL loan repayment as a fixed percentage of the daily catch. ened in the late 1980s, price realisations in these markets increased and LINKAGES the marketing role of SIFFS became secondary, while the focus shifted The district federations provide support services like accounting and to technology development and advocacy. administration. They also arrange loan finance for the societies through local banks, provide inputs for fishing and lobby locally on behalf of SIFFS is now one of the largest suppliers of outboard motors in south- the societies. In the 1980s, when there was a shortfall of credit from the ern India and also owns and manages a large number of boat servicing banks, the district federations formed revolving funds and lent to the yards. From 1991, after the process of economic liberalisation started, societies. They continue to do so through their corpus funds and by there was a spurt in the motorisation of fishing boats and, therefore, the arranging loan finance from SIFFS. credit needs of fishermen increased. To fill this gap, SIFFS started pro- viding microfinance services in 1996. The apex federation – SIFFS – started as the Trivandrum district feder- ation (TDF). As other federations were formed, the need for an apex In the SIFFS system, each tier carries out a role that is best suited to its body was felt and the TDF evolved into the SIFFS. The initial mandate position in the hierarchy. These distinct roles complement each other was to undertake bulk marketing, processing, developing/adapting new to create operational convergence. technologies and systems through research and development and advo- The governing bodies of each of these tiers are elected from the rele- FIGURE 2.2 – THE COMMODITY COOPERATIVE MODEL UTILISED BY SIFFS vant general body of members. For example, all the member fishermen elect the PCS governing body. These governing bodies lay down guide- SIFFS lines and appoint staff for operations. The institutional linkages at SIFFS give rise to a governance structure in which professional managers, appointed and supervised by the DISTRICT LEVEL FEDERATIONS DISTRICT LEVEL FEDERATIONS elected representatives of member-owners of the PCS, handle opera- tions. This enables the member-owners to assert their demands from the institution. However, to balance member needs with growth ori- PRIMARY CO-OPERATIVE SOCIETY (PCS) (PCS) ented and sustainable management, decisions are taken in consultation with the apex body and relating member demands to the institution’s obligations and constraints. FISHERMEN FISHERMEN This case provides an illustration of how a member-owned institutional
MICROFINANCE BEST PRACTICESstructure for governance can be established. The institutional linkages client retention due to its centrality to member needs, while facilitatingprovide strategic operational advantages for the organisation in the regular loan repayment despite flucuating production cycles. It is acontext of its member-oriented objectives. structural arrangement relevant to any member owned organisation that is vertically integrated.Apart from a unique governance structure, the institutional linkagesprovide other advantages to SIFFS: 2.2.3 SAMRUDDHI • The need for direct support from SIFFS is limited and opera- tions can be conducted in far-flung areas at low cost Bhartiya Samruddhi Finance is part of a consortium of companies pro- • A number of PCS have had commercial interactions with their moted and controlled by Bhartiya Samruddhi Investments and members for 10–20 years. The apex federation, SIFFS, can Consulting Services Limited (BASICS). This Hyderabad based organi- therefore, assess the creditworthiness of individual fishermen sation operates in Andhra Pradesh and several neighbouring states. The based on the records of their credit history that are kept with group’s mission is to promote sustainable livelihoods, by providing an the PCS integrated set of technical and financial services. To fulfill its mission, • Since the PCS also controls the marketing of each member’s BASICS has assumed the role of a holding company, owned by a group fish catch, it can track repayment ability of eminent professionals who have a commitment towards develop- • SIFFS gets loan repayments through the deduction of a speci- ment. fied percentage of realisations from sales marketed via the PCS. This system ensures repayment linked to actual cashflow, The capital11 of these founder-promoters was augmented by loan funds but gets affected by seasonal lows in fishing. that were then down-streamed as equity into Samruddhi, which is the main operating company. This mechanism has enabled BASICS toSIFFS represents a sector specific model of microfinance. It is an inte- retain the majority shareholding in Samruddhi while increasing itsgrated system wherein the MFI leverages the relationships of its insti- ability to raise equity from other sources.11 The holding pattern of thetutional components with the borrowers. Credit assessments can be BASICS group of companies is illustrated in Figure 2.3.based on the prior experience of its components, the supply of othertechnical inputs assures the efficient utilisation of the credit and repay- The rationale for this structure is that it allows the constituent busi-ment is linked to the marketing services provided to members. nesses to operate efficiently in their individual lines while allowing BASICS Ltd to focus on raising resources and providing strategic direc-This framework of institutional linkages and governance enhances tion. In this structure, Samruddhi is an NBFC with a focus on micro- loans, Indian Grameen Services (IGS) is the technical support11 As discussed in Section 7, Samruddhi now has the largest capital base of all the MFIs in organisation that also provides microfinance and micro-enterprise India. research and consultancy services and the Local Area Bank provides Governance and Institutional Linkages… 11
