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
MICROFINANCE BEST PRACTICESThus, products drive the growth and sustainability of an organisation However, recent times have seen a trend towards more innovation inand form the basis for determining the quality of the interface between products. Eclectic models such as Samruddhi in India, and many of thethe MFI and its clients. The design and introduction of products needs more progressive MFIs that may be based on either the SHG orcareful handling because of these factors. Further, products need to be Grameen models, have also begun to experiment with innovations incomplemented by an MIS that is able to monitor their status efficiently products. Thus, a wider range of products in savings and credit is nowand provide information on the characteristics of clients. Products being offered. This includes various kinds of deposit facilities, lines ofform a critical part of the competitive strategy of MFIs and variation in credit and individual cash flow linked loan products. In addition,product features and promotional strategies is the key determinant of insurance facilities are now being offered by several MFIs.market share. One drawback in MFI operations is that most saving products offeredProduct design, introduction and delivery can be analysed in terms of by MFIs, including the illustrations below (other than SEWA Bank), arethe 4Ps of marketing: extra-legal as the regulatory framework does not permit deposit mobili- • Product features sation by institutions other than banks or RBI-registered NBFCs. • Price Nevertheless, in recognition of the paucity of such services for micro- • Placement depositors, regulators have not disallowed savings mobilisation from • Promotion clients of MFIs. The focus on savings products, in this section of the report, is on the design features to the exclusion of their legal implica-In addition to the above parameters, the process of new product devel- tions. In the medium term, MFIs will need to reassess their savingsopment can be analysed via the system depicted in Figure 4.1 products to ensure that they are in compliance with the regulations.4.1.2 SECTOR PROFILE Another aspect that needs consideration is that products offered by MFIs are often not backed by an appropriate MIS. This can lead to inef-Most Indian (and indeed international) MFIs, tend to offer products ficient recording and poor monitoring of product performance.and services that are derived from the basic microfinance model that theorganisation follows. Thus, SHG-based MFIs facilitate savings rotation For the sector as a whole, the development and marketing of productsat the group level and focus mainly on credit products, whereas offered by MFIs is still evolving. Product promotion strategies (beyondGrameen model MFIs generally collect compulsory savings and offer basic information about product features), product costing and posi-two or three standardised credit products. tioning are generally not given due consideration. As the sector matures, MFIs will increasingly need to give these aspects greater priority.14 Kotler, P, 2001. Marketing Management. Prentice Hall of India Private Limited This section provides illustrations of a few institutions that are setting products & delivery… 27
products & delivery…the trend for the sector in terms of product offerings and new product The transition from internal circulation to mainly voluntary savingsdevelopment. Three of the following MFIs (Spandana, SEWA and ASA) occurred largely on the basis of client feedback. The voluntary savingsspecifically target women; Samruddhi and VSSU cater extensively to product, despite a zero interest rate for the depositor, has shown moremen clients. than a four-fold increase between March and September this year. This reflects client acceptance of and trust in Spandana’s services (on 30 September 2002 the voluntary savings deposited with Spandana4.2 ILLUSTRATIONS OF BEST PRACTICE amounted to Rs40 lakhs representing around 4% of total assets).4.2.1 SPANDANA In addition to the main savings products, described in Table 4.1, Spandana also facilitates “house owner savings”. This essentiallySpandana offers its members savings, loan and insurance products. operates as a chit fund for participating members, and promotes ‘dreamEach of these has been developed and modified based on client feed- savings’ under which husbands are encouraged to save to fulfil any assetback and the organisation’s assessment of its funding and portfolio purchase dreams of members of Spandana. All the savings productrequirements. features are actively promoted. Notably, the organisation highlights its savings products (and loan and social security products describedSAVING PRODUCTS below) in a pamphlet, produced in Telugu (the local language), depicting a comparison of features with similar products offered bySpandana has an interesting timeline with regard to the evolution of other MFIs. This promotion strategy – similar to the B segment car andsavings products – Figure 4.2. It experimented with various savings the white goods industry – is an important element in tackling a highlyproducts, eventually settling on a product that functions like a pass- competitive situation that could otherwise lead to an erosion of marketbook savings bank account along with a loan-linked savings product. share.FIGURE 4.2 – TIMELINE: EVOLUTION OF SAVINGS PRODUCTS INTERNAL CIRCULATION COMPULSORY MAINLY COMPULSORY WITH MAINLY VOLUNTARY THOUGH AT GROUP LEVEL SAVINGS INTRODUCTION OF VOLUNTARY LOAN LINKED SAVINGS CONTINUES • • • • PRE 1998 1998–2000 2001 2002 ONWARDS
MICROFINANCE BEST PRACTICESLOAN PRODUCTS While credit products are standardised with Spandana retaining the main product associated with Grameen MFIs, the following productThe main loan product of Spandana is the general loan that has stan- features are noteworthydard features. Loan amounts range from Rs5,000–12,000 in rural • Only 50-week loans are given – this enables quick recording ofareas. In recognition of the higher absorptive potential in urban areas, data and easy tracking of dues and recoveries. It also ensuresthe upper limit there is Rs15,000. The interest on loans is 15% pa flat compatibility with the MIS. Weekly instalments, based onand a 1% fee is deducted up-front. The loan period is 50 weeks except household cash flows, lower the amount of each instalmentin the rural areas where a monthly system is used. Prepayments on and make repayment easier for poor clients. Since prepay-loans are allowed primarily to enable members to graduate to the next ments are allowed, clients can, if they have the capacity, useloan cycle if they have the capacity to absorb a new loan. shorter terms for repaying loans.TABLE 4.1 – SPANDANA’S SAVINGS PRODUCTS PRODUCT INTEREST RATE FEATURES TARGET CLIENTS ORGANISATION’S PERSPECTIVE SPHOORTHY No interest • Any amount can be deposited during All members • Marginally higher transaction costs offset by increase in (VOLUNTARY) paid weekly centre meetings savings per member & boost to competitive strength SAVINGS • Withdrawable savings – withdrawals can derived from the flexibility to deposit and withdraw freely be made at centre meetings • Supports delinquency control – used to repay loan instalments during times of low cash inflow for the borrower SIRI 9% pa • Loan linked savings product – after All borrowers • Profitable due to low transaction costs SAVINGS the 2nd loan cycle, 10% of the loan • Positive impact on asset-liability structure & ability to amount has to be maintained with revolve funds Spandana • Form of collateral even while getting members to save • Amount accumulated weekly at • Generates goodwill & positive referrals from exiting centre meetings; not deducted clients since such members exit after getting the deposit upfront from disbursement back • Amount returned if member withdraws from organisation products & delivery… 29
products & delivery… … 4.2.1 • Loan ceilings by cycle have been increased to accommodate SOCIAL SECURITY/INSURANCE PRODUCTSSPANDANA’S client needs for larger loans; this has also improved Spandana’s PRODUCTS financial performance With risk mitigation and borrower welfare in mind, Spandana offers • Larger loans are for clients with good credit histories (“star insurance to its members. While Spandana has experimented with borrowers”) and higher absorptive capacity; also, special loans, various schemes, it now offers a standardised product that is manda- at lower interest rates (12% flat pa) are for HIV positive mem- tory for all borrowers – Table 4.2. bers – this differentiation serves as a good promotion tool for Spandana NEW PRODUCT DEVELOPMENT • Other loan products offered at interest rates of 12–15% pa include an education & infrastructure loan – however, these Over the last two years, Spandana has been following a tried and tested are a very small part of the portfolio method of new product development and introduction. While adher- • Pricing of loans is marked to the market and is competitive ence to the new product development process depicted in Figure 4.1 is with respect to other MFIs that have aggressive growth plans; not strict, Spandana broadly follows the steps shown in the figure. The it enables a comfortable margin over costs. main features of this process at Spandana are: • An evaluation of the overall product mix and potential market niches • Priority to ideas generation and screening with client feedback TABLE 4.2 – SPANDANA’S INSURANCE PRODUCTS PRODUCT PREMIUM FEATURES TARGET CLIENTS ORGANISATION’S PERSPECTIVE SOCIAL 1% of In case of: All borrowers • Differentiating product (from competitor’s SECURITY SCHEME loan amount • Member’s death – entire loan product mix) – boosts promotion efforts outstanding amount is adjusted • Allows risk mitigation for the organisation • Husband’s death – Rs5,000 • Pricing is based on using 50% higher mortality • Fire accident – Rs1,000 rates (than LIC’s benchmark 2 deaths/1,000) and so far has yielded large margins on this product No documentation required – disbursement immediate and is made at a special centre meeting
MICROFINANCE BEST PRACTICES and staff perceptions forming an important input • Use past experience in the market • Concept development through several staff meetings (credit • Analyse operational cost incurred in delivery, cost of funds officers and head office managers) though this stage is, in prac- (including that of idle funds) and market (bank) interest rates in tice, not distinct from the product development step various savings products • Business analysis as a priority – cost and profit analysis • Provide incentives and disincentives • Pilot testing and selecting pilot markets with care – based on the results of the pilot, product design may be modified SAVINGS PRODUCTS • Market testing through staff meetings and sales analysis – though, this is not done systematically but more as something VSSU offers its clients the facility of a daily deposit scheme, a savings that happens over time scheme similar to that of a commercial bank, fixed and recurring • Refinement and review of the product mix deposits as well as a regular income plan. These are described in Table • Product promotion efforts used not only to promote the rele- 4.3. Its depositors have access to a savings-plus bundle of products called vant products but also to tackle competition – apart from Seven in One facility under which services such as life, medical and edu- direct communication through staff, skits and songs used as a cation insurance, in kind incentives, travel incentives, social develop- supplementary tool to promote new (and existing) products. ment facilities and a doorstep collection facility are provided to the regular depositor. The doorstep collection facility, an innovative place-4.2.2 VIVEKANANDA SEVAKENDRA-O-SISHU UDDAYAN (VSSU) ment strategy in microfinance, gives VSSU access to a hitherto untapped customer segment that does not or cannot come to the officeVSSU is an NGO working in the South 24-parganas district of West for transactions.Bengal. The local market is fairly competitive with a number of MFIsand NBFCs vying for a share of the same target market. To compete Along with these incentives there are also disincentives such as penaltiessuccessfully in this environment, VSSU offers a wide array of products for early withdrawal. Through these means the organisation differenti-catering to the different financial needs of its clients. The product port- ates between client segments and encourages loyalty.folio has a good mix of offerings, which cater to client needs and organ-isational objectives in a balanced manner. Innovations in product The VSSU brand is promoted as one that offers a product to suit everyfeatures, pricing, promotion and placement have been adopted to need, on good terms and conditions. Each of its savings products tar-design the portfolio. gets a specific market segment and has features that are better than the products offered by the formal sector. For example, the Fixed DepositThe guiding principles of product design at VSSU are (FD) product offers a higher interest rate than the banks and shorter • Give what the market needs terms than post office deposits. • Base features on clients needs and income patterns products & delivery… 31
products & delivery… … 4.2.2 The organisation maintains its competitive edge by providing the client LOAN PRODUCTS VSSU’S with anytime access to its services 365 days a year – an innovative place-PRODUCTS ment strategy that gives VSSU a distinct advantage over most other financial The organisation offers its clients a number of loan products. These intermediaries in its operational area. include loans for general purposes, education, small group enterprises and the purchase of rickshaws. The interest rates on the products range Another strategic aspect that gives VSSU an advantage is its well- from 6–24% on declining balances. The pricing strategy adopted by defined and detailed product cost analysis. This is illustrated in Figure VSSU is largely based on the cost of funds. For instance, since the 4.3, using the daily deposit product. source of funds for the education loan is a loan with extremely soft terms (VSSU considers it a grant) the product carries the lowest inter- FIGURE 4.3 – OPERATIONAL ASSUMPTIONS FOR PRODUCT COST ANALYSIS est rate of 6% on a declining balance. STAFF To secure its loans VSSU offers it clients an array of collateral substi- • 1 field officer handles 200 clients/day tutes. These include mutual guarantors, third party guarantors, social • 1 field officer works for 25 days/month and guarantees by reliable persons, asset hypothecation and post-dated earns a monthly salary of Rs 2,000 (Rs80/day) cheques. The suitability of the substitute is determined by the organisa- • Staff cost/day/client = Rs 80/day/200 clients tion. For those members who have a large savings deposit, VSSU = 40p/client/day extends the facility of a within deposit loan (loan that is less than or equal to the amount of savings) without collateral. The product allows the member to obtain a loan of upto 99% of his/her savings balance at STATIONERY INTEREST an 18% interest rate. = 20p/client/day TOTAL COST Paid to client = 80p/client/day = Rs60 p.a. To promote its brand, VSSU gives its clients an interest incentive if AUDIT AND = Rs250/client p.a. Earned from bank they agree to put up a VSSU signboard. The features of its savings MONITORING = Rs99 p.a. products are publicised by printing the product terms and conditions = 20p/client/day in the client’s passbook. Clients are also informed of these features dur- ing the organisation’s Annual General Meetings. NET TRANSACTION COST NET INCOME EARNED 4.2.3 SEWA BANK = 70p/client/day =Rs39 p.a. SEWA Bank is a pioneer in the field of microfinance. It was the first microfinance institution to register legally as a bank. As an urban coop-
MICROFINANCE BEST PRACTICESTABLE 4.3 – SAVINGS PRODUCTS OFFERED BY VSSUPRODUCT FEATURES TARGET CLIENTS ORGANISATION’S PERSPECTIVEDAILY DEPOSIT • Fixed amount to be deposited each day Daily wage • Easier for clients to save daily • Lock-in period of 18 months earners (earlier • Early viability established through transaction • 7-in-1 facilities after lock-in period rickshaw pullers) cost analysis • 4% simple interest after lock-in periodSAVINGS DEPOSIT • Additional withdrawable product for clients of other Bank savings • Withdrawable savings option for existing savings schemes account holders clients • Minimum balance Rs500 • Lower collection costs due to add-on transaction • Maximum of 4 transactions allowed per month • Meets organisation’s short-term fund • Doorstep collection for a deposit amount >Rs1,000 requirement • 5% simple interest for periods >90 daysFIXED DEPOSITS (FD) • Deposit upto Rs 45,000 for a maximum of 78 Investors of • Clients need investment options for long term months post office and bulk funds • 7-in-1 facility for depositors deposits/banks • Source of long term funds for the organisation • 8–11% quarterly compound interestRECURRING DEPOSIT • Minimum monthly deposit Clients who do not • A flexible option for savers augments deposits • Can be used as collateral to access loans have a daily income • Increased member credit-worthiness by use as • 7-in-1 facility loan collateral • 10–11% compound interest • Reduced risk for the organisationMONTHLY INCOME • Pension plan Retired persons and • Reduced cost of funds for the organisation.SCHEME • One time deposit for 60 months pensioners • Costing done on the basis of cost of external • Personal accident insurance and idle funds • 9% simple interest paid out monthly • More stable cash flow products & delivery… 33
products & delivery… … 4.2.3 erative bank it is one of only two banks – the other being a Local Area Moreover, the Bank while conducting all withdrawal or disbursementSEWA BANK’S Bank promoted by BASIX – focusing on providing microfinance ser- transactions at its office in Ahmedabad, has increasingly moved to PRODUCTS vices. As elsewhere, Ahmedabad, where SEWA Bank operates, is char- collecting deposits and loan repayments at the clients’ doorstep. For acterised by the lack of access of low-income people to commercial this it uses extension counters, mobile vans, bank field staff bank services. At the same time, the city has seen a number of instances (Handholders) and community leaders it has trained for this purpose of fraud perpetrated by financial service providers, which makes mar- (Bank Saathis). While this raises issues of financial control for SEWA keting financial services very difficult. Bank, with the development of appropriate systems this potential problem can be overcome. In this situation, SEWA Bank’s brand positioning as a “trustworthy bank for the self-employed poor” has been quite successful (see Figure 4.4). Another aspect is the additional cost – mainly in the form of SEWA Bank offers a full range of products and services based on client commission paid to the Bank Saathis – of 1% of the deposits collected. feedback, staff discussions, research and impact studies. These products This incremental cost is variable and does not create a significant are differentiated as follows according to the life cycle needs of clients adverse impact on the bank in case the Saathis do not succeed in their • Savings: to enable planned expenditure endeavours. Apart from being very convenient for clients, this facility • Credit: for productive expenditure including house building forms an important part of the institution’s placement/delivery and debt redemption strategy. Thus, SEWA Bank’s mix of doorstep and office-based services, • Insurance: to meet unplanned expenditure needs combine convenience and physical access with the trust traditionally • Financial counselling: to enhance clients’ understanding of associated with banking services – something that is highly valued by financial management. its low income clients. FIGURE 4.4 – TRUST-RETURN TRADE-OFF IN DEPOSIT SERVICES SEWA Bank is also a pioneer in terms of leveraging the relationships built by its sister organisations – the Self-Employed Women’s Association and its various affiliates – to push market penetration. R ETURN ON DEPOSITS HIGH NBFCs These institutions have played a major role in promoting the bank’s ser- MEDIUM SEWA Bank vices in their areas of operation. A very good example is the housing division of SEWA, which has been instrumental in arranging a unique LOW Commercial partnership between SEWA bank and the Ahmedabad Municipal Banks Corporation. In this arrangement, the SEWA housing division identi- LOW MEDIUM HIGH fies an area and pursues the Municipal Corporation to adopt the area for basic infrastructure development. Once this is done, SEWA Bank TRUST extends housing loans in the area.