Governance and Institutional Linkages… … 2.2 both savings and credit facilities in its delimited operating area of three products and operating systems at low cost.INSTITUTIONAL districts. Each of these members benefit from being part of a group • Samruddhi has been able to leverage a host of institutional LINKAGES through pooled financial resource generation, the sharing of knowledge relationships that the holding company has built up. For and technical resources and through a coordinated approach to devel- example, BASICS’ ability to mobilise equity from the Ford opment finance. The parent also benefits because it diversifies its risk Foundation and SDC and its relationships with the World across entities designed to concentrate on specific activities. The risk in Bank (and International Finance Corporation) has leveraged this structure lies in the possible duplication of activities and sub-opti- substantial investments directly into Samruddhi. mal utilization of resources if the managements of each of the operating companies do not clearly understand and subscribe to the strategic 2.3 ROLE OF THE BOARD objectives of the group as a whole. Prudent, ethical and effective governance is the cornerstone of any pro- In Samruddhi’s case, the design seems to have worked until now. In fessionally managed financial service enterprise. In financial service summary: enterprises, the role and constitution of the governance system of MFIs • The holding company has successfully raised external finance. It should be properly defined to address the concerns of various stake- has mobilised both equity and loan funds for its group companies. holders and ensure prudent and sustainable management. The Board • The consulting arm, IGS has undertaken research and techni- can play a key role in such a system. cal support projects that have enabled Samruddhi to develop At Samruddhi, the governing board is comprised of the board mem- FIGURE 2.3 – HOLDING PATTERN OF THE BASICS GROUP OF COMPANIES bers of the holding company (BASICS Ltd) and the nominees of vari- ous financial institutions that have invested equity in it. As a result, BASICS Ltd Samruddhi’s board composition represents a fine balance between cor- Holding company porate and development management expertise. Eminent profession- als from both these fields find place on it alongside renowned academics. This is how the company retains its development focus while operating as a professional financial service provider. Bhartiya Samruddhi Indian Grameen Krishna Bhima The company has also issued sweat equity 12 to its manager promoters Finance Ltd Services Samruddhi with the objective of aligning the long-term interests of the promoters NBFC Sec 25 company Local Area Bank Ltd with the interests of the shareholders. The board has two committees for Audit and Finance with clearly
MICROFINANCE BEST PRACTICESdefined roles and responsibilities. The Managing Director (MD) along improving operations and maximising the benefits derived from thewith three independent directors with expertise in finance constitutes the presence of the board members.Audit Committee. Similarly, the Finance Committee includes the MDand two independent directors with financial management backgrounds. With regard to the shareholding structure, although the holding ofIt is entrusted with the task of laying down financial management poli- BASICS Ltd in Samruddhi is now below 51%, it continues to exercisecies related to the extension of loans, raising of capital, management of management control by virtue of being the largest single shareholdercash, accounting, reporting of financial information, making invest- and retaining the confidence of institutional and other minority share-ments and for taking any non-routine financial management decisions. holders. In order to do this, the management has put in place a growth- oriented enterprise with prudent management systems from which theIn order to obtain inputs from other stakeholders, Samruddhi con- investors hope to earn attractive returns in the long term.ducts quarterly review meetings (BASIX Quarterly Reviews or BQRs).It invites a number of people representing stakeholders from different At IASC, as the board is drawn from both parent organisations, PWDSinstitutions for these meetings. The mix of invitees to each BQR and HDFC. IASC is able to combine the developmental perspective ofincludes donors, potential investors and lenders, interested MFI repre- PWDS with prudent financial management skills provided by HDFC.sentatives/teams and staff members from regulatory agencies. Dates for The board meets regularly and directs the MFI management on criticalthis quaterly