MICROFINANCE BEST PRACTICESTABLE 4.4 – SEWA BANK’S RANGE OF SAVINGS PRODUCTSPRODUCT INTEREST RATE FEATURES TARGET CLIENTS ORGANISATION’S PERSPECTIVESAVINGS 4% p.a. • Any amount can be deposited and All members • Basic savings product – cheap source ofACCOUNT withdrawn at any time fundsCURRENT ACCOUNT No interest • Provides cheque facilities to Institutional clients • Helps tap the significant small business institutional clients community • Large and low cost source of fundsFIXED DEPOSIT 7–10.5% p.a. • Products with a tenure between 60 All members • Positive impact on the asset-liability days and more than 5 years structure • Fixed deposit certificates can be gifted • Significant source of funds for the institutionRECURRING DEPOSITS 4% pa for daily • Some products have a bundled offer of Daily deposit – • Significant source of funds(including a deposit; a loan, conditional on regular savings daily wage earners • Promotes regular savings habit indaily deposit • Daily deposit provides easy savings clients and serves as a long term sourceproduct) 10.5% facilities Long term recurring of funds compound • Long term deposits have monthly deposits – • Positive impact on the asset-liability p.a. for long deposit amounts that range from all members structure term deposits Rs50–750 (>5 years) • Conversion of recurring deposits into fixed deposit products is allowed • Each recurring deposit product is distinctively branded and promoted with the objective of meeting certain life cycle needs products & delivery… 35
products & delivery… … 4.2.3 SAVINGS PRODUCTS Designed with the diverse credit needs of its clients in mind, the mainSEWA BANK’S loan products of SEWA Bank have features that suit the circumstances PRODUCTS SEWA Bank has become a leader in microfinance with regard to sav- of each type of borrower. The income generation and debt redemption ings products owing to its belief that the provision of secure opportuni- loans have cashflow based flexible repayment. The housing loans have ties to save and build assets is critical for low-income women. Savings lower interest rates and longer terms and are given only after ensuring also provide the bank a regular inflow of funds at a relatively low cost. that the Ahmedabad Municipal Corporation plans to undertake devel- The range of products offered by the bank is described in Table 4.4. opment work in that area. The jewellery based secured loan’s USP is speed of appraisal and disbursal that makes it convenient for people It is evident from the table that SEWA Bank offers a variety of product faced with an emergency. features in its savings product mix. This mix is coupled with extensive deposit mobilisation efforts including the use of promotional material Despite its effort to design products to meet the credit needs of its and annual lottery schemes attached to deposit accounts, and the pro- clients the bank has a low credit-deposit ratio. It is this perception that vision of easy access delivery channels (placement). This has enabled has led SEWA Bank to undertake further product development – such the organisation to increase its deposit base from Rs268 million on 31 as the recently introduced daily instalment loans. The bank also plans March 2001 to Rs464 million a year later. to undertake more intensive promotion initiatives for its loan products. However, with regard to pricing, SEWA Bank has a problem. The inter- INSURANCE PRODUCTS est payable on all its long-term deposits is not only in excess of those offered by comparable institutions in the market it is also higher than SEWA Bank’s insurance products are linked with formal insurance the returns on its investment activities. Moreover, the quantum of sav- agencies – the Life Insurance Corporation for life insurance and the ings the bank has raised is also much higher than its fund requirements. General Insurance Corporation for non-life insurance. The link with these agencies allows the Bank to offer products that enhance borrower This situation vis-à-vis the bank’s savings products may not be finan- welfare by enabling risk mitigation for them (and by extension also for cially sustainable in the medium to long term and is therefore currently the organisation). under review. These products form an important addition to the institution’s product LOAN PRODUCTS mix to complete a comprehensive financial services package, which addresses most of the life cycle needs of the Bank’s clients. To promote SEWA Bank’s loan products have a number of useful product features its insurance products SEWA Bank plans to use Bima Sevikas (field specifically designed for the needs of its clients. These products are out- staff specialised in insurance). lined in Table 4.5.
MICROFINANCE BEST PRACTICESTABLE 4.5 – OUTLINE OF SEWA BANK’S LOAN PRODUCTSPRODUCT INTEREST RATE FEATURES TARGET CLIENTS ORGANISATION’S PERSPECTIVEINCOME 17% p.a. • For debt redemption and income generation All members • Basic loan product targeted at self-GENERATION declining activities employed clientsLOANS • First loan is Rs5,000 and maximum loan amount Some loans are Rs25,000 targeted at special • Repayable over 3–5 years categories of clients – tenure decided by a special loan appraisal, client – such as the wives rating system and client cash flows of mill workers • Smaller loans (daily loans) of amounts <Rs5,000 are given for meeting urgent requirements of clients – requires very little processing timeHOUSING LOAN 14.5% p.a. • Given for house repair, extension, construction Members with • Expected to be an important contributor to declining • ‘Parivartan’ scheme involves upgrading of slum stable savings growth dwellings. balances and live in • Firm belief that improved housing facilities • Product is part of an institutional partnership selected slum areas are productive and beneficial for both the between the Ahmedabad Municipal Corporation lender and borrower and Mahila Housing SEWA Trust • Provides a competitive edge to the organisation and boosts promotion efforts for all productsSECURED LOAN 17% p.a. • Uses jewellery as collateral after valuation by experts All members who • Secured loan declining • Jewellery physically retained by SEWA Bank until have jewellery • Easy and quick access to loans for clients loan is fully repaid who have jewellery and need to convert such assets into a more liquid form • Positive impact on organisation’s brand products & delivery… 37
products & delivery… … 4.2.3 FINANCIAL COUNSELLING repayable in equated monthly instalments and carry a 15%SEWA BANK’S p.a. declining interest rate. ASA is also flexible when it comes PRODUCTS This service was formally introduced only recently (July 2002) though to agricultural loans. Based on requests from members, it can it has been available informally for a long time. This service has the decide to offer a loan with repayments made on monthly or potential for providing a thrust to SEWA Bank’s position in the highly quarterly terms. competitive market in urban Ahmedabad. The idea behind the service is to enable its clients to understand planning, consumption and invest- • Different products for different purposes: There are four ment, fund sourcing and asset distribution in relation to personal such products. This differentiation enables improved tracking financial management. Initial perceptions of this recently introduced of loan utilisation and contributes to portfolio diversification. service are that it is a useful addition to SEWA Bank’s product mix and Thus, product design enables risk mitigation. the bank’s clients have an increasing interest in it. • Placement that facilitates internal control and reduces trans- 4.2.4 ASA TRUST actions costs: All loans are disbursed from the branches on two fixed days every week – this strategy facilitates internal The Activists for Social Alternatives Trust (ASA) is one of the largest control and also reduces transaction costs relative to the earlier MFIs working in the Thiruchirapalli region of the southern Indian system where disbursements were made every day of the week. state of Tamil Nadu. • Savings as a sustained and growing source of funds: Savings ASA follows the Grameen Bank model and has evolved its products and are of two types – voluntary and compulsory. The compulsory delivery systems over time. ASA’s basic products are simple and have savings are linked to the number of years of membership, a clearly laid out terms and conditions. While this limits the product product design feature that enables a sustained and growing design features it is compensated to some extent by the fact that ASA’s source of low cost funds for the organisation. The voluntary product mix is wide and meets a variety of life cycle needs. The mix savings act as an additional mode of savings for the members includes savings, credit, insurance linkage and non-financial services. even while enhancing the abilities of members to repay loans on time. ASA was amongst the first Grameen patterned MFIs Key features of ASA’s products include to introduce a voluntary savings product. • Simple product design: Products are designed to facilitate easy • Insurance linkage to mitigate risk: Insurance linkage prod- record keeping and tracking. Most loans are repayable on a ucts complete the product mix at ASA – all members who bor- weekly basis with a repayment period of 50 weeks at an 18% row for animal husbandry purposes are linked with a large, p.a. flat interest rate. Only the loans given for housing are public sector insurance agency for animal insurance. This has
MICROFINANCE BEST PRACTICES been in practice since the late 1980s. In addition, over the past Figure 4.5. These steps involve participation at all levels of the organi- couple of years, life insurance has been encouraged for all sational hierarchy. members – by now an estimated 70% of members have been covered under this scheme which entails insurance being This process has enabled ASA to react to client feedback quickly and issued by the largest life insurance company in India. This has, thus, enhanced its ability to retain clients by offering appropriate strategy of insurance linkage enables ASA to mitigate risk even product features. Field level communication is also given importance while limiting its contingent liabilities for insurance claims. through staff disseminating information at client meetings, client repre- Nurturing the relationship with established insurance agencies sentatives are also used for this purpose. has helped to facilitate the insurance service in terms of claims settlement and has been of benefit to all the parties concerned. Other product promotion efforts include the use of padyatras. Such an event involves an organised walk undertaken by senior branch staff andApart from these financial products, ASA offers business development the top ASA management to provide an opportunity for direct interac-services to clients. This non-financial product is seen as a useful supple- tion with clients. This mode of interaction has been well received byment that, apart from benefiting clients, enhances the organisation’s ASA’s clients and provides a unique way to communicate with them onability to cope with competition. A special team has been formed to a periodic basis.assess the need, mode of delivery and types of non-financial, businessdevelopment services for members. The exact form that this service will 4.2.5 SAMRUDDHItake before it is replicated on a larger scale is now being researched.ASA’s role will be that of a facilitator and will be based on cost recovery. Samruddhi was started as an innovation in microfinance to promotePreliminary indications are that there is a significant demand for such livelihoods. It has a strong client focus and its products and deliveryservices though this will only be tested when the service is offered on a systems have been designed, to meet the needs of various clients in dif-commercial basis. Nevertheless, members see even the existing scale of ferent rural livelihoods/sectors. Perhaps the most important attribute ofsuch services as an additional benefit and a supplementary product that Samruddhi’s operations is its ability to take an unconventionalwidens the range offered by ASA. approach to controlling its costs and risk. Its product development process stresses the segmentation of the target market and the develop-ASA’s products have been modified over time with changes in the prod- ment of specific product structures and delivery channels.uct design based on both client feedback and inputs from the branchstaff. For this purpose, the organisation follows a systematic process of The organisation’s product features are drawn from three main parametersproduct development and review. The structured process for enabling • Repayment ability (duration)client responses to feed into product design and the multiple steps • Associated risk (security)required for introducing new product features are summarised in • Purpose products & delivery… 39
products & delivery… … 4.2.5 Repayment ability (cash flow) determines the duration of loans, which ment. Through these, Samruddhi facilitates indirect income generationSAMRUDDHI’S vary from upto one year (for short term loans) to 1–3 years (for and, thereby, aims to contribute to wider economic development. PRODUCTS medium term loans). Loans greater than 3 years are presently not issued as Samruddhi feels that it does not have the capacity to appraise and Permutations of these parameters with various placement modes, for manage these loans. To mitigate its default risk, the organisation col- both delivery and collection, provide the client with a valued credit ser- lects a refundable cash security (CS), which is a specified percentage of vice. Loan pricing is done on a cost plus basis including the cost of risk. the disbursed amount. Thus, a General Purpose loan extended to an SHG carries an interest rate of 15% with CS and 18% without CS. Crop loans that are inher- Purpose-wise loans are available for both farm and non-farm activities. ently risky carry higher interest rates of up to 24%. Farm loans are for cultivation, purchase of agricultural inputs and live- stock rearing. Non-farm loans include manufacturing, trade and services. Unlike most MFIs in India, Samruddhi does not have field workers Within this, Samruddhi has a product for “growth microenterprises”. that transact directly with the client. Instead it works through These are loans for units that have the potential to generate wage employ- Customer Service Agents (CSAs) who are self-employed field officers responsible for business development and the collection of Samruddhi FIGURE 4.5 – STRUCTURED PROCESS FOR PRODUCT DEVELOPMENT & MODIFICATION loans. As the commission paid by Samruddhi is directly related to the volume and quality of business generated by the CSA, this mode of Summarised feedback from clients (received through the loan origination is cost-effective. The organisation’s Field Executive branches): discussed at core team (top management) meeting (FX) monitors the work of each CSA. Loans are disbursed through various channels that serve to increase the Feedback loop Discussion with the branch managers outreach of the programme while at the same time reducing risk. For example, crop loans that are extremely risky are disbursed to joint liabil- ity groups (JLG). The JLG maintains peer pressure and also reduces the Discussion with the Coordination Committee transaction cost for Samruddhi. Other channels include loans to SHGs, (ASA staff plus representatives of clients) SHG Federations and Mutually-Aided Cooperative Societies (MACS) as well as Revolving Savings and Credit Associations (ROSCAS). Communication with clients through field staff Like disbursement, collection is also designed to minimise cost and risk. Collections are the job of the CSA and lending to groups reduces the cost of transactions. Samruddhi also lends to members of milk cooperatives. The manager of the milk chilling plant acts as an informal