interaction are fixed well in advance and are linked to the issues keeping in mind both perspectives. This governance systemdates of board meetings. This facilitates easy attendance at the meetings ensures that IASC operates as a sustainability-oriented professionallyand maximises the board’s participation. Typically a field visit is organ- managed MFI that is conscious of its developmental goals.ised for groups of participants, led by the senior management staff atSamruddhi, to observe and comment on its operations. Following the SKS, an MFI based in the state of Andhra Pradesh, has a board com-visits, a detailed feedback session is held. During this, discussions take prising eminent professionals who also serve on the board of SKSplace on issues related to strategy, operations, products and impact. The Foundation – the parent organisation based in the United States ofBQRs feed into the board meeting that is conducted immediately after America. This arrangement provides SKS access to the expertise of peo-the completion of the feedback session. ple who occupy responsible positions in management and finance. Like Samruddhi, this organisation has also formed committees within theThis formal mechanism for obtaining feedback from stakeholders rep- board to oversee various aspects of governance and operations. Thisresenting different sets of interests has proved to be very useful. It has enables clear demarcation of specific responsibilities within the board.contributed significantly to policy decisions taken by the board towards Besides this, SKS also has a system of empanelling advisors who are called on to provide inputs when required. Advice on issues such as12 Equity acquired by a company’s executives on favourable terms to reflect the value the expansion and competition strategy as well as operational policies is executives have added and will continue to add to the company. obtained in this way. Governance and Institutional Linkages… 13
Governance and Institutional Linkages… NEW GENERATION FINANCIAL INSTITUTION2.4 EXCELLENCE IN GOVERNANCE • The holding company, being a larger entity, is able to mobilise external sources of financeThe illustrations in the previous section highlight that the primary • Leveraging a host of institutional relationships that the holdingdeterminant of a governance system is the strategic apex – the govern- company and other subsidiaries have built up with the externaling board. The board composition, the framework it sets itself and the agenciesway it functions forms the basis of the system. In addition, institu- • Utilising business synergies with the various sister companies.tional linkages influence governance issues and vary vastly based on the For example, Samruddhi uses the technical skills of IGS to traintype of organisation. The following lessons on governance and institu- its micro-entrepreneur clients.tional linkages emerge from the sample institutions ROLE OF THE BOARDINSTITUTIONAL LINKAGES • Balanced board composition with representation from corporate MEMBER BASED ORGANISATIONS and development management experts • Clear procedure to exercise owner control for example at SIFFS • Ensuring the stake and role of managers in organisational gover- the fishermen own the primary societies, which further own the nance and development, by employing innovative measures such district federation as sweat equity • Specific roles assigned to that tier in the hierarchy best suited to • Clear functional responsibility centres within the board – the role; these distinct roles complement each other to create Samruddhi has an Audit and a Finance Committee constituted operational convergence by board members • Operations managed by professionals who are appointed and • Systematic mechanism to provide the board with feedback from supervised by an elected board a broad range of stakeholders through exercises such as the • Integrated systems wherein the MFI leverages the relationships BQRs. that its different arms have with the borrowers CORPORATE AND SOCIAL SECTOR PARTNERSHIP • Benefits from both parents – local development knowledge from the social partner and professional managerial expertise from the commercial partner • Leveraging the goodwill of both partners to form local alliances and mobilise funds
MICROFINANCE BEST PRACTICES2.5 EMERGING TRENDS • Separate organisations/divisions for undertaking different tasks: More and more multi-service organisations are movingAs discussed in the illustrations and analysis, the overall trend within towards the separation of microfinance divisions or even sepa-MFIs in India is to move from an altruistic approach to a professional rate organisations for undertaking non-core activities. Thus,and sustainability-oriented approach. Some of the emerging ways what has traditionally been called the “credit and savings pro-through which MFIs are trying to achieve this are gramme” is now becoming an MFI in its own right or an inde- pendent microfinance profit centre. • More active boards: The governing boards of MFIs are becom- ing increasingly active not only in shaping institutional direc- • Building external arrangements to leverage local knowledge tion but also in ensuring that their directives are implemented and operating systems for generating revenue streams: A few through the board members’ direct oversight of day-to-day MFIs are leveraging their local knowledge and networks to operations. develop arrangements with large financial service providers for selling specialized products and services. Selling insurance • Composition of the board: MFIs are now consciously trying products is a very good example of this trend. Other MFIs are to induct finance professionals and eminent practitioners as trying to become agents of commercial banks, for onlending. board members. Overall, this has the effect of injecting a pro- Under this arrangement, the bank appoints the MFI as its fessional culture into the organisation and the microfinance agent who in turn does the lending for the bank and earns a sector as a whole. It also enhances the leveraging ability of the commission on it. These arrangements are covered in the fol- organisation in relation to its external environment. lowing sections. Governance and Institutional Linkages. 15
3 Operational strategy 3.1 INTRODUCTION TO OPERATIONAL STRATEGY 3.1.1 DEFINITION AND OVERVIEW The discussion in this section documents best practices based on the “Strategy is the direction and scope of an organisation over the long term elements that define strategy which achieves advantage for the organisation through its configuration of • Long term direction and scope resources within a changing environment, to meet the needs of markets • Allocation of resources and to fulfil stakeholder expectations.” 13 • Advantage emerging from the chosen strategy • Ability to cater to markets FIGURE 3.1 – PORTER’S “FIVE FORCES” FRAMEWORK • Ability to adapt to a changing environment • Meeting stakeholder expectations P OTENTIAL E NTRANTS In this section, the focus is on operational strategy. Financial strategy is threat of entrants discussed in Section 7. The three aspects of operational strategy, critical for microfinance, that have been discussed are • client development & expansion • competitive response • organisational structure S UPPLIERS B UYERS C OMPETITIVE Bargaining Bargaining R IVALRY Client development and expansion strategy impacts the type of clients power power of the MFI, the retention rate, portfolio quality and the organisation’s cost structure and efficiency. An organisation’s response to competition is key to ensuring its long- term survival in markets that are becoming more crowded by suppliers threat of sustitutes of financial services. To analyse competitive strategy, in addition to the S UBSTITUTES above parameters, the “five forces” framework developed by Michael Porter (Figure 3.1) has been used.
MICROFINANCE BEST PRACTICESOrganisational structure is important as it affects the ability of the MFI Organisational structuring is an aspect that is given some attention byto take decisions and run operations efficiently. This is particularly sig- the most focused MFIs. However, in a typical MFI the structures andnificant since people are the most important resource of an MFI, and roles within the organisation are not clearly defined and do not func-therefore, the manner in which people are organised is critical to the tion well, leading to inefficiencies in operations. In a number of cases,effectiveness of strategy. The organisational structure of best practice the organisation structure emerges out of a trial and error approachMFIs is discussed in this section in the context of strategic management. rather than as a well-planned process. There are only a few MFIs that have been able to re-orient their structures to address areas of potential3.1.2 SECTOR PROFILE weaknesses in operations.Many MFIs in India do not have a well-defined client development This section documents the practices of MFIs that have formulatedand expansion strategy. As microfinance is still largely donor driven, operational strategies in any one or more of the three areas of focusthe client-targeting strategy is generally laid out clearly, is long term indicated above. As in other sections of this report, the organisationsand specific in nature and defines target client groups in terms of eco- chosen here do not represent all the cases of best practice – they arenomic or social classes. However, despite this, most MFIs have not for- merely illustrations of some instances where best practice elements havemulated coherent strategies that enable client promotion in such a been identified by the study team. Moreover, even in some of the illus-manner that it results in systematic expansion. By contrast, best prac- trated cases, while they may represent best practice in the Indian micro-tice MFIs have a well-defined strategy that not merely lays out the tar- finance sector, there is still potential for improvement.get clientele but also defines the path to the systematic scaling up ofoperations. 3.2 ILLUSTRATIONS OF BEST PRACTICE:With regard to competition, MFIs are prone to ad hoc reaction driven CLIENT DEVELOPMENT AND EXPANSION STRATEGYstrategy rather than to proactive pre-planned measures. Only a fewMFIs build elements of competitive strategy into their client promo- 3.2.1 SPANDANAtion and organisational activities. The deployed strategy includes theuse of appropriate communication tools for client promotion, respon- Spandana is an MFI working in the state of Andhra Pradesh, the hub ofsive, client friendly and competitively designed products and other microfinance in India. Within the state, its operations are concentratedmeasures to tackle competition. Such practices lead to the ability to in the urban slums of Guntur city and rural areas of Guntur districtgrow faster and increase the outreach of the MFI’s financial services. that surround the town. Spandana’s client promotion and expansion strategies are well defined and interlinked. This interlink is evident13 Johnson G, and Scholesk,1998. Exploring Corporate Strategy. Prentice Hall of India from Table 3.1 that describes the client/group formation process which Private Limited takes place over a period of 10–15 days. Operational strategy… 17