MICROFINANCE BEST PRACTICESguarantor for these loans. For these members the repayment instal- risk. Table 4.6 shows the pros and cons of Samruddhi’s loan products.ments are deducted directly by the plant from the payments due tomilk producers. This collection method helps to control delinquencyTABLE 4.6 – PROS AND CONS OF SAMRUDDHI’S LOAN PRODUCTS PRODUCT PROS CONS SAMRUDDHI’S STRATEGY INDIVIDUAL LENDING √ Low transaction and opportunity x high transaction cost for lender • loan origination and collection by CSAs cost for clients x higher risk reduces transaction cost for lender √ “credit focussed” rather than a • cash security acts as collateral model-based approach JOINT LIABILITY GROUP √ group peer pressure x group default • self appraisal of loan proposals (JLG) √ lower transaction cost x limits flexibility as group • legal mutual agreement between members formation required SELF HELP GROUP (SHG) √ group peer pressure x high group mobilisation cost • no end use restriction therefore a higher √ low transaction cost interest rate/CS • Microfinance Agents (MFAs) operating like CSAs reduce monitoring cost MUTUALLY AIDED √ Low transaction cost with high x Restricted control over the • Thorough financial and operational appraisal COOPERATIVE SOCIETIES individual outreach end-use of the MACS (MACS) x Low geographical and sectoral • The responsibility of assuring individual diversification repayment lies with the MACS ROSCAS √ Income generating common x Activity may be seasonal and • Cash flow based repayments as the activity is activity of a group market dependent increasing the common √ Low risk due to members’ own portfolio diversification risk • Higher interest rates along with cash security funds invested in the same activity products & delivery… 41
products & delivery…4.3 DESIGNING FINANCIAL PRODUCTS FOR THE POOR PRICE • Pricing based on a detailed costing of the product, consider-Sophisticated product design and development practices illustrated ing transaction costs and client costs as well as prevalent mar-above do, of course, need to be deployed in accordance with the strate- ket rates – VSSU has a well defined framework forgic framework of an MFI and the capacity of its MIS to handle its undertaking thisinformation and monitoring requirements. Specific features of the • Pricing is a strategic decision undertaken in line with sustain-product design and delivery mechanisms of best practice institutions ability considerations and overall organisational goals – facedcovered by this research are with competition Spandana decreased its interest rate on loans but only after an analysis of the financial implications ofPRODUCT FEATURES the change • Undertaking continuous client and market research as well as organisational assessment as key steps that feed into product PROMOTION feature design – ASA, SEWA Bank, Spandana and VSSU • A systematic strategy to explain product features or promote respond quickly to client feedback and market competition the differentiating features of an organisation’s product mix by designing products that fit within the capacity of their sys- vis-à-vis competing offerings – Spandana’s use of a pamphlet tems and boost their financial performance prepared in the local language, is an important tool in tack- • Highly flexible and client-friendly product features that ling competition, whereas, ASA uses, amongst other tools, a enhance the competitive strength of the organisation – VSSU padyatra to promote products, obtain feedback and build offers a fully withdrawable savings product and bundled loan customer loyalty and savings products while SEWA Bank offers an annual lot- • Multiple promotional tools that supplement direct commu- tery scheme for savers, daily savings collection at the doorstep nication efforts of an organisation – VSSU provides incen- for daily wage earners and a loan linked to regular deposit tives to clients to place its sign-board at the site of their behaviour for some recurring deposit products business while Spandana organises skits in potential markets • A comprehensive product mix catering to a wide range of and uses songs to advertise its products and services. financial services: differentiation within product lines and a • Specific brand positioning of the institution and its products complete range of product lines – SEWA Bank’s differenti- – SEWA Bank positions itself as a “trustworthy bank for the ated savings products and comprehensive package of financial self-employed poor”, while to Spandana’s clients it is “a trust- services illustrates this; VSSU’s savings product line reaches worthy MFI providing very efficient and responsive financial three distinct market segments – daily wage earners, salaried services”, similarly VSSU positions itself as “products for persons and the retired everyone at better terms with anytime access”
MICROFINANCE BEST PRACTICESPLACEMENT MFIs covered under this study show, unconventional and innovative • Delivery mechanisms that enable convenient access of finan- thinking is required to meet the needs of low-income clients. Products cial services to clients – SEWA Bank uses mobile vans, Bank and services are key elemens of expansion and delivery strategies and Saathis and “Handholders” who reach clients at their need to be designed to balance client and organisational needs. As the doorstep; VSSU provides its clients any time access to ser- sector matures, deployment of innovative product design and delivery vices, 24 hours-365 days strategies described in this section is likely to become more common. • Multiple and low cost delivery channels that enhance prod- While some of the products and delivery systems discussed here are as uct outreach – Samruddhi uses collection agents, collabora- yet to be fully tested, a broader panorama of the microfinance sector in tion with agri-input companies, village level institutions and India indicates that these products form the vanguard for some of the other institutional service providers emerging trends in the industry, includingNEW PRODUCT DEVELOPMENT • Fully flexible product offerings: Products that can be innova- • A systematic process based on market and client level tively designed to meet customer needs – this would mean research and feedback including a conceptual design phase, a many more variations in features than are being commonly business analysis and a pilot test – Samruddhi and Spandana offered at present. Such a development would necessitate follow this structure to introduce new products accompanying sophistication in information and monitoring systems used by MFIs.4.4 EMERGING TRENDS • Automation: To facilitate easy transactions, some MFIs in the country are thinking of creating an ATM-based infrastructureIt is evident from the above discussion that improvements from the while others are experimenting with the use of smart cards anddays of rigid or very loosely defined products have taken place in the personal digital assistants (PDAs) to facilitate recording,microfinance sector in India. As MFIs in India grow and expand and as reducing transaction costs and improving delivery.competition in the sector increases, a greater focus on products anddelivery methods will be needed. Product offerings will require careful • Detailed marketing and product development strategies:thought in relation to the 4Ps of the marketing mix. Moreover, new Formal and systematic steps to decide on design, promotionproduct development will also need to be undertaken more systemati- and positioning of products. Developing coherent andcally and scientifically. Considerations of branding, product position- detailed marketing strategies similar to those employed by theing and improving organizational MIS to cope with the increased formal financial sector are being considered for markets suchrequirements brought about by these changes will also be necessary. as Guntur district of Andhra Pradesh where competition is becoming intense. products & delivery 43
5 Management Information Systems 5.1 INTRODUCTION strategy and access to resources are the key factors that determine the complexity of the required system. 5.1.1 DEFINITION AND OVERVIEW Generically, a good MFI information system should incorporate the A system is a group of interrelated components working together towards a following characteristics common goal by accepting inputs and producing outputs in an organised transformation process. O’Brien15 • User friendliness for data entry and reporting: MFI systems are mostly used by semi-skilled personnel at the branches and MIS: A management information system captures data, processes it and need to provide a good user interface to minimise error provides relevant information for control, analysis and decision-making at the operational and strategic level in a cost efficient and timely manner. • Timely, accurate and reliable information: The microfinance business is fast moving involving numerous transactions and From the definition above it is clear that, given their critical link with decision makers who need reliable information on time to decision-making, Management Information Systems (MIS) are required facilitate control and decision making in every type of organisation. An MIS has special relevance for MFIs given that their operations involve very large numbers of small financial • Design and output flexibility to suit the organisation’s chang- transactions with clients at frequent intervals. These transactions have ing needs: Given the sector’s nascence and rapid growth, most to be constantly monitored to assess the health of the organisation and MFIs are growing at a brisk pace and information needs are decide on future actions. Thus, operational and strategic decision mak- constantly changing. This requires systems that can be modi- ing in an MFI relies heavily on appropriate and timely information fied and upgraded easily at a reasonable cost. being gathered through effective systems. • Links to ensure data flow within an organisation: To improve While each MFI strives to develop its own system or perhaps to acquire cost efficiency and human resource productivity, it is impor- the best available MIS, there is no one single formulated information tant to link up the MIS with other management systems like system that can address the needs of all institutions. An MFI’s size, accounting. methodology, volume of operations, managerial structure, expansion • Secure and stable architecture: The large number of transac- 15 O’Brien, James A, 2000. Management Information Systems. Tata tions and the resulting storage and processing requirements McGraw Hill, India. make stability and security critical factors for MFIs.
MICROFINANCE BEST PRACTICES • Cost-effectiveness: Considering the delicate financial health either or all of the following problems and low margins earned by most MFIs, it is necessary that the • The degree of software customisation possible is limited. The system be highly cost-efficient. available software usually caters to a uniform microfinance programme and does not allow for local variations.5.1.2 SECTOR OVERVIEW • The cost of the available software is usually beyond the MFI’s budgeted resources.Most Indian MFIs do have some basic information systems to ensure • Post-purchase service is limited.data flow to the head office, chief functionary or donor agency. Inmany organisations, large and small, these systems are manual, not pro- Locally developed software is easier to incorporate within the existingfessionally designed and prone to errors. Recording at the field level system if it is planned and designed carefully. While it requires greatercomprises of client passbooks and a loan register that are consolidated – staff time during the development phase than standard software, thegenerally with a significant time lag – at the head office. Accounting is investment in development balances out as adoption becomes easier.very basic in nature and annual financial statements are often preparedseveral months after the end of the accounting period. Reports for use This section looks at some of those institutions that have succeeded inby staff are very few in number and tend to focus more on donor setting up systems that overcome these difficulties. While two of therequirements than on operational utility. MFIs documented here have computerized systems, one organization – Spandana – has a manual recording process that puts to rest the ideaAs MFIs grow, gain exposure and experience and obtain greater access that manual systems are inherently weak and signify the inefficiency ofto grant funds the accounting systems are usually the first to be com- an organization.puterised. The portfolio system usually runs on a basic MS Excelspreadsheet. As computer-literate personnel are scarce at the price MFIsare willing to pay, most organisations find it easier to maintain manual 5.2 ILLUSTRATIONS OF BEST PRACTICErecords and computerise only during the consolidation and preparationof reports. 5.2.1 SPANDANAMature institutions introduce professionally designed management Spandana has a manual recording and reporting system that is repre-information systems to deal with growth in the volumes of credit and sented in Table 5.1.clients. Most of these MFIs opt for software that has been customisedfor them, such as the FAMIS software used by Samruddhi or the Spandana modifies its systems to minimise data redundancy and cap-Portfolio Tracker developed by SKS and CFTS. This is because the ture as many details as possible. While the manual system is very cost-available MIS software for MFIs, in the Indian market, suffer from effective and requires low operator skills, it does leave open the Management Information Systems… 45
Management Information Systems TABLE 5.1 – SPANDANA’S MANUAL MIS OPERATOR MEMBERSHIP SAVINGS LOANS DISBURSEMENT LOANS COLLECTIONCLIENT Field worker (FW) CENTRE REGISTER SAVINGS PASSBOOK/CARD • • LOAN PASSBOOK • • WEEKLY COLLECTION SHEET •BRANCH Accountant MEMBER Product-wise savings register • Disbursement register BASELINE DATA • FW DAILY FINANCIAL STATEMENT • Branch Manager (BM) DAILY DEMAND COLLECTION BALANCE • Accountant CASH BOOK • GENERAL LEDGER • BM •Weekly progress report • •Weekly receipts and payments • •Monthly progress report • Note: Text in italics represents points of data consolidation Ratios • HEAD OFFICE (HO) THE RESULTING REPORTS GENERATED BY THE MIS AT SPANDANA ARE REPORT GENERATED BY GENERATED FOR FREQUENCY FINANCIAL STATEMENT FW Cashier – check cash balance Daily DEMAND COLLECTION BALANCE BM & FW BM – overdue calculation Daily PROGRESS REPORT BM HO – operations for consolidation Weekly & monthly RECEIPTS AND PAYMENTS Accountant Accounts department for consolidation Weekly PERFORMANCE RATIOS BM HO operations for monitoring Monthly CENTRE MEETING APPRAISAL BM HO – Human resource department for performance appraisal Weekly
MICROFINANCE BEST PRACTICESpotential for entry errors. Additionally in view of the organisation’s reports that are prepared at the HO level are manual but these are soonexpansion plans and considering potential situations of a very high and to be incorporated into Portfolio Tracker. All the main reports aresudden increase in delinquency levels, the current system could be a shown in Table 5.3.limiting factor in terms of the efficiency of operations. The SKS and CFTS system, comprising Portfolio Tracker & AccountsNevertheless, while these potential downsides exist, given that the module, is a standardised software for the Grameen model. The com-organisation is able to produce branch wise statements of financial and plexity level is low and its Windows platform allows easy disseminationoperational highlights by the end of every week and consolidated state- of operating knowledge to the field staff. This standardisation has alsoments within a day or two of every month end, it is clear that the man- enabled proper definition of access rights and security procedures. Theual MIS is quite efficient and cost effective at the present scale and integration of the Portfolio Tracker with the Accounts module permitsquality of operations. This efficiency facilitates the remarkably high error-free data transfer in quick time. These features make it very user-staff productivity levels (around 450 active borrowers per field staff friendly and architecturally stable. However, the system is relativelymember) at Spandana, and thereby, impacts positively the organisa- inflexible and is limited in terms of incorporating changes in operatingtion’s bottomline. parameters. It also lacks analytical and planning capability and these functions must be performed separately. SKS is now in the process of5.2.2 CASHPOR FINANCIAL AND TECHNICAL SERVICES LTD (CFTS) incorporating these modules into the Portfolio Tracker software. AND SWAYAM KRISHI SANGAM (SKS) The MIS is based on a “part distributed processing” model where theBoth CFTS, an MFI based in the Mirzapur district of the eastern branch offices have limited processing capacity. They manage opera-Indian state of Uttar Pradesh, and SKS (with operations in the south- tions, reporting weekly to the head office where the information is col-ern state of Andhra Pradesh) use the Portfolio Tracker (originally devel- lated and analysed.oped by Grameen Communications) to record data and generatereports. The software was enhanced by CFTS to include an accounts The collection sheet is the basic recording document. It automaticallymodule (Version 2.1). SKS then made further changes in-house and is generates amount due and amount repaid. In case of a deviation frompresently using Portfolio Tracker 2.5. As both organisations use the the default amount, the collection/ disbursement is recorded manually.same software, broadly the information flow is depicted in Table 5.2. At the end of the day’s operations, the information is confirmed by the branch manager/cashier, following which the relevant voucher entriesBoth CFTS and SKS generate a number of reports both at the branch are made in the accounts module. The confirmation process preventsand HO levels. As most of the reports are auto-generated by the system, the possibility of erroneous entries being passed.the term “generated by” in the table refers to the person who is respon-sible for producing the report as part of his/her job functions. A few SKS is also experimenting with innovative recording mechanisms using Management Information Systems… 47
Management Information Systems TABLE 5.2 – PORTFOLIO TRACKER OPERATOR D ISBURSEMENT LOANS • C OLLECTION CLIENT FW • CLIENT PROPOSAL BM • WEEKLY LOAN APPROVAL EASE CHECKRROWS OF THIS FW • DISBURSEMENT VOUCHER • • MEMBER PASSBOOKS •ABLE FW • COLLECTION SHEET BRANCH Auto generated • Due disbursement report • Auto generated • STAFF CASH POSITION REPORT • • Branch Cash position report • Budget report • Cash flow report • BACK UP DATA HO Accounts District Manager • Financial statements • Portfolio reports • Ratio calculation Note: Text in italics represents points of data consolidation The field worker at SKS is called the Sangam Manager and at CFTS is called the Customer Service Representative
MICROFINANCE BEST PRACTICESpalm pilots and smart cards. These are presently being piloted to TABLE 5.3 – MAIN REPORTS GENERATED BY CFTS AND SKSanalyse their cost-effectiveness. The organisation envisages that REPORT BY GENERATED FOR FREQUENCY CFTS SKSthese devices will save staff time during meetings and, thereby,enhance productivity. CASH POSITION REPORT FW Assistant BM – to verify physical cash Daily • • BM – to confirm the transaction5.2.3 SAMRUDDHI (BHARTIYA SAMRUDDHI FINANCE) BRANCH CASH POSITION + BM HO – Accounts to tally cash and bank Daily • • BANK DEPOSIT SLIP balancesSamruddhi has fully computerised and decentralised informa- CASH FLOW REPORT BM HO – Accounts to record expenses Weekly • •tion and accounting systems, integrated with the help of a cus- and other receipts and paymentstomized, FoxPro-based application software Financial DUE DISBURSEMENT BM HO – Operations manager Weekly • •Accounting and Management Information System (FAMIS). (DISBURSEMENT LIST)Data generated by FAMIS is further analysed at the head office BUDGET REPORT BM HO – Planning and monitoring Weekly - •using an Oracle Discoverer tool. The flow of information from (FOR THE NEXT 2 WEEKS) managerthe field to the branches and further on to the HO is sum- LOAN DISBURSEMENT BM HO – Accounts to tally cash Weekly - •marised in Table 5.4. BRANCH FINANCIAL BM HO – to consolidate Monthly • • STATEMENTSFAMIS enables the staff at the branches and the HO to generate BRANCH PERFORMANCE REPORT BM HO – to monitor portfolio quality Monthly • •a variety of reports as and when required. Table 5.5 lists some of and outreachthe key reports that are used in the organisation to monitor AREA REPORT Area HO – to consolidate Weekly & • -operations. Besides these there are also reports that are regularly manager Monthlyprepared for different donors agencies. FINANCIAL STATEMENTS HO – For internal reporting Monthly - • AccountsThe term “generated by” refers to the person who generally SEGMENTED FINANCIAL STATE- HO – For business planning Monthly - •views/prints and uses these reports. MENTS FOR CREDIT Accounts PORTFOLIO REPORTS HO For monitoring Monthly - •FAMIS is a FoxPro application on a DOS platform that has LOAN LOSS PROVISION HO For consolidation Monthly - •been designed exclusively for Samruddhi, keeping the organisa- STAFF PERFORMANCE REPORT HO/BO For consolidation Weekly • •tion’s unique information needs in mind. While, it is not very RATIOS HO For planning and monitoring Monthly - •user-friendly because of the DOS platform, it does provide theflexibility of working with a wide range of loan products, inter-est rates and delivery channels. Management Information Systems… 49
Management Information Systems TABLE 5.4 – SAMRUDDHI – FAMIS OPERATOR LOANS DISBURSEMENT LOANS C OLLECTIONCLIENT Customer service agent (CSA) • APPLICATION AND REGISTRATION • REPAYMENT SCHEDULE • REPAYMENT RECEIPT COUNTERFOIL •BRANCH Field Executive (FX) &UH • LOAN APPROVAL Transaction assistant (TA) • APPROVED LOANS COMPUTERISED TA • DISBURSED AMOUNT ENTERED • • FEES RECORDED • • Day wise demand chart CSA • REPAYMENT RECEIPT • TA •INDEXING & BRIDGE TO ACCOUNTS MODULE • • COMPUTERISE REPAYMENT FOR CLIENT TA •DAILY CLOSING OF ACCOUNTS • Auto generated Daily cash book and bank book Auto generated Outstanding report Overdue report Employee performance Village performance TA Branch monthly statement DATA BACK-UPHO Executive (Management Consolidated monthly statement Information) PAR/NPA analysis Quarterly pogrammatic indicators NPA tail analysis – trend analysis Overdue turnover – biannual Village concentration – biannual
MICROFINANCE BEST PRACTICESFAMIS also provides the option to generate a number of reports on var- MIS software. This combines the functional robustness of FAMIS withious operating parameters. The system backup is sent to the head office the user friendliness of a Graphical User Interface (GUI) and the highwhere information is compiled and a wide range of reports is generated capacity and security of relational databases. In developing this system,through a Decision Support System (DSS) from the Oracle Samruddhi has adopted a systematic development process includingCorporation. Another limitation of the FAMIS software is its limited needs identification, a system audit, establishing a task force and a for-processing capacity. malised contracting system.On account of these limitations, Samruddhi is now working on anOracle Relational Database Management Syatem (RDBMS)-based TABLE 5.5 – KEY REPORTS USED BY SAMRUDDHI TO MONITOR OPERATIONSREPORT GENERATED BY GENERATED FOR FREQUENCYDAY-WISE DEMAND CHART TA CSA – to keep track of collections that are due from clients WeeklyOVERDUE REPORT (AGEING OF PORTFOLIO) FX FX&UH – to follow up on overdue loans by the 15th of each MonthlyEMPLOYEE PERFORMANCE TA monthVILLAGE PERFORMANCE TA HO – to compute biannual staff incentives Monthly (DEPTH OF COVERAGE IN EACH VILLAGE) UH – to develop diversification strategy As requiredMONTHLY STATEMENT TA HO – for consolidation and further analysis on Oracle Discoverer MonthlyCONSOLIDATED MONTHLY STATEMENT Manager Information COO, Manager Operations – to monitor the performance of the Monthly unitsPAR/NPA ANALYSIS COO, Manager Finance – to make provisions MonthlyNPA TRAIL ANALYSIS (TRACKING LOAN NPA OVER COO, Manager Finance, Manager Operations – to monitor the Monthly THE YEARS) portfolio qualityOVERDUE TURNOVER (MOVEMENT OF OVERDUES) COO, Manager Ops. – to monitor recovery of bad loans BiannualCURRENT YEAR PERFORMANCE COO, Manager Ops. – to monitor current performance AnnualVILLAGE CONCENTRATION COO, Manager Operations – to plan for further growth and Biannual expansionPROGRAMMATIC INDICATORS (OUTREACH, PORTFOLIO Board, Funding agencies and other external persons Quarterly QUALITY INDICATORS) Management Information Systems… 51
Management Information Systems5.3 LESSONS IN SYSTEMS OPTIMISATION microfinance. The illustrations demonstrate that information systems provide the foundation for building control and incentive systems asThe type of information systems – manual or computerised – could well as for facilitating daily decision-making. The key features ofvary depending on the organisation’s needs and available resources, information systems identified by this research arehowever, a well worked out information system is essential inCHARACTERISTIC MANUAL COMPUTERISEDUSER • Easy to use forms not requiring • GUI enabled software with user-friendly data entry screens and menus for generating outputs suchFRIENDLINESS high data entry skills as is in the Portfolio Tracker. • The interface reduces the task of entering the loan number repeatedlyACCURACY AND • Care in avoiding duplication in • Integration of accounts and portfolio modules, such as in Portfolio Tracker and FAMIS, reducesRELIABILITY the formats reduces manual manual transfer errors. errors • Semi-automated transfer of data from the portfolio to the accounts module allows corrections • Large number of checks by the • Fixed input cells with validation conditions prevent erroneous entries; for example, FAMIS does not branch managers and the head allow the field staff to enter fees that are less than defined for the product office staffFLEXIBILITY AND • Purchasing of source code enables further modifications, as in the case of the Portfolio TrackerEXPANDABILITY • Determined by operational load; use of software that has an adequate processing capacity to enable quick retrieval. Thus, Samruddhi’s present software is unable to support its needs but the MFI is moving to software that will allow computerisation of its entire information systems including human resources and payroll. SKS is planning to include a monitoring component in the Portfolio Tracker • Flexibility to generate a wide variety of key reports on various critical parameters easily and in a time and cost-efficient manner, such as in the Samruddhi Decision Support System
MICROFINANCE BEST PRACTICESDATA FLOW • Decentralised recording, con- • Decentralised recording and consolidation at the branch level. Daily transaction entries solidation and cross-checking are done at the branch level and updated at the head office on a weekly basis as in CFTS, of data at appropriate opera- SKS and Samruddhi. tional levels, in a timely and • Overall consolidation at head office through back-up storage devices reducing the physical efficient manner as in transfer of reports. Spandana. • Reduced redundancy in input screens • Logically linked and sequenced recording formats: Spandana ensures that data from one for- mat is consolidated or used at the next level, instead of simply recording it once againARCHITECTURE • Access to books of accounts • Use of tested software with a stable architecture and easy to maintain with the organisa-(MAINTENANCE, restricted to enhance security, tion’s in-house IT capability. The Portfolio Tracker has been developed by Grameen TrustSECURITY & TECHNICAL such as in Spandana while the FAMIS software has undergone constant modifications to maintain its perfor-DESIGN) mance • Data security maintained through properly defined user rights. • Access to source code is restricted to the administrator and developer • Software specifications in line with the volume of transactions preventing a system crash due to overload. The FAMIS FoxPro software cannot handle the volume of transactions at Samruddhi and is now being replaced by Oracle software that can process larger volumes of data. • Back-up data of the branches stored at the head office. All the computerised institutions send regular soft back-ups to the head office. This ensures security while also being cost- effective. • Use of temporary tables for daily transactions which does not affect the master tables with- out confirmation by the authorised person Management Information Systems… 53
Management Information Systems … 5.3 REPORTING • Standardised report format • Standardised set of comprehensive reports which are disseminated to various levels accord- LESSONS IN from each branch allowing ing to predefined dates and frequency SYSTEMS quick consolidation at the HOOPTIMISATION • Frequency of reporting concur- rent with operational decision making • Reports capture all the relevant information at the field level PROCESS • Ongoing analysis of informa- • Critical analysis of existing information system, involving all stakeholders, to identify tion needs and objectives as shortcomings and assess needs done by Spandana • Establishment of an exclusive team to interface between the vendor and the operations • Continuous upgrades in the team recording formats and reports • Formalised contract with vendor for software development and post-purchase mainte- to meet the changing needs nance • Comprehensive audit and documentation of the new system to verify definitions and out- puts • Networking with other institutions using the same software for upgrading and debugging such as in CFTS and SKS • Adequate (over a few operating cycles) piloting and testing of software before implementa- tion
MICROFINANCE BEST PRACTICES5.4 EMERGING TRENDS • Automation: New methods of managing collection are being experimented with. These range from low end hand-heldAs organisations in the microfinance sector in India grow, they feel the smart card readers with data entry screens to more sophisti-need to manage their information better as the volume of data handled cated small computing systems that perform basic consolida-by each MFI expands. This has led to a number of innovations in the tion and processing functions.information management sub-systems of collection, transfer, process-ing, storage and reporting. Amongst all of these sub-systems, the most • Architecture: In the area of processing and storage, the movecritical and expensive in microfinance is collection and this is where has been towards (RDBMS) that are more secure, have highermost innovations are being attempted. This is being targeted at two lev- processing capacity and provide further integration of infor-els mation. • Streamlining of business processes: A number of organisa- Overall, as the sector matures and systems are tested more rigorously, a tions that had earlier restricted themselves to established mod- more universal architecture of appropriate information systems for els such as Grameen or SHG are now adopting a mix of microfinance is likely to emerge. strategies, including individual lending, that reduce the cost of transaction management. Since gathering information imposes a significant cost, considerable attention is being focussed on it by using methods such as Business Process Reengineering. Management Information Systems 55
6 Internal control for risk management 6.1 INTRODUCTION Internal control is comprised of the following five interrelated compo- nents (Figure 6.1) 6.1.1 DEFINITION AND OVERVIEW • Control Environment: The core of any organization is its peo- Internal Controls are all resources and procedures used by managers to ple – their individual attributes, including integrity, ethical exercise control over the activities of an organisation. It is a process that values and competence largely determine the environment in allows the management and its personnel to be reasonably sure that the which they operate. objectives they have fixed are achieved. Appropriate controls help to correct contradictions and detect anomalies between different decision • Risk Assessment: Establishment of mechanisms to identify, centres as well as to ensure that designated policies and procedures are analyze and manage related business and operating risks. followed at all levels of the organization. • Control Activities: Establishment and implementation of con- The Basel Committee on Banking Supervision defines internal con- trol policies and procedures to help ensure that the actions trol16 as “a process, effected by an entity’s board of directors/trustees, man- identified by management as necessary to address risks and agement and other personnel, designed to provide reasonable assurance obtain the specified goals are effectively carried out. regarding the achievement of objectives in the following categories • Verify the efficiency and effectiveness of operations; • Information and Communication: Surrounding these activi- • Assure the reliability and completeness of financial and manage- ties are information and communication systems. These ment information; and enable the organization to capture and exchange the informa- • Comply with applicable laws and regulations” tion needed to conduct, manage and control the MFI’s opera- tions. This definition reflects certain fundamental concepts • Internal control is a process. It is a means to an end, not an end • Monitoring: The entire process must be monitored, and mod- in itself. ifications made as necessary. In this way, the system can react • Internal control is effected by people. It is not policy manuals dynamically, changing as conditions warrant. and forms, but people at every level of an organization. • Internal control can be expected to provide reasonable assur- ance and increased probability, not absolute assurance, to an 16 1998. Framework for Internal Control Systems in Banking Organisations. Basel entity’s management and board. Committee Publications, No.40.