Operational strategy… TABLE 3.1 – SPANDANA’S CLIENT DEVELOPMENT PROCESSSTAGE PROCESSES/CRITERIA FOLLOW-UP ACTIONVILLAGE SELECTION Lies within 20 km of an existing branch office (reduced from 30 km limit used earlier) Has the potential to provide the organisation with a minimum of 60 clientsSLUM SELECTION Potential for at least 3,000–4,000 clientsINTRODUCTORY PHASE Open to all the slum/village dwellers Women who are interested approach the branch Organisation and branch profile and overview of credit policies explained manager (BM) to form groups to target clienteleMEMBER SELECTION Economically active poor woman (in the age group 18–55 years), either self-employed or wage labourer Monthly income: individual <Rs1,500 (US$30); family <Rs2,500 (US$50) Resident of village/slum for at least one preceding year, not owning a large house Willing to be a co-guarantor for other women in the groupGROUP FORMATION Specific inputs provided to potential members on the ideal characteristics Groups with leader formed in one day of other members and the leaderTRAINING 5-day training in the local language with easy, numerical illustrations on Groups formalised products and use of multiple communication tools Group recognition test including process, policy and control aspects
MICROFINANCE BEST PRACTICESEach stage in the client formation process is carefully structured. After FIGURE 3.2 – RESPONSE TO COMPETITION – SPANDANAmember selection, there is considerable emphasis on communicatingthe rules that govern organisational practices, including those related to COMPETITIONgroup behaviour and products. Credit discipline is emphasised at allstages as is the organisation’s background and philosophy. ANALYTICAL REVIEW OF OPERATIONS AND PRODUCTS VIS-À-VIS COMPETITORSThus, right from the formative stages, Spandana focuses on clients get- ACTION TAKENting a sense of its guiding principles of being a dynamic, responsive,trustworthy and disciplined MFI. This strategic positioning enhances • Review of product design (lower interest rate, larger loan size)its ability to expand. While being comprehensive, the entire process of • Business analysis of changes in interest ratesclient/group formation is quite quick. This agility, apart from limiting • Increased communication with clients by actively promotingthe costs of promotion, has obvious benefits for potential to expand Spandana’s advantages relative to the competition through pamphletsoperations and penetrate markets. highlighting process and product differentiation (operational procedures; Spandana’s voluntary savings and social security productApplying the elements that define any strategy, it is clear that Spandana versus competitor’s compulsory savings)fares well. The client promotion and expansion strategy has direction • Piggy backing promotion efforts of the competitor while drawingand purpose, long-term implications in terms of expansion and ability clients awayto cover markets and it meets the needs both of the new clients for • Intense marketing and relationship building exercises in areas ofmicrofinance services with low transaction and opportunity costs and competitionof the MFI for volumes of business and additional outreach. • Close monitoring of competitor’s performanceIn addition to using the client development process to enable it to IMPACTexpand operations, Spandana has other elements that define its expan-sion strategy. These are • Increase in staff motivation and drive • Vertical concentration: Expansion to areas adjacent to an • Retention of clients in operational areas and strengthening of existing branch (maximum distance is 20 km) and market size organisation’s brand (60 per village and 3,000–4,000 per slum); based on experi- • Rapid growth due to better designed products and procedures and ence, Spandana estimates a conversion rate of 25% per village increased efficiency and, therefore, focuses on villages that have a target population • Attempts by Spandana to network to encourage cooperation amongst of at least 240 households MFIs • Splitting existing branches: A new branch is created out of an Operational strategy… 19