MICROFINANCE BEST PRACTICESTo understand this better in the context of microfinance, the entire Portfolio control thus performs the preventive and feedback functionprocess of internal control can be broadly classified as in the larger internal control system and this is what makes it such a • Prevention: Involves building checks into the methodology, critical aspect in microfinance operations. Tracking enables regular operational and reporting processes and ensures in-built risk monitoring of both financial (credit and liquidity) as well as opera- assessment and maintains the control environment. Includes tional (transaction and fraud) risks while also giving a picture of opera- client appraisal, loan utilization, peer pressure, collateral, port- tional performance. folio tracking, cash control, documented policies • Detection: Undertakes the identification of risks and lapses in INTERNAL AUDIT adhering to policy and setting up suitable control activities. It includes mechanisms such as portfolio tracking, loan utiliza- “Internal auditing is an independent, objective assurance and consulting tion checks, internal audit, cash control, external audit activity designed to add value and improve an organization’s operations. It • Correction: Includes developing and implementing solutions helps an organization accomplish its objectives by bringing a systematic, to close the gaps identified during detection. Effective com- disciplined approach to evaluate and improve the effectiveness of risk man- munication and monitoring is a part of this. The result is a agement, control, and governance processes” – The Institute of Internal change in policies and procedures Auditors, USAThese are clearly not mutually exclusive stages – a preventive measure, FIGURE 6.1 – COMPONENTS OF INTERNAL CONTROLsuch as a portfolio report, could also be a way to detect risks. Similarly,a detective measure could result in the development of better ways to CONTROLprevent risk. While MFIs employ a number of ways to maintain con- ENVIRONMENTtrol over their operations, the critical ones covered by this study are • Portfolio control • Internal audit RISK CONTROL ASSESSMENT ACTIVITIESPORTFOLIO CONTROLMFIs provide small loans to a large number of clients and are thereby INFORMATIONhandling a large number of transactions. The sheer volume of transac- & COMMUNICATION MONITORINGtions requires that risk be reduced both before disbursement – throughclient appraisals – as well post-disbursement through a regular andcomprehensive portfolio tracking system. Internal control for risk management… 57
Internal control for risk management … 6.1 This component of internal control focuses on evaluating the opera- earlier, or due to visionary governance, most large MFIs have recog-INTRODUCTION tions ex-post for risk management and compliance. The board uses the nized and installed portfolio-monitoring checks into their basic collec- TO INTERNAL internal audit report to make policy decisions, which lead to further tion reports and managerial processes. CONTROL improvement and implementation of control measures. The results are usually confidential and, to avoid any bias, the internal auditor reports Only a small number of MFIs have developed the detective measure of directly to the board. internal audit. Most are either deterred by the associated increase in cost or rely more on “faith” in staff. Where they exist, MFIs use this function In the business of managing money, good internal control systems are to ensure policy compliance and proper recording to prevent frauds. In crucial to ensure process and financial compliance and to maintain reg- most cases, since there is no concept of audit charter, functional objec- ulator and investor confidence. tives and procedures are poorly defined. 6.1.2 SECTOR PROFILE Internal audit teams could be comprised of the staff of other branches, or the operations manager alone. The periodicity of audits ranges from an Most MFIs have procedures built into their operations that act as con- occasional visit to regular planned visits. The scope of the audit rarely trol measures. However, these are usually informal and their relevance includes head office auditing and is usually limited to field and portfolio as risk-mitigating elements is not recognized. Such procedures are operations. Financial audits are regarded as the domain of the external designed to facilitate proper targeting, credit appraisal, smooth flow of auditor. funds, mitigate credit risk and provide critical points for monitoring. Reporting, once again ranges from informal telephone discussions to Most institutions recognize the need for a formal control mechanism standardized detailed reports. The degree of sophistication of the inter- only after a significant event of misappropriation of funds or if there is nal audit is usually a function of the professionalism and skill of the top a serious malfunction in the MFI’s operations. The latter is more likely management or the vision of those responsible for the MFI’s governance. to occur as the portfolio and client base expands. As the portfolio is an MFI’s largest asset, tracking it is the most basic 6.2 ILLUSTRATIONS OF BEST PRACTICE: preventive measure that MFIs have. However, a large proportion of PORTFOLIO CONTROLS MFIs in India do not have comprehensive portfolio control and track- ing systems. While the average tracking system at present does provide This section illustrates some of the best practices through which insti- the MFI information on the volume of its portfolio and repayments, it tutions ensure that their control systems cover both pre-disbursement is usually unable to provide accurate information on critical aspects as well as post-disbursement aspects of operations. such as overdues and delinquency. Due to the malfunctions mentioned
MICROFINANCE BEST PRACTICESCLIENT APPRAISAL be used immediately as a delay would mean a loss of income and the borrower would be unable to pay the first installment. If the money isPrevention begins with the client appraisal process. SKS uses a low cost not used the member has the option of coming to the Sangam meetingand quick method of appraisal that does not require substantial staff with the money and stating the reasons for not using it. If she feels thatskills. Its Sangam (branch) managers appraise individual loan applica- it is possible for her to use the loan, the Sangam Manager may, attions as well as corroborate data with other members of the group, who his/her discretion allow her to retain it for one more week. However,are the guarantors. The application is further discussed in the weekly this is not allowed beyond the second week. If the unused money is notstaff meeting. These multiple levels of subjective evaluation ensure presented before the meeting but remains unused then the member isthat potentially risky applicants are not sanctioned loans. However, the liable to pay the installment and interest due on it. Enforcing utiliza-process is not very accurate in terms of assessing the cash flows of the tion is the responsibility of the group leader and the Sangam Manager.borrower in relation to her ability to repay loans. At every meeting, members are reminded of the purpose for which they have taken a loan and that there should not be any cross-usage.Samruddhi’s client appraisal technique is more detailed though itrequires specialized skills and is undertaken by the FX. The FX reviews While SKS relies on peer pressure, Samruddhi relies on the FX and theeach application in terms of the credibility of the applicant in the mar- CSA to ensure that the loan is used immediately and properly. Often itket and his/her experience in the activity. A cash flow is prepared for may involve approaching the supplier, from where the borrower isthe applicant, taking into account household income, income from the expected to acquire machinery, inputs or any other commodity foractivity, expenses and other debts of the applicant. Similar to SKS, which the loan is extended. If a borrower has failed to use the loanSamruddhi also examines the intent and liquidity of the co-obligant amount as expected and the CSA/FX suspect that there is no intention(guarantor). For Samruddhi, this process is especially critical as it bases of doing so, the borrower is made to repay the entire loan amountits repayment schedule directly on the borrower’s cash flow. immediately. The CSA and FX can take the help of the Unit Head for this purpose. Documentation and reporting of loan utilization is a sys-Samruddhi also appraises the applicant’s project in terms of the target tematic and well laid out process at Samruddhi.market, infrastructure, technical feasibility and skill required for theproject. Other external risks such as operating environment, govern- DETECTION OF OVERDUESment policies and competition are also considered. At CFTS, overdues are detected immediately in the field as this is theLOAN UTILIZATION first line of defence against risk. The pre-printed collection sheets gen- erated by the Portfolio Tracker require the Field Worker simply to can-Besides loan and client appraisal SKS also follows up on the utilization cel out any payments that he/she has not received. These stand out asof loans within a week of disbursement. SKS believes the loan should anomalies and are immediately discussed during meetings. To discour- Internal control for risk management… 59
Internal control for risk management … 6.2 age delinquency, members of the overdue client’s group have to pay Rs2 until nightfall, if necessary, to collect the loan. Prior to leaving in theILLUSTRATIONS OF per week and other members in the same Centre have to pay Re1 per morning, Centre Managers record their departure and destination in BEST PRACTICE week. Thus the collection of overdues is largely by peer pressure. the branch’s Movement Register. Upon their return in the evening, when the other Centre Managers see that one Centre Manager has not Samruddhi too, instructs its CSAs to carry the borrower due report returned within the expected time, they go to the delinquent Centre updated every month. This consists of a list of two types of borrower: and join the other Centre Manager. This is followed up by a visit from one, whose loans are due during the period and second, whose loans are the Branch Manager. overdue. This gives the exact amount to be collected from each borrower on the due date. It also includes a column on Interest Due Per Day While reports provide the basis for the tracking of delinquency, the (IDPD) which shows the additional interest amount to be collected or organizations also have a systematic and standardized follow-up proce- deducted for any delay or advance payment from the specified date. dure that is communicated and followed meticulously. At Samruddhi, the overdue report is generated by the FX on the 10th day of each PORTFOLIO TRACKING month and followed up along with the CSA. On the 15th the Unit Head analyses and follows up with the FX on the status of overdues. A Portfolio tracking information is provided to the CFTS and SKS man- second follow-up is then scheduled on the 25th of the each month. The agement in the monthly branch performance report while the Unit exact process to be followed differs from one age category to another. Heads at Samruddhi see this information online or through a number As the loan gets older, the senior management gradually takes over. of reports including the overdue report. Both these reports include age- Thus, for a 1–30 day-old loan, overdue collection is done mainly by the ing statements. Besides operational tracking of the portfolio, CSA, for 31–60 day overdue loans the FX is responsible for collection Samruddhi also uses tools to generate further information on the per- while for loans in 61–90 day category, collection is primarily the formance of the organisation’s productive assets as a whole. These responsibility of the Unit Head. These responsibilities are well laid out include tracking the loan NPA over the years and monitoring the and documented to ensure that overdues are dealt with regularly. movement of overdues. Dealing with overdues is a control activity that is closely integrated 6.3 INTERNAL AUDIT with the environment established in the organization. SKS has a zero- tolerance policy that is clearly communicated to its clients: In case a 6.3.1 CFTS member does not attend a meeting or attends and does not pay her installment, the group is asked to pay the installment. If the group is The Internal Audit Department (IAD) at CFTS has the general pur- unable to pay, the whole Centre becomes responsible for paying the pose of determining whether or not the organisation’s business is being loan. If the Centre does not pay the loan, the Centre Manager stays conducted according to the operations manual, particularly with
MICROFINANCE BEST PRACTICESrespect to financial management and internal controls. Besides being a The report is sent directly to the Executive Chairman with copies givendetective process, CFTS’ audit also functions as a corrective means. It is to senior management. The report along with an Audit Compliancetermed as a constructive and learning experience for all those con- Request is also sent to the supervisor of the audited branch. It detailscerned. the findings in the report and asks for specific changes to be made by specific dates and for an Audit Compliance Report to be submitted toIn consultation with the Executive Chairman, the IAD decides upon the management within three months of receiving the request.the visit schedule. This is confidential and knowledge of it is restrictedto the two decision making parties. A branch audit takes about two On receiving the Audit Compliance Report, the senior managementweeks during which the team stays at the branch and collects informa- would request a short follow-up audit.tion through both formal and informal channels. CFTS’ internal audit is a secondary level of control. It builds on the pri-The internal audit process is clearly laid out in the operations manual mary control activities that are part of the organisation’s procedures.and incorporates checks for both process and financial compliance. Therefore, the purpose of the audit is simply to check whether the con-Some of the aspects included are trol procedures embedded in the operations are actually functioning or • Cash verification and cash handling process compliance not. As an additional indicator for management, the standardized • Verification of transfers from the Branch Office to the District report format prioritises risk and allows for horizontal as well as longi- Office including disbursement records, collections against dis- tudinal comparisons between branches. bursements, salary payouts, branch reconciliation and trial bal- ance verification. This also includes sample Centre audits with 6.3.2 SAMRUDDHI at least one Centre per field worker. The visits are usually dur- ing Centre meetings and take the form of surprise checks Samruddhi’s operational spread poses a significant problem in terms of • Process and financial compliance of fund management internal control. An internal audit department such as that of CFTS, is • Verification of branch assets and supplies not feasible for Samruddhi’s widespread operations. It has, therefore, developed the concept of Independent Local Auditors (ILAs).The output of the audit exercise is an Audit Report. The Report hasthree main sections As soon as a unit is established, local chartered accountants are identi- 1 An Executive Summary giving an overview of the findings fied and the senior management appoints an ILA. Microfinance orien- 2 Critical findings of the audit team that need to be addressed tation is provided to the ILA along with Samruddhi’s operations immediately manual and a booklet that lists the areas that they need to audit along 3 Other findings and observations with the scope of the audit. There is also a system of holding annual meetings of all ILAs in which the progress and potential areas of Internal control for risk management… 61
Internal control for risk management … 6.3 improvement are discussed. This meeting is also used by the organiza- Samruddhi’s ILA concept is useful for organizations that are geographi-INTERNAL tion to introduce new policies pertaining to internal audit. cally dispersed and have decentralized operations. However, for the ILA AUDIT methodology to function effectively the organization should have a pro- The process entails the internal audit being undertaken each month. fessional control environment, established control policies and proce- The main areas audited are – cash, loans, disbursements, business plan dures, well developed information systems and clear mechanisms to check and capital expenditure. Both the old and the new portfolio are exam- the performance of the ILA. ined on a sample basis. A field visit is mandatory, checking at least 30 borrowers. Focus is placed more on credit policy compliance and the checking of reports generated by the MIS. 6.4 ENSURING RISK MITIGATION The ILA submits a quarterly report to the Audit Committee with a Since microfinance is an activity with large volumes of small transac- copy to the Unit Office. The committee, comprised of two directors, tions, practitioners must put in place internal control mechanisms to discusses the report and along with the Group Associate Vice President. prevent and detect fraud and to avoid deviation from organizational The issues highlighted in the report are referred to the Operations norms. The sample institutions described above have employed the Manager for follow-up. He then issues a letter to the Unit Head along following practices to make their internal control mechanisms efficient with a copy to the ILA. While the Unit Head is given 15 days to and effective. respond to the variances reported by the ILA, if the matter is urgent it is sorted out through a conference call between the Unit Head, senior CONTROL ENVIRONMENT management at the Head Office and the ILA. • The Board has an Audit Committee or a member responsible for internal audit to keep a check on the Internal Audit team This process of using ILAs is a low-cost approach as travel is signifi- and lend it greater credibility. For instance, the chairman of cantly reduced. Besides this, the local resident status of the ILAs often CFTS is responsible for internal audit. helps facilitate Samruddhi’s relationship with local banks. The accessi- • The internal audit department reports directly to the board bility of the ILA often means that the Unit Head frequently interacts and reports cannot be influenced by senior management. This with him/her regarding statutory financial or legal requirements associ- creates an environment of autonomy and fair play amongst ated with managing the portfolio. However, the latter also increases the the junior staff and management. At Samruddhi the ILAs chances of collusion between the unit and the ILA and the decentral- report directly to the Audit Committee ized process limits Samruddhi’s control. To deal with this, Samruddhi’s • An environment of zero-tolerance for misappropriation of external audit includes an independent verification of the units to sup- funds. For example, CFTS has dismissed staff members who plement the regular visits of Head Office managers. commit fraud.
MICROFINANCE BEST PRACTICESRISK ASSESSMENT made to repay the total loan amount immediately • Multiple levels of evaluation including corroboration of client • Quick field level detection of overdues. For example the pre- data with guarantors and drawing from the experience of printed collection sheets and recording process at CFTS other staff – SKS Sangam managers appraise applications immediately highlight the overdues in the meeting individually, with group members and discuss them with • Zero tolerance policy to ensure ontime payment – SKS has a other staff in meetings policy of not closing centre meetings in the village until the • Cash flow based appraisal to determine absorption capacity repayment is collected and repayment potential – Samruddhi uses this to establish • Standardised follow-up process – at Samruddhi, the opera- repayments schedules for its clients tions manual gives clear responsibility for follow-up according • Assess the ability of the co-obligant to repay. For instance to the age of the overdue Samruddhi examines the intent and liquidity of the co-obligant • Monitoring geographical diversification of portfolio to reduce INFORMATION AND COMMUNICATION the risk associated with excessive concentration in a single area • Documented process for an organisation with an internal • Tracking the movement of overdues through an ageing analy- audit department – CFTS has a section on internal audit as sis to assess delinquency risk – Samruddhi also tracks the non- part of its operations manual. Samruddhi provides its ILAs performing assets over the years with brochures on the main areas that they need to cover • Orientation to operations for internal auditors. For example,CONTROL ACTIVITIES Samruddhi’s ILAs are provided with a copy of the operations • Stipulated maximum period for loan utilisation – through manual and also conducts an annual Auditors Meet to share experience SKS requires members to use loans in one week as experiences further delay leads to utilisation for other activities • Result of audit shared with branch. Both CFTS and • Thorough loan utilisation checks – Samruddhi may check Samruddhi send a copy of the audit report to their branches with the supplier from where the borrower is expected to for follow up action acquire the machine, inputs or other commodities that serve the purpose for which the loan is extended MONITORING • Standard process for dealing with non-utilisation. For • Audit compliance follow-up – Samruddhi has a conference instance, if a member of SKS has not used the fund within call with the ILA and Unit Manager to discuss the action two weeks she is liable to pay the instalment anyway. At taken, while CFTS requires branch managers to submit an Samruddhi, if a borrower has failed to use the loan amount as Audit Compliance Report expected and has no intention of doing so, the borrower is Internal control for risk management… 63
Internal control for risk management6.5 EMERGING TRENDS • Operations/internal audit manual: To communicate issues related to operational policy and to ensure proper compliance,Due to the growing size of Indian MFIs, increasing attention is being MFIs are developing detailed operations and audit manuals.paid to internal control as a critical management function. This has led This is resulting in better understanding of policy at the oper-to a number of new developments that, though nascent at this stage, ational level and is making it easier to spot non-compliance.point towards the emerging scenario. Recording and transaction management procedures are increasingly being clearly laid out to regulate compliance.Some of the developments that deserve mention are • Business planning: To monitor target achievement and • Involvement of the Board of Directors and senior manage- progress, MFIs are introducing comprehensive business plan- ment in control activities: As a result of the growing impor- ning procedures with participation from all levels of the orga- tance of internal control, board members and senior nization. This results in realistic plans that have the support of management are being made directly responsible for oversee- operating staff. Such plans help in spotting variances for initi- ing/managing control systems. The concept of an Audit ating detailed checks and corrective measures. Committee of the Board is becoming accepted and enables a clear delineation of internal control from other operations. Overall, microfinance in India is currently moving towards better risk assessment and mitigation tools that prevent, detect or facilitate • Separation and professionalisation of the audit team: Until correction. now, most MFIs have treated internal audit as ad-hoc checks which were conducted by the senior management and some other staff from a different area. Now MFIs are making inter- nal audit a regular feature and creating separate in-house/out- sourced audit teams (of professionals) to undertake this task.
MICROFINANCE BEST PRACTICES Internal control for risk management 65
7 Financial management & accounting policies 7.1 INTRODUCTION For the purpose of this study, financial management practices under- taken by MFIs are analysed in terms of 7.1.1 DEFINITION AND OVERVIEW • depth and quality of investment, • financing “Financial management is concerned with the acquisition, financing and • asset management management of assets with some overall goal in mind.”17 Apart from financial management, this section also considers account- It is evident that financial management, with its three sub-functions, is ing practices. Accounting refers to the recording, classification and a critical management issue for all MFIs. Financial management related summarising of economic events resulting in the consolidation of infor- to acquisition includes investment decisions on the asset composition mation and presentation of financial statements that can then be used as also disinvestment decisions related to reduction or disposal or for decision-making purposes. It is guided by certain universal princi- replacement of assets that are no longer required. ples though accounting practices are open to interpretation even while seemingly adhering to the principles. This has become apparent from Financing decisions relate to the liability and equity side of the balance recent accounting scandals that have affected the world economy. The sheet. Issues such as the leverage of the MFI (debt to equity ratio), div- sound use of policies and disclosure of financial information is key to all idend payout and raising capital are all part of financing decisions. The financial management decisions. Poor accounting practices lead to determination of sources, maturity and cost profile of debt are other inaccurate financial statements and, in turn, sub-optimal decisions. important financing decisions that need to be taken after considering claims to assets and other conditions that may be imposed by lenders. The emphasis here is on accounting policies and reporting while the recording and consolidation of financial information was covered in Asset management decisions particularly involve the management of Section 5. In this section, accounting practices are analysed based on current assets. For MFIs, issues related to portfolio quality are the most the accuracy of disclosure and the principle of conservatism in the important asset management decisions. Further, consideration of the liq- reporting of financial information. Thus, the guiding principle used in uidity of assets is also important. Apart from studying the maturity pro- analysing accounting policies is that information should be disclosed in file of assets, financial managers must also study the costs of maintaining detail and prepared in such a manner that assets and income are not assets and the potential returns to them in order to make informed deci- overstated even while expenses and liabilities are not understated. sions that affect the profitability and sustainability of an MFI. 17 Horne, VHC. and Wachowicz, JM, 2000. Fundamentals of Financial Management. Prentice-Hall of India
MICROFINANCE BEST PRACTICES7.1.2 SECTOR PROFILE (along with accounts) from operations is one step that some MFIs have taken. A few have gone further and introduced formal mechanisms forMost Indian MFIs merge financial management with other functional facilitating financial analysis of consolidated as well as branch operations.areas that are the responsibility of the senior management. Thus, thefinancial management function is not separated from the operational Proper investment management of idle funds for optimal returns, a sys-management. Mechanisms that enable good financial analysis are also, tematic approach to fund raising and planned portfolio diversificationoften, not in place. Instances of MFIs undertaking common size analy- are some other initiatives being taken. While not every one of thissis or examining financial statements for the purpose of decision-mak- select group of MFIs may be following what could be termed ‘besting are rare. practices’, the trend is positive and leads to a slow but growing recogni- tion of the need to improve standards and practices with regard toEven when financial analysis is undertaken, the focus is on generating financial management.reports for donors. While some reports are also for internal purposes,these often have little significance from a financial management per- In terms of accounting policies, the situation is similar. Most externalspective. In these cases, the information is generally not used for analy- auditors used by MFIs in India generally do not add value to the auditsis or any decision making but only on presenting financial exercise and the establishment of appropriate accounting policies suf-information as a formality. This results in financial decisions that, while fers. Most MFIs have emerged from multi-service, grant-driven NGOspossibly being acceptable, may not be the most efficient in the particu- and even after the establishment of a sizeable microfinance programme,lar circumstances of the MFI. the accounting practices of such institutions are not adapted to the changed requirements. Thus, for multi-service organisations, separateThis lack of appreciation of the need for financial management skills in financial reporting of microfinance operations is not very common.MFIs is a matter of concern. With increasing scales of operation and From the M-CRIL database only 25% of the 67 multi-service organisa-more complex financial products, MFIs need to place greater emphasis tions rated, prepared separate financial statements for microfinance.on enhancing technical capabilities to undertake financial management. Even in these institutions, cost allocation is, usually, not fully accurate.Further, the ever-increasing scale of transition since the late 1990s fromlargely grant-based operations to more debt-financed operations As a result, provisioning (for loan losses in particular) and asset qualityrequires a parallel improvement in financial management techniques. monitoring that are important for any financial intermediation activity are often not undertaken. Financial disclosures other than asset quality areWith the growth, gradual mainstreaming, a larger scale of conversion to generally not provided; it is common to find financial statements wherelegal structures that entail greater regulation and skill improvement in the account heads are insufficiently detailed, making it difficult to analysesector, a small but growing band of MFIs is taking the lead in changing aspects such as the level of dependence on subsidised versus non-sub-the outlook towards financial management. Separating this function sidised loans. Financial management & accounting policies… 67
Financial management & accounting policies … 7.1.2 The treatment of grants received, as operational income is also very com- demand for loans in its operational area, Spandana has chosen to deferSECTOR mon. This inflates operational profit figures and creates a false sense of com- any increase in its fixed assets. The focus on meeting client creditPROFILE fort about the sustainability of microfinance operations. Here also, a gradual demand has resulted in a low investment in computerisation – the lack shift in approach is taking place and a few MFIs are moving towards the of both hardware and software customised to meet the organisation’s adoption of sound accounting practices and financial reporting. needs. Even in the foreseeable future, Spandana intends to maintain an asset composition that does not have non-portfolio assets (including The following are some illustrations of institutions that are setting pro- fixed and short term assets) at levels greater than 15–20% of total gressive trends in financial management and accounting practices. assets. This strategy – partly driven by high levels of credit demand – ensures that assets are productively utilised and yield maximum returns even while serving large numbers of loan clients. 7.2 ILLUSTRATIONS OF BEST PRACTICE: FINANCIAL MANAGEMENT With regard to the financing of its fast growing portfolio, Spandana’s strategy incorporates the following elements 7.2.1 SPANDANA • Reliance on commercial sources of funds since the organisa- tion believes that, in the long-term, this is the only way to find Spandana is a fast growing and progressive MFI that has developed the resources necessary to fuel its growth most of its operational and financial systems through experience and • Diversification of sources of funds to lower the funding risk; testing. The organisation had around 23,500 clients as on 30 by 30 September 2002, Spandana had seven major institu- September 2002 up from 16,400 clients as on 31 March 2002. Even tional creditors. Spandana is also considering raising preferred with this scale of operations it handles its MIS (refer to Section 5) and equity from institutional lenders as it transits into a non-bank- financial management needs through manual systems and procedures. ing legal form; discussions have also taken place with a pro- posed microfinance investment company for raising equity Spandana’s financial management systems stand out when viewed in • Simple spread sheet-based cash planning for debt servicing – the context of the relatively low degree of computerisation that they this sheet consolidates information on loans from all lenders work with. Despite this, the organisation has evolved relatively efficient and provides a quarter-by-quarter disaggregation of expected ways of generating information and has evolved basic, but effective outflows; use of pivot tables is planned to enable a summarised financial management and analysis techniques. and flexible presentation of information • Focus on long-term financing relative to the current nature of Considering investment activities, Spandana’s high growth rate has most of its loans – as a result the working capital management meant that its asset distribution is inevitably concentrated (90%) on its and liquidity concerns related to debt servicing are minimised most productive asset, loans to clients. Given the high and growing • Loan linked savings products (Siri savings) – to provide stabil-
MICROFINANCE BEST PRACTICES ity to the liability structure and reduce the liquidity pressure quarterly basis. In order to track the sustainability of the institution, created by the recently introduced voluntary savings product Spandana, undertakes monthly analysis of its income statement (see Section 4) (branch wise and consolidated) using adjusted costs for inflation • Careful monitoring of financial risk through basic ratio analy- (impact on the real value of equity), subsidised funds (affecting finan- sis to track its leverage, capital adequacy and debt servicing cial costs) and in-kind donations (affecting operating costs or cash position – this monthly analysis is undertaken branch wise and flows mainly for fixed assets received in-kind). then consolidated. Regarding the cost of managing assets (primarily the loan portfolio),Maintaining portfolio quality is accorded the highest priority in the Spandana keeps a close track of staff productivity. Profitability and pro-organisation and is reflected in the high levels of discipline evident in ductivity ratios are tracked very closely, resulting in healthy competi-all aspects of Spandana’s operations. In terms of asset protection, the tion between branches in reaching the highest levels of growth whileorganisation uses risk mitigation measures for its portfolio. These mea- maintaining portfolio quality. Branch level economics are also workedsures include having a mix of urban and rural loans in its portfolio sup- out in detail as part of its expansion and cost control strategy (referplemented by social security (insurance) products (refer Section 4) that Section 3). For the organisation as whole, a breakeven analysis has beenprovide some protection to both the borrower and the organisation. undertaken to understand the implications of growth on the financial margin it earns from its operations.Within the urban portfolio, there is considerable diversity with over ahundred sub-categories of enterprises financed. Portfolio monitoring by 7.2.2 SAMRUDDHIactivity is also undertaken regularly to maintain a check on and reducecovariant risk. The MFI’s internal control measures (including internal In terms of financing strategy, Samruddhi is a model MFI on accountaudit by a specialised team) constitute another means of asset protection. of its fund raising capability. It has the largest equity base of all MFIs in India and its management believes that a sound capital base is essentialFor short-term cash management, expected inflows from loans are esti- for undertaking any financial services activity. To achieve this,mated and monitored weekly and decisions taken after considering the Samruddhi has mobilised equity funds of Rs20 crores from variousexpected outflows towards loan disbursements and expenses. Simple, Indian and international financial institutions. This has been madeeasy to produce, weekly report formats facilitate this decision making possible by ensuring that the systems employed by the MFI meet theprocess. For long-term planning, Spandana uses detailed financial pro- strict norms of any due diligence conducted by these institutions.jections that are revised periodically. The organisation takes a long-term view of fund-raising and believesTracking and analysis of income statements, balance sheets, past fund- that there is a lag time of at least a year between mobilisation efforts andflow statements, financial ratios and trend analysis are undertaken on a the actual fund coming in. Therefore, it starts fund-raising a year in Financial management & accounting policies… 69
Financial management & accounting policies … 7.2 advance of the projected requirement. In making an assessment of the On an average each of Samruddhi’s branches have 4–5 bank accounts.ILLUSTRATIONS OF quantum of its funding needs, it relies on its comprehensive budgeting Cash limits for these are set at approximately Rs1 lakh ($2,000) per BEST PRACTICE and planning system. bank account. If there is an excess amount in the bank, it is converted to an FD. The Independent Local Auditors (ILA – see Section 6 for Portfolio and investment management functions in Samruddhi are in- more details) have to report all exceptions and the number of days the built to the two tiers of its fund management system: unit fund man- branch bank balances are in excess of specified limits. An excess amount agement and central fund management. in the bank with respect to limits affects the performance assessment of the Unit Manager. FUND MANAGEMENT AT THE UNITS To hedge against any deterioration in asset quality, Samruddhi has a The fund needs of Samruddhi’s unit offices are met from three main system of diversifying its portfolio across sectors and geographical sources regions. There are limits to exposure under various loan categories and 1. Client repayments: Repayments have to be reported on these are maintained strictly. The Unit Heads at Samruddhi also moni- the same day and any laxity on this is penalised tor the geographical diversification of the portfolio to ensure that not 2. An overdraft facility against the security of fixed deposits too much is concentrated in a village or area. The report generated by (FDs) is used when repayment funds are inadequate. Earlier the system provides village-wise information on the number of loan cash was transferred from the Head Office (HO) to branch as accounts, the outstanding amounts in those accounts and the repay- and when required. This resulted in huge bank draft charges. ment rate. For Samruddhi, it is important to track these aspects of the Then it was suggested that branches make FDs and retain cash portfolio as a CSA could try and build a large portfolio in a single vil- but the amounts held were smaller with low returns and high lage to reduce travel costs. Such a situation would multiply the organi- transaction costs. Also, the units resorted to retaining large sation’s risks. cash balances anticipating disbursement. The system was changed and FDs worth Rs10 lakhs ($20,000) were put in a CENTRAL FUND MANAGEMENT SYSTEM few select accounts against which the units are given an over- draft facility. To ensure appropriate utilization of the overdraft The HO’s comprehensive cash and investment management system facility, the Unit Head has to provide detailed explanations to integrates the unit fund requirements and the organisation’s repayment the senior management at the HO. obligations with investment planning to optimise the use of funds. 3. Head office: The last resort for funds is the HO since the overdraft is limited. For the transfer of funds from the HO, a Repayments and disbursements are tracked on a daily basis from all request has to be made in advance and a week is required for branches to determine detailed fund requirements. A daily cash balance completing the transaction. report and weekly bank statement from all units is submitted to the
MICROFINANCE BEST PRACTICESHO. The details of investments with maturity dates are compared to ate allocation of common resources over the different programmes ofthe debt servicing obligations for the next two months. Investments are the organisation.made keeping the safety, liquidity and returns in mind, in that order ofpriority. Most funds are placed in FDs with banks and exposure to any External audit is also an area where MFIs are moving towards a moreone bank cannot exceed 20% of Samruddhi’s equity base. All cash formalised process. Samruddhi has a formal external audit contractingshortfalls for emergencies and repayments are covered from a credit line system which sets out the audit process as well as the non-critical areastaken from ICICI bank. Since Samruddhi pays interest at the rate of that the external auditor has to cover in the audit.13.5% per annum on this credit line, it makes repayments on the over-draft a priority. Samruddhi’s disclosure practices are amongst the most comprehensive in the MFI sector. The annual statement of accounts contains a histor-Loans are not prepaid even if there is adequate cash for this purpose ical performance analysis on key parameters like growth in loanand despite the fact that Samruddhi’s investments yield lower returns accounts. Also presented is a disaggregation of the portfolio by unit andthan the cost of funds. This is done because the transaction cost for product. Trends in financial performance are analysed by key prof-obtaining loans is much higher than the difference between the invest- itability ratios like the return on assets, return on equity, operationalment yield and cost of funds. self-sufficiency and financial self-sufficiency. Some other key disclo- sures that Samruddhi makes are as follows: • The basis for the preparation of statements7.3 ACCOUNTING POLICIES • Revenue recognition • Fixed asset costingIn terms of accounting practices, examples for different aspects can be • Depreciation methodtaken from several institutions. For recording and accounting • Aging statement for the portfoliotreatment, most MFIs follow the accounting policies laid down by the • Policy for making provisions and reserveslaw. Revenue recognition is based on cash (except in the case of Non- • Policy for writing off loansBank Finance Companies some of which follow accrual based income • Method of calculating employee benefitsrecognition, as permitted by law) while cost is recognised on the • Foreign exchange transactionsprinciple of accrual. • Share capitalFor multi-service organisations, there is a problem of allocating com- These disclosures provide a range of information that a regulator, anmon costs. In this aspect, SKS has an elaborate system of tracking the analyst or a lay reader would need in order to understand Samruddhi’stime allocation of staff to various services or programmes and appor- operations.tioning the cost of the resources accordingly. This leads to an appropri- Financial management & accounting policies… 71