Operational strategy… existing branch only when the number of clients in the latter 3.3 RESPONSE TO COMPETITION exceeds 3,000; a senior officer is transferred to manage the new branch, with the older branch being run by a relatively junior 3.3.1 SPANDANA team • Gradual allocation of resources: Only one senior credit officer Competition for Spandana comes from the many other MFIs as well as is assigned till disbursements reach Rs20 lakhs (US$40,000); finance companies in its area of operation. Spandana views competi- only then is a branch created physically; with growth, more tion as a positive factor. It believes that competition spurs the organisa- staff resources are allocated; all such decisions are based on a tion to attain better performance and meet client needs in a more careful business analysis of new branch economics comprehensive and efficient manner. Faced with a high growth ori- ented, aggressive supplier of microfinance services in the recent past,Since the new branches evolve organically from an existing branch, no the organisation emerged successfully in the battle for the urbanincremental overhead costs are incurred until the new branch is created Guntur market. Figure 3.2 depicts the response of the organisation inphysically. As a result, the branch breaks even with a smaller portfolio. this situation.If the branch were to start afresh, significant costs would have to beincurred in terms of overheads and search cost, before the branch An analysis (using Porter’s five forces framework) of the competitive sit-started yielding returns. uation and Spandana’s response to it is presented in Table 3.2The resultant concentrated and low cost operations, coupled with other While much of Spandana’s success is due to competitive strategies con-factors such as time saving procedures and cost-effective MIS, has ceived and deployed after the onset of competition, the managementenabled Spandana to reach high levels of financial sustainability and out- now believes that it needs a more comprehensive strategy that willreach in a relatively short time span of four years. Growth continues to be enable it to cater to competitive situations more proactively. As the fivefast with the organisation increasing its member base between March and forces analysis in the table indicates, the competitive situation maySeptember 2002 from 16,400 to 23,500 members (43% growth over this change radically in the future. Therefore, plotting the organisation’speriod) even while operating in a geographically concentrated area. position vis-à-vis its competitors on parameters such as marketingSpandana is sure that the market potential within Guntur district is intensity versus depth of coverage or undertaking a SWOT analysis areimmense and that this strategy can be sustained in the future. methods that should be used for formulating a long-term strategy. 3.3.2 SEWA BANK SEWA Bank operates in Ahmedabad city – a highly competitive market – in the western Indian state of Gujarat. Small and large non-bank
MICROFINANCE BEST PRACTICESfinance companies (including the omnipresent Sahara group), chit TABLE 3.2 – SPANDANA’S RESPONSE TO COMPETITION – IN THE ‘FIVE FORCES’ FRAMEWORKfunds, urban cooperative banks and commercial banks all operate in FORCES SPANDANA’S RESPONSEthe city. In this environment, SEWA Bank has managed to compete indeposit mobilisation by increasing the amounts and numbers of small, POTENTIAL Barriers to entry to Spandana’s market are relatively low - withself-employed depositors. ENTRANTS comparatively small scale & low capital costs MFIs can gain entry though Spandana’s established presence, productThe main threat to SEWA Bank is the low barriers to entry though the differentiation & cost advantage do impose some barrierspower of buyers and suppliers and the threat of substitutes is low. POWER OF There is no formal organisation of buyers but buyerSEWA Bank’s response to competition has been through a three- BUYERS bargaining power could increase in the medium term ifpronged approach (CLIENTS) competition increases • Deeper product mix including daily savings as well as quickly disbursed daily (instalment) loans and greater product differ- POWER OF The power of suppliers is low as Spandana is one of the few entiation SUPPLIERS MFIs enjoying a high credit rating; moreover, there are several • Renewed efforts at brand positioning as a “trustworthy bank (LENDERS) suppliers for such MFIs for the self-employed poor” – invitations to new clients to visit SEWA Bank’s branch THREAT OF This threat is low as there is only a marginal level of • Better client services including doorstep collections by trained SUBSTITUTES involvement in microfinance from the formal financial sector community workers (Bank Saathis) and bank field staff and even where other MFIs might become interested, there (“Handholders”) are not many substitutes for the financial products and services being offered by Spandana; however, alternative savingOver the last three years, SEWA Bank’s response to competition on the options for clients from banks and non-bank financedeposit mobilisation front has yielded good results companies are threats that may become more significant in • Total savings (from individual accounts only) grew by an the future impressive 21% between 31 March 2001 and 31 March 2002 to reach Rs176 million COMPETITIVE Potential intensification of competition from large and small • Of this, high cost savings (average cost 10.5% pa) grew by RIVALRY MFIs is possible due to the relatively low barriers to entry; 23% and low cost savings (average cost 4.5% pa) by 17% pa – price wars are possible and the advantage of product though the faster growth of high cost savings is an issue of con- differentiation may diminish as competitors develop new cern and the bank is considering ways to lower its overall cost products or copy those of Spandana of funds Operational strategy… 21