Financial management & accounting policies other sources including potential equity investors7.4 EFFECTIVE FINANCIAL MANAGEMENT • Analysing working capital needs and maximising efforts to attain a stable liability structure – even while generating sufficient fundsGood practice in financial management and accounting provides with an optimal cost and conditions; for both Samruddi andfinancial benefits, long-term direction and stability to the operations Spandana, use of a mix of development and commercial investorsof microfinance institutions. Clear accounting policies contribute to has meant a stable liability structuredisclosure and transparency in terms of reporting financial perfor-mance and providing an accurate reflection of the financial position of ASSET MANAGEMENTthe MFI. Emerging lessons from the sample institutions include • Clear strategy to protect and manage assets through measures such as internal audit, portfolio tracking, portfolio diversification and clientINVESTMENT level insurance – Spandana has developed a coherent strategy for• Careful investment planning based on a realistic assessment of protecting its asset quality and also for controlling the costs related safety, liquidity needs and returns in that order to managing its portfolio through operational procedures, branch• Limits on exposure to a particular instrument or institution level and organisational economic analysis and monitoring of pro-• Limits on non-portfolio assets to less than 15–20% of total assets ductivity, cost and profitability ratios. • Use of current accounts for collection as is done by IASCFINANCING • Limits for branch office bank accounts• Comprehensive planning with scientific forecasting• A long term planned approach to fund-raising; proper contingency ACCOUNTING measures like cash credit facilities • Cash basis for recognition of interest income on loans except in• A financing strategy that entails use of multiple and stable sources of cases where loans are repayable in quarterly, half-yearly or yearly funds leading to funding risk mitigation – Samruddhi has structured instalment basis – cash based recognition of income is a commonly itself in a legal form (NBFC) that permits the greatest access to capi- used practice and represents a conservative way of reporting tal markets and under certain regulatory conditions, to deposits income from the public; its strategy has involved developing relationships • Treating grant inflows as non-operational income and reporting with multiple lenders, mobilising equity capital from international these inflows after determining operational profitability – and domestic investors even while retaining management control Spandana uses this basis clearly separating non-operating income through the use of a holding company. Spandana’s strategy entails from operating income the use of multiple sources of funds – relationships are nurtured with • Providing a detailed disclosure statement with regard to the each of the lenders and new strategic relationships explored with accounting policies adopted and also providing details of each
MICROFINANCE BEST PRACTICES account head through schedules to the financial statements – • Cash management is fast becoming an important aspect of Samruddhi has a very detailed annual report that clearly outlines financial management in microfinance. Clear cash transfer its accounting policies on income recognition, provisioning, write- procedures, specific cash holding limits and emphasis on the offs, depreciation and also shows the disaggregated account heads optimal utilisation of excess cash are becoming the norm in through schedules to the financial statements most progressive MFIs• Standardising and clearly defining the scope of an external audit through the use of a formal contracting system – this is being done • Cheque based disbursement and repayment: Some MFIs are by Samruddhi in a professional manner now moving towards a cheque-based system of loan disburse- ment and repayment. IASC has also introduced the concept of using current collection accounts for receiving repayments from remote areas. Apart from enhancing cash control, this7.5 EMERGING TRENDS reduces the delays in encashing cheques and allows for the speedy transfer of cash.Financial management and accounting are inter-related key functionalareas for all institutions engaged in financial intermediation. With a • Accounting: Documented accounting practices with increas-greater scale of operations, increased reliance on commercial funds and ing emphasis on disclosure. In multi-service organisations,on for-profit institutions that provide a platform for attaining high levels there is also a trend towards making separate statements forof outreach, financial management is now attracting the requisite degree their microfinance divisions.of attention. The trend to commercialisation – along with the recent cri-sis of confidence in corporate accounting in the US – is also leading to However, a more widespread application and appreciation of the needgreater recognition of the need for sound accounting practices. for financial management techniques and of sound accounting prac- tices, is still required. MFIs need to allocate specialised humanWith the scaling up of operations and conversion to more mainstream resources for financial management and to develop their skills. Suchlegal structures (such as NBFCs) the following trends can be observed teams should deal with investment, financing and asset managementin financial management practices decisions on a day-to-day basis. Accounting policies need to ensure that the preparation of financial statements, the basis for all financial man- • Separately dedicated professional staff and department for agement decisions, is transparent and reflective of the true financial financial management: A few institutions have started creat- position of the organisation. Such a focus will enable MFIs analyse ing a separate, dedicated department to deal with financial their balance sheets in a more appropriate and efficient manner and management. Typically, such departments are headed by Chief manage the organisation’s risk accordingly. Financial Officers (or equivalent positions). Financial management & accounting policies 73
8 Human resource management 8.1 INTRODUCTION take all activities that generate revenue. This makes managing human resources, an important part of an organisation’s operations. 8.1.1 DEFINITION AND OVERVIEW The components of a human resource management system are illustrated Human resource management is “a process consisting of the acquisition, in Figure 8.1. The acquisition, development, motivation and mainte- development, motivation and maintenance of human resources.” 18 nance of human resources are all important elements of the system and must be undertaken in the context of prevailing external influences. People enable an organization to operate. In microfinance, due to the absence of the mechanization that is associated with production organ- • Acquisition: The management ensures that it has the right isations, people take on an especially significant role since they under- number of the right kind of people at the right places and at FIGURE 8.1 – COMPONENTS OF HUMAN RESOURCE MANAGEMENT18 the right time. Acquisition therefore includes, human resource planning, recruitment and employee orientation. • Development: The skills of the people in an organization need ACQUISITION to keep up with the needs of the organisation in relation to improving the techniques and technology available for opera- tions. The development component takes into account train- ing for skill improvement and career development. EXTERNAL • Motivation: High performance depends on both ability and MOTIVATION INFLUENCES DEVELOPMENT motivation. Motivation is affected by the job design, perfor- mance evaluation, compensation and discipline within the organization. An effectively motivated employee who has con- temporary skills and knowledge can be expected to be a com- petent employee. MAINTENANCE 18 DeCenzo DA & Robbins SP, 1997. Personnel/Human Resource Management. Prentice-Hall of India
MICROFINANCE BEST PRACTICES • Maintenance: The objective of this last major component is to 8.1.2 SECTOR PROFILE retain people who are performing well. This requires that the organization provide a stimulating work environment and safe Given that many MFIs in India have evolved from multi-service NGOs and healthy working conditions. Maintenance is a theme that with a welfare orientation, they tend to focus on staff that have a devel- is reinforced by the development and motivation components. opment background and are willing to work in the ‘tough’, ‘grass-roots’ conditions that they operate in. While this is certainly an important • External influences: These include government and labour aspect, unfortunately, there is excessive emphasis on it. As a result, regulations as well as commonly accepted modes of employee other issues of acquisition, maintenance, development and motivation and organisational behaviour. Such influences underlie the are relatively neglected. entire human resource management function. Most NGO-sponsored MFIs do not rely on recruitment as a tool forThis study, documents specific best practices for the following compo- getting qualified senior staff. Instead, they often redeploy senior staffnents from their other development activities to microfinance. Though this is • Acquisition occasionally successful, the redeployment often leads to microfinance Recruitment and selection being conducted as merely another development assistance programme Employee orientation rather than a potentially sustainable activity. • Development Training Given the insufficiently differentiated treatment of microfinance with • Motivation respect to other development activities, many multi-service NGO- Performance evaluation and compensation MFIs do not understand that special skill sets are required in the staff members who deal with microfinance. Result of the inappropriateThe maintenance and employee retention component is closely linked recruitment practices, management systems tend to be underdevelopedto these three and the documentation of best practice for it weaves and inefficiencies creep in. This is particularly relevant at middle andthrough the illustrations on the three components. Also, as many pro- senior management levels. Staff members who may have beengressive MFIs adhere to basic government and labour requirements on extremely good at managing other development programmes may notissues such as pension, gratuity, work hours and work conditions, the be suitable to manage microfinance activities.component on external influences has not been discussed in detail dur-ing the course of this study. However, this in no way undermines the Due to their emergence from idealistic development organisations,significance of this component that plays an important part in terms of MFIs have traditionally refrained from using monetary incentives as afair recruitment and compensation. tool of employee motivation, relying instead on the staff ’s orientation and intrinsic inclination to undertake development activities. However, Human resource management… 75
Human resource managementthis is now changing and many MFIs do provide cash incentives for SKS usually hires persons with rural management qualifications, goodgood performance. accounting skills and preferably relevant work experience. As staff members have to act as promoters of the programme, they are alsoTraining is presently in-service, though there is an increasing trend tested in public speaking. The process is designed to assess a candidatetowards sending staff for training – whether domestic or international – in relation to the key attributes required for a potential job.sponsored by development assistance organisations. To assess field skills, the short-listed candidates are then sent on a fieldThe better-managed MFIs in the country are now becoming quite pro- visit with a branch manager. The field visit is mandatory for recruit-gressive with regard to human resource management. Clearer acquisi- ment at all levels, as SKS perceives such skills to be critical. During thetion, maintenance, development and motivation practices are being field visit, a member of staff who is likely to work with the applicantdeveloped. The role of the HR function is becoming better defined and does the evaluation. In the case of field staff, it is the branch managerskilled personnel are being assigned to it. MFIs now place greater who evaluates the applicant. Final selections are made on the basis ofimportance on these issues and are developing specific policies for the branch manager’s feedback.human resource management. Some of these changing practices arediscussed below. All these policies are laid out clearly in a manual – this facilitates sys- tematic adherence to the designated process of recruitment. In order to reduce acquisition cost and facilitate training, SKS undertakes most of8.2 ILLUSTRATIONS OF BEST PRACTICE: its recruitment in batches. RECRUITMENT AND SELECTION 8.2.2 SAMRUDDHIRecruitment is the identification of appropriate personnel for actual oranticipated organizational vacancies. Samruddhi has a detailed and well-structured selection and recruit- ment process. It specifies the qualifications, skill sets and experience8.2.1 SKS required for potential staff members. The CSAs should have passed the (10+2) secondary school examination and should have knowledge ofSKS relies on both advertisements and posters to attract potential rural dynamics, activities and culture. The applicant must be a local res-employees. The process is systematic. Applicants are asked to come for ident, have knowledge of the local language and be willing to travel bya walk-in interview and a written test. The test is designed to assess a motor scooter or motor bicycle in the field. This profile is designed totheir mathematical and local language skills. SKS perceives these to be ensure that the applicant is aware of the socio-economic environmentthe two most important skills that a person working in field operations in the operating area. Supervisory staff such as Field Executives (FX),in microfinance should possess. In addition, for its managerial staff, should preferably hold master’s degrees in a relevant subject and be
MICROFINANCE BEST PRACTICESwilling to work for a unit located in a small town. A careful assessment an exposure visit at a specified unit. At the end of the visit the applicantof the attributes required in a candidate increases the chances of achiev- submits a report on the specific points asked for and the unit managering a fit between job requirements and candidates’ capabilities. submits a feed back report. Selected candidates then take psychometric tests and have a final meeting with the COO and a Manager level staffThe channels used for publicising vacancies vary across levels. For member. This is a discrete selection process in which an unsuccessfulCSAs, vacancies are advertised by word of mouth or through printed performance at any stage results in rejection of the applicant. The com-advertisements in the local newspaper. For the recruitment of FXs, the prehensiveness of the process enables assessment of the candidate on aorganization relies on management school campuses and advertise- range of parameters critical for Samruddhi’s operations.ments in local papers. Senior managers are recruited either throughnewspaper advertisements or through professional recruitment agen- All the employees who join the company are under probation for sixcies. For all levels, the organisation also uses its archive of unsolicited months after which they need to take a test to exhibit a minimum levelapplications received during non-recruitment periods, which are stored of understanding of the job. The test is followed by a brief interviewin a database. A mix of these channels gives the organisation a substan- with the COO and Managers. The reporting officer also submits atial pool of applications to choose from. Of this, the word of mouth written report. Based on these the employee is confirmed or the proba-recommendations from its staff gives the organisation higher comfort tion period is extended further.levels while assessing a candidate.The recruitment process is systematically laid out to assess candidates 8.3 EMPLOYEE ORIENTATIONon all the critical parameters and avoid subjective biases. The applica-tions and resumes are scrutinised and suitable applications are identi- Employee orientation, or induction training as it is often called, isfied based on predetermined criteria. In case there are a number of important to draw new employees into the organisational environ-applicants there is a common test to shortlist the best candidates. ment. Classroom sessions aim to direct their skills towards microfi-Short-listed candidates are then called for an interview to assess their nance while field based training enables them to acquire relevantsuitability and discuss their job description and remuneration package. experience before they take on individual job responsibility. The induc-In the case of the CSAs this is followed by a credibility check con- tion process, for some best practice institutions is described below.ducted locally and a final interview with a HO representative at least ofthe Manager level. 8.3.1 CFTSIn the case of FXs who are Samruddhi’s employees, as against the CSAs CFTS has a three-month training period for all staff. The process is sys-who are agents and where the organizational stake is higher, all short- tematic and the curriculum is well laid out across the three months, aslisted candidates have to undergo a performance simulation test during follows: Human resource management… 77
Human resource management … 8.3 • Month 1 – targeting: This starts with a day-long in-house ing is both classroom based and on-the-job. It commences with a 4–5 EMPLOYEE briefing and is followed by a one month field visit during day long workshop that uses techniques such as discussions, role plays,ORIENTATION which she or he is an apprentice to a senior Customer Service demonstrations and lectures to cover aspects related to the organisa- Representative (CSR). The idea, as evident is to test the tion’s mission, vision, the operations manual, PRA techniques, loan apprentice’s performance in the key function of targeting. At appraisal methods and MIS. There is also a briefing on questions fre- the end of the visit the Branch Manager evaluates the trainee quently asked by clients. This gives the new staff a feel for the job and on specific parameters that include initiation, interest and gradually draws them into the work environment. skills to motivate. The trainee also undertakes a written test that includes case studies and the use of the Cashpor Housing The trainee is then attached to a senior Sangam Manager in the field. Index (CHI). Care is taken to match the trainee profile with the manager’s profile. • Month 2 – credit management: This focuses on how to create Trainee skills are also considered – better performing trainees are sent and maintain discipline in the groups. Once again it involves to the tougher branches, as the more difficult tasks require better both classroom and field training. Aspects covered are the human resources. During one and a half to two months of field train- preparation of a loan proposal, the disbursement process and ing, the trainee must form at least one group to be confirmed in the collection. At the end of the second month, the probationers job. The orientation module is constantly modified based on trainee have to be well versed in various aspects of credit management feedback and actual situations encountered in the field. in the field. • Month 3 – MIS and accounting package: During this period 8.3.3 SAMRUDDHI the trainee understands the basic concepts of accounting, the formats in use and the organisation’s MIS. These are mostly The period of induction for the CSAs is four weeks. Induction can be done on the job under the supervision of senior staff. either in the unit where the trainee will join or a different unit, prefer- ably an old unit. Training includes classroom sessions on the basic con- This process has evolved with experience. It has been reduced from six cepts of the job as well as field exposure. For the latter, the trainee is to three months with a focus on practical aspects so that the existing accompanied by a designated CSA-trainer for a full week to observe the staff members do not need to spend too much time with trainees. work pattern in the field. He is expected to interact with customers and other employees, understand the methodology, documentation process 8.3.2 SKS and organisation’s accounting system. The training period for SKS field staff is also three months. While two Before they go to the field, the FXs are provided an orientation through key people in the organization are designated trainers, other staff mem- classroom discussions on the organisation’s mission, philosophy, poli- bers are also invited to provide their inputs in specific areas. The train- cies and other administrative matters by the senior management. The