Operational strategy… … 3.3 • The number of depositor accounts grew by more than 52% to 3.4 ORGANISATIONAL STRUCTURERESPONSE TO reach 172,010 by end March 2002.COMPETITION 3.4.1 SAMRUDDHI To build upon these achievements in deposit mobilisation, the organi- sation is now considering ways to consolidate its competitive position Samruddhi has a decentralised organisational structure (Figure 3.3). and to develop a comprehensive strategy to address the competition. The organisation is divided into units that have been formed on the Targeting new market segments, decentralising operations by increas- basis of geographical areas. ing the outreach of doorstep services, increasing the number of exten- sion counters, linking with other institutions such as the Ahmedabad In this decentralised structure each Unit functions as a profit centre Municipal Corporation and SEWA Bharat Trust in financial service while Samruddhi’s Head Office is essentially responsible for strategy. provision are some of the measures that the bank has begun to use. The Head Office particularly defines strategy related to fund mobilisa- tion and expansion. It also defines the operational policies such as those FIGURE 3.3 – SAMRUDDHI’S ORGANISATIONAL STRUCTURE related to portfolio management, recruitment, staff training and com- pensation. These roles are not fulfilled through a master plan, but GROUP CEO rather strategic control is built through business plans that are devel- oped by the Units and agreed by the Head Office. Overall, Samruddhi’s Head Office and Units have a two-way relationship that help both entities function efficiently and work towards achievement of MANAGER CHIEF OPERATING OFFICER COMPANY SECRETARY organisation’s mission. FINANCE & ACCOUNTS MANAGER Strategically, the main advantages of Samruddhi’s structure are OPERATIONS & HR • Each unit is able to concentrate on the problems and opportu- UNIT HEAD nities of its business area. These could vary vastly as Samruddhi works in a number of different regions and states – Rayalaseema and Telengana regions of Andhra Pradesh, FIELD EXECUTIVE FX 1 FX 2 FX 3 FX 4 TRANSACTION Maharashtra, Madhya Pradesh and Orissa. The units are ASSISTANT encouraged to innovate to attract untapped potential market segments of clients. • The Head Office focuses on the measurement of unit perfor- CUSTOMER SERVICE AGENT CSA 1 CSA 2 CSA 3 mance and has put in place a comprehensive incentive system for all levels staff. This incentive system is discussed in Section 8.
MICROFINANCE BEST PRACTICES • As the Head Office is not involved in day-to-day operations, the senior management is able to focus on strategy and policy 3.5 LESSONS IN OPERATIONAL STRATEGY issues. • This structure encourages managerial development, as the While operational strategy can vary depending on environmental fac- units are the training ground for undertaking senior manage- tors and organisational objectives, the illustrations highlight the key ment functions. elements that are required for the successful implementation of all microfinance operations. Strategies developed by MFIs must provideHowever, this decentralised structure has some inherent disadvantages long-term direction and be adapted to environmental conditions.that Samruddhi’s operational procedures attempt to mitigate. A decen- They should also yield some advantage through the efficient alloca-tralised structure could result in confusion over the locus of responsi- tion of resources while catering to market demand and stakeholderbility. To prevent this, the organisation has clearly defined and expectations.documented the roles and responsibilities of each staff member. The key features of good practice in operational strategy identified byAdditionally, to ensure co-ordination and the smooth flow of informa- this research aretion between the Units and the Head Office, Samruddhi has investedsignificantly in its MIS and human resources. These in turn facilitate CLIENT PROMOTION AND EXPANSION STRATEGYthe efficacy of the internal control systems of the organisation (see • Expansion strategy has long term direction and is integratedSection 6.3.2). The latter plays a vital role in ensuring the smooth with client promotion strategies. It has specifically definedfunctioning of Samruddhi as the leading Non-Bank Finance Company conditions that guide decisions related to expansion and is(NBFC) engaged in microfinance in the country. geared towards yielding competitive and other advantages to the organisation – Spandana’s use of conditions related to potential market size and distance from existing branches govern expansion decisions • Strategy related to the allocation of resources for expansion is based on a careful resource needs analysis and is in line with the business plan of the organisation – Spandana allocates human resources based strictly on staff productivity and analysis of basic branch economics; branches evolve organi- cally from existing branches Operational strategy… 23
COMPETITIVE STRATEGY 3.6 EMERGING TRENDS• A comprehensive analysis of competitive position, SWOT analysis and use of the five forces framework that ensures a MFIs are becoming increasingly aware of their external and internal envi- continuing ability to cater to growing markets – Spandana’s ronments and are gearing up professionally to manage them better. The actions have elements of such a strategy and it plans now to trend is to move away from an attitude of grant-dependent survival to develop a comprehensive strategy that will proactively place it becoming more proactive in working for sustainability. ahead of its competition• Client needs, product analysis and review, new product In this context, some trends that are gradually emerging in the microfi- development or product differentiation and cohesive com- nance sector in India are munication/promotion strategies yield competitive advan- tage – SEWA Bank’s response to competition focused on • Treatment of microfinance divisions as Strategic Business client needs analysis leading to new deposit products; further Units: Overall, multi-service organisations are now making it undertook an organisational branding exercise through a the strategic move of treating their microfinance programmes well-conceived promotion programme as strategic business units with a distinct purpose and clientele. This is leading towards organisational restructuring and theORGANISATIONAL STRUCTURING creation of separate staff functions and roles with proper• A decentralised structure for organisations with widely dis- responsibility assignment to staff/units. There is a distinct persed operational areas to provide operational flexibility for increase in professionalism in the management of microfi- quick decision making – Samruddhi works in a number of nance institutions. states and has, therefore, made the Unit Head responsible for the Unit’s operations with the authority to make day-to-day • Paradigm shift in target clientele definition: Part of the decisions process mentioned above involves expanding and redefining• A standardised structure with well defined roles and respon- the target group. MFIs are realising that it would be difficult sibilities of staff and line functions. At the same time it allows for them to achieve sustainability if they serve a small commu- for flexibility given that different branches work under differ- nity with relatively limited and homogenous needs. Therefore, ent market conditions a number of MFIs now choose to define their clients as “ the• The role of the head office is planning, monitoring and co- poor” instead of a smaller caste or occupation-based sub-set. ordination thereby allowing it to focus on strategic issues rather than operational decisions. There is also a marked shift away from the member-based par- adigm, wherein a client had to become a member first, then save and then take a loan. MFI programmes are now based on
MICROFINANCE BEST PRACTICES credit-needs whereby a client can become a member to take a • Increased focus on competition management: A few years ago loan and remain dormant after repaying the loan till she needs MFIs thought of competition only in terms of the local a loan again. MFIs realise that credit needs are not permanent moneylenders and other MFIs. Now they are increasingly and a fixed membership base is harsh on members – in terms redefining competition to include all financial service of opportunity cost – on the one hand, and restricts the growth providers in their work areas. As government programmes are of the MFI, on the other. largely under-cutting MFI operations, organisations are look- ing at their services and operating procedures to establish• Planned growth: Most MFIs are moving from supply depen- themselves as efficient service providers with low opportunity dent to demand based growth. Disbursements are planned and and transaction costs. As most clients are becoming price-con- managed instead of being sporadic and dependant on incoming scious, MFIs – as a strategy to manage competition – are funds. This is resulting in improvements in business planning focussing on communication with clients as a preventive and and client communication . These plans are not only for cash corrective measure to reduce dropouts. management but also have a bearing on the sustainability of the MFI. This trend has impacted the mindset of lenders who now see MFIs as commercial ventures with social objectives. Operational strategy 25
4 Products and delivery 4.1 INTRODUCTION Small (micro-) financial products are, in one sense, the reason for the existence of microfinance institutions as well as the basis for the gener- 4.1.1 DEFINITION AND OVERVIEW ation of revenue from the services provided. “Products are anything that can be offered to a market to satisfy a want or MFI products include mainly loans and savings, increasingly insurance need” and, occasionally, also other financial services. Products must be P Kotler14 designed to address the needs of clients while simultaneously meeting organisational objectives. These twin goals often involve trade-offs. FIGURE 4.1 – PRODUCT DEVELOPMENT SYSTEM FUTURE PLANS MARKETING PRODUCT STRATEGY IDEA GENERATION CONCEPT PRODUCT PRODUCT MARKET LAUNCH AND DEVELOPMENT & SCREENING DEVELOPMENT DEVELOPMENT DEVELOPMENT OR PILOT TEST COMMERCIAL- & BUSINESS ISATION ANALYSIS CUSTOMER MODIFY PRODUCT FEEDBACK TO OR MARKETING MODIFY I F T H E A N A LY S I S / R E S P O N S E I S N E G AT I V E – D R O P T H E P R O D U C T