MICROFINANCE BEST PRACTICESissues to be included in the briefing vary each year based on feedback Samruddhi also encourages its employees to identify suitable trainingfrom the existing employees. This is followed by a six-month exposure sources and programmes for themselves. Training programmes utilisedto other units and hands on experience in the unit assigned to them. are of two kinds – internal and external. Internal programmes are onThey are then brought together to share their experiences and under- the job as well as classroom based. As part of external training,stand further details of the credit appraisal process. Samruddhi feels Samruddhi offers its employees the option of Continuing Educationthat training delivered by people who are involved in operations tends Programmes (CEP). This entails the organisation and the individualto have a greater impact as trainee and trainer have a better communi- sharing the cost of any training programme relevant to the work of thecation and the informal environment also helps. organisation. Samruddhi also provides a loan for this purpose. All the three organisations covered also use training as a staff retention8.4 STAFF TRAINING mechanism. In this way, training addresses the human resource mainte- nance function as well.Staff training is a learning experience that aims to bring about a rela-tively permanent change that improves the individual’s ability to per-form on the job. MFIs use both formal training and management 8.5 PERFORMANCE EVALUATION AND COMPENSATIONdevelopment initiatives to improve the skills of their staff. 8.5.1 CFTSAt CFTS training acts as a refresher. Training needs are identified bythe training officer who visits the branches regularly and are also based CFTS’ performance appraisal was developed to maintain both produc-on requests from Branch Managers. Through this method the organisa- tivity and quality. For the field staff it is linked with individual andtion provides inputs when required rather than committing resources branch performance and strikes a balance between competition and co-for a longer period. operation. The incentive is provided in addition to the staff member’s basic salary and can be up to 50% of the basic amount. The incentiveSamruddhi on the other hand regards training as an ongoing process. system incorporates all staff members including the Assistant GeneralThe annual Personal/Professional Learning and Review (PLR) process Managers (AGMs). The operations staff members have an individualhelps assess the personal and professional learning needs of an individ- target based system while the head office staff’s incentive is linked toual for improving performance. The organisation uses the information the achievement of overall organizational targets. The support staff ’sgenerated through the PLR to identify training needs and prepare a incentive is based on an aggregate of other incentives.training calendar. This helps in organising the training programme andwork allocation accordingly. Monthly incentive • Linked to individual performance Human resource management… 79
Human resource management … 8.5 • Number of groups formed; Rs500 per group of very poor • Loan utilisation checks PERFORMANCE clients and Rs300 per group of moderately poor clients. • Quality of office workEVALUATION AND • Quality of field work COMPENSATION Quarterly incentive • Linked to branch and individual performance The above parameters include both objective and subjective indicators. For • Based on achievement of branch target on the following para- those indicators that are based on judgement, it is the Branch Managers with meters; whom the discretion lies. For Branch Managers, the incentive system is based Number of borrowers – 10% of salary on overall operational performance of their branch. Number of savers – 10% of salary • Interest income earned by individual – for 90% of interest col- 8.5.3 SAMRUDDHI lected, 0.1% of the income amount is given as an incentive and for 100% interest collected the incentive is 5.5% of the Similar to CFTS, Samruddhi calculates its gross pay as fixed pay plus interest income. incentive. The incentive can be up to 50% of the fixed pay. This pay structure is applicable to all the staff including the Managing Director. The appraisal system is entirely objective and has evolved over the At the field level, the target performance is assessed on disbursement, years. For instance, the portfolio at risk was removed as a parameter repayment rate and the improvement in repayment rate. Besides these, because the organisation noticed that staff were adjusting repayments the mentor assesses an employee’s performance on functional responsi- against savings to maintain portfolio quality. bilities and ability to meet challenges. Each employee is also evaluated on a human resource and teamwork index. The above system makes it possible for staff performing well to attain quite a large amount (up to 50% of the fixed amount) in variable per- At the head office, the figures by company are taken for assessing the formance pay. This, coupled with a policy of fast track promotion for performance of employees. Each staff member can earn more if they, high performance in the field helps the organisation retain good people. their unit and the company perform better. This helps align organisa- tional interests with employee interests. Promotions are also based on 8.5.2 SKS performance and there is an emphasis on filling vacancies through pro- motions from within, at least at the operational level. This is not only a The SKS performance evaluation system too, has different incentives tool for ensuring optimum employee contribution to organisational for the Sangam Manager and the Branch Manager. The Sangam goals but also motivates employees to stay with Samruddhi, as they see Manager’s incentive is based on potential for higher growth in responsibility and earnings. This facili- • Formation of a minimum of two groups per month tates employee retention. • Less than 25% dormancy (eligible borrowers without a loan)
MICROFINANCE BEST PRACTICES • Documented and systematic process of recruitment maintains8.6 MAKING THE MOST OF PEOPLE objectivity as well as allows for instinct decisions - Samruddhi has a well-documented, discrete selection procedure.Like most organisations, the sample organisations described above • Formal orientation period allows the new employee to movedepend on their staff to translate their strategies, policies and manage- into the job gradually, for example, Samruddhi has a six-ment systems into day-to-day operations. Human resources are the month probation period.crux of an organisation’s functioning. DEVELOPMENTThe best practices identified during this study that can help in making • Formal training needs assessment process - Samruddhi uses thethe most of the people employed by an MFI are PLR process to determine training needs • On the job training - at CFTS the three-month training periodACQUISITION has classroom sessions alternating with actual field experience • Recruitment methods matched to job level and skill. For • Refresher courses to reinforce learned skills - branch managers example, SKS advertises in the local newspapers for CSA level at CFTS often ask for short courses to reinforce skills learnt jobs and Samruddhi visits campuses to recruit FXs. during induction • Rigorous selection to minimise costs of replacement. At • Individual career development through self-assessment. For Samruddhi the candidate passes through multiple levels of instance at Samruddhi, the PLR process encourages employees selection, each of which acts as an elimination process. to identify their learning needs and suitable external training Therefore, the candidates left at the end are the most likely to courses. succeed in the job. • Support for continuing education ensures that needed talent is • Use of tests that assess job related skills - SKS measures mathe- available within the organisation. matical and local language skills, both of which it regards as critical to the working of a Sangam manager. MOTIVATION • Performance simulation tests through field visits. For example • Established performance standards for all staff - thus, the field at SKS, the final shortlisted candidates go to the field during staff are appraised based on the number of groups they form which their performance and ability to work is evaluated by and financial targets achieved, while the branch managers are their probable co-worker. At Samruddhi the FX’s perspective appraised on the achievement of the branch target. of the job is also examined through the candidate’s visit report. • The actual performance is measured through regular reports • Background investigations - Samruddhi undertakes a credibil- that are part of the MIS, ensuring objectivity. ity check for its CSAs who handle a large amount of cash. • Appraisal linked to a number of objective and subjective para- Human resource management… 81
Human resource management meters ensures all round staff productivity - SKS appraises the 8.7 EMERGING TRENDS performance of the Sangam Manager on the number of groups formed as well as the quality of office and field work High quality human resources are critical for any organizational activ- • Performance based incentives for staff - a number of MFIs ity, an importance that is magnified in the case of the Indian MFI sec- have a part fixed and part variable incentive system, the vari- tor with its traditional paucity of quality personnel. To acquire, able part of which is linked to the key performance standards motivate, develop and retain these resources is, therefore, of utmost (refer first point) which provides staff an incentive for per- importance. This importance is being realized increasingly and, as is forming well the case with other aspects of microfinance operations, human resource management too is becoming more professional. Organizations are rec-MAINTENANCE ognizing the significance of a skilled and committed resource and are, • Sponsored training programmes - investment in sponsored therefore, trying to develop systems that attract and support employees. skill enhancement is viewed as an incentive and is being Some trends that are emerging are increasingly used as a retention tool • Fast track promotions for high performers - a number of MFIs • Separation of Human Resource Management as a key func- promote staff who perform well quite fast. This applies espe- tion: With the increasing importance of this function, some cially to field staff and acts as a motivation for them to stay MFIs are separating this function from general administration • Earn more as you perform better - performance-linked incen- and deputing qualified personnel and adequate resources to tives without strict limits makes it possible for good perform- ensure that human resource issues are properly addressed. ers to earn significant additions to their remuneration, which acts as an incentive to stay on. • Recruiting professionals: Moving away from a pure social development perspective, MFIs have started recruiting suitably skilled professionals as managers whose skills are required for any well-run financial intermediation activity. Sourcing of staff is undertaken from institutes that offer courses in rural man- agement. Though this means an increase in personnel recruit- ment and retention costs, efficient and well-managed operations help earn more income. Additionally, since a num- ber of financial lending institutions have started looking at the quality of an organisation’s staff base before investing in them, this also helps in raising resources for the organisation’s activi- ties.
MICROFINANCE BEST PRACTICES• Focus on induction and orientation: The selection and induc- • Incentive based salaries: More and more MFIs are adopting tion of a new employee is becoming a well laid out systematic composite salary structures with fixed and variable compo- process that aims to develop basic knowledge of microfinance nents. The variable component is based on the performance of and the skills needed for operations. staff on factors that are critical for the organisation’s opera- tional success and the achievement of its objectives.• Training: MFIs are now including training in their business plans as an investment in building skills. This includes external training. Earlier training was only undertaken at the donor’s initiative. Human resource management 83
Conclusion – what next?The primary task of this study was to document “best practices” critical areas of improvement and the tools necessary to assess andemployed in the microfinance sector in India. To achieve this, the study improve performance in each area have been documented here.team used its knowledge of a broad spectrum of about 100 MFIs inIndia that have been rated by M-CRIL in order to identify the institu- Overall, the study team hopes and expects that this document willtions to be included in the document. The MFIs finally covered are enable MFIs in India to move away from the mould of traditionallylisted in the Annex to this document. The list includes an array of governed and managed organisations to more professionally run finan-organisations ranging from relatively small MFIs to large ones; multi- cial institutions. While this study shows that it is possible to adopt bestservice organisations to exclusive financial service providers; societies to practices and achieve excellence in microfinance management, it is alsoNBFCs and member-based cooperatives to for-profit organisations. apparent that documentation alone is not enough. A larger effort –The common thread that binds this diversity is that each of the sample capacity building, formal training, on site technical assistance andMFIs has achieved a high level of excellence in some area of its func- investor and donor support – would be required to disseminate andtioning. inculcate a best practice culture among all the stakeholders. For this rea- son, the Microfinance Best Practices Programme – of which this docu-The purpose of this study was to illustrate best practice in different mentation effort is a part – has proposed a follow up programme (referaspects of microfinance. As stated in the introduction, the nine MFIs Figure on page vii).selected do not necessarily represent the universe of best practice MFIsin India. Instead, they serve to illustrate the salient features of best prac- As part of the programmetice for the benefit of the larger body of MFIs in the country. 1 This report will be published, discussed at a regional workshop forThe discussions presented as the sector profile in each section, demon- South Asia to be organised in India in early 2003 and distributed tostrate that Indian microfinance is a growing sector. Even though, in some 500 MFIs in the Asian region. The message for donors will beaggregate terms, the sector is still in a nascent stage of development, nev- reinforced through an investor awareness workshop (includingertheless, there are many MFIs that have a strong interest in improving donors) to be organised during 2003.their operations and adopting best practices. The illustrations of bestpractice in this report – in different areas of operation from governance 2 In the second phase, the scope of this research will be widened toto product design, MIS to financial management techniques, internal cover MFIs in other Asian countries – particularly Bangladesh,control to operational strategy – should provide such organisations with Indonesia, the Philippines, Nepal and Cambodia. This will broadenthe ideas to enable them to improve existing practices appropriately the range of practices covered by the programme and will help toadapted to suit the local conditions and capabilities of each MFI. The attune it to specific country level considerations that may arise.
MICROFINANCE BEST PRACTICESThis phase will include Such an effort at disseminating the best practices to a wider audience is critical given that most of the practices presented have the potential to • Capacity building with select MFIs that have the potential to enhance the abilities of MFIs not just in India, but throughout the expand outreach in the region to enable them to adopt better Asian region – with suitable adaptations – to scale up and operate in a practices in their operations, accelerate their movement sustainable manner. Given that the outreach of microfinance in India, towards sustainability and enhance their ability to raise finan- in particular, but also in many other Asian countries is extremely lim- cial and other resources for increasing outreach. This is likely ited relative to the size of the market, such initiatives are likely to act as to include formal training modules in combination with selec- a positive reinforcement to other efforts – policy changes and dialogue tive on-site support in the adoption of practices most suited to with regulatory agencies, formalisation of assessment procedures the needs of the particular MFIs’ local conditions. through tools such as ratings and standard setting for MFIs - that are being made in the microfinance industry at present. • Engagement of present investors – both development and commercial – and the inclusion or drawing in of potential commercial investors to increase the flow of financial resources for microfinance. • An effort to address policy issues that limit the ability of MFIs to raise resources either locally through member deposits or through institutional borrowing or from international investors in the form of equity, loans or other financial instru- ments such as guarantees and securitisation of assets.Both of the latter activities will entail a series of structured workshops,seminars and dialogue and documentation in order to promote under-standing of the needs and abilities of MFIs, assessment/rating agenciesand the sophistication of tools now available to the microfinance sector.The programme will, in early 2003, propose a series of detailed actionsto promote this agenda. 85
Annexures…ANNEX 1 – ORGANISATIONAL PROFILE (AS ON 31 MARCH 2002)ORGANISATION LEGAL FORM EXPERIENCE MODEL SERVICE STRUCTURE MEMBERS STAFF1 BRANCHES (YEARS)ASA Trust 10 Grameen Multi-service 30,900 201 25CFTS Company 5 Grameen MFI 18,000 117 10IASC Company 4 SHG MFI 9,700 11 2SAMRUDDHI NBFC 6 Mixed MFI 40,0002 99 13SEWA BANK Co-operative 28 Individual MFI 172,0003 105 1 +5 collection Bank lending centresSIFFS Society 6 Federated MFI 8,500 9 5 lendingSKS Society 4 SHG Multi-service 5,600 65 4SPANDANA Society 4 Grameen Multi-service 16,400 38 8VSSU Society 8 Individual Multi-service 7,000 23 – banking 1 For multi-service organisations, staff includes allocated microfinance staff in terms of time spent in handling savings and credit activities 2 With a –10% to 5% error margin 3 The figure provided is for savings accounts – the number of members or unique savers is not available
MICROFINANCE BEST PRACTICES ANNEX 2 – OPERATIONAL STATISTICS (AS ON 31 MARCH 2002)4ORGANISATION PORTFOLIO SAVINGS BORROWINGS DONATED PAID UP EQUITY NET-WORTH AVERAGE ACTIVE RETURN ON EQUITY/GRANTS LOAN SIZE BORROWERS ASSETS (%)ASA 58,026,700 18,780,226 5 83,416,100 Not available - 4,371,095 ~5,000 8,340 Not availableCFTS 54,580,700 5,360,000 86,880,000 - 1,530,000 5,230 15,050 -2.45IASC 42,385,400 2,556,933 63,999,700 430,310 6,000,000 17,940 3,120 13.53SAMRUDDHI 223,327,000 - 169,788,000 - 206,001,000 211,516,000 26,630 11,270 0.5SEWA BANK 106,748,700 464,390,851 13,035,700 - 11,777,000 81,887,711 11,429 9,250 0.7SIFFS 21,293,000 163,281 24,253,800 732,663 1,351,000 19,63,000 10,164 2,460 -1.8SKS 13,616,600 1,751,010 621,500 15,763,868 - 3,535 3,850 -SPANDANA 46,688,900 6,023,698 35,101,100 5,061,729 - 10,060,364 5,575 13,210 11.5VSSU 23,791,200 25,272,777 2,464,300 41,46,144 10,000 4 Data presented is based on reports provided by the MFIs – the information has not been verified by M-CRIL. 5 Includes member savings and the centre fund. 87
Abbreviations & glossaryAGM Assistant General Manager JLG Joint liability groups: five-member group sharing the legalBANK SAATHIS SEWA Bank’s commission agents responsibility for the credit extended to every group memberBIMA SEVIKAS SEWA Bank field staff specialised in insurance MACS Mutually Aided Cooperative SocietyBM Branch Manager MFI Micro Finance InstitutionBO Branch Office MIS Management Information SystemBQR BASIX Quarterly Review NABARD National Bank of Agriculture and Rural DevelopmentCENTRE As defined by the Grameen methodology, an operating unit NBFC Non Banking Finance Company: specialised public/private entity of 7–10 groups (35–50 members) whose principal business is lending and accepting deposits.CEP Continuing Education Programmes Categorised subject to conditions specified by the central bankCHI Cashpor Housing Index: a wealth ranking system based on an asset NGO Non Governmental Organisation classification developed by Cashpor Inc., Malaysia NPA Non-performing AssetsCOO Chief Operations Officer PADYATRA A campaign on footCS Cash Security: guarantee mechanism used by Samruddhi PCS Primary Cooperative Society: a cooperative society of primaryCSA Customer Service Agents: commission agents for Samruddhi producers united voluntarily to meet common economic needs.CSR Customer Service Representative: Cashpor and SKS employees PDA Personal Digital Assistant working as credit officers PLR Personal/Professional Learning ReviewDOS Disk Operating System RBI Reserve Bank of IndiaDSS Decision Support System: an "informational” computer application RDBMS Relational Database Management SystemFD Fixed Deposit: bank term deposits RMK Rashtriya Mahila KoshFW Field Worker: credit officer ROSCA Revolving Savings and Credit AssociationFX Field Executive: designation for Samruddhi’s junior level managers RRB Regional Rural Bank: specialised banks for rural clientele sponsoredGUI Graphical User Interface by scheduled public sector commercial banks and the governmentHANDHOLDERS SEWA Bank field staff who guide the clients through the process of SANGAM Group of MFI members formed for the purpose of accessing credit applying for loans SDC Swiss Agency for Development and CooperationHO Head Office SHG Self Help Group: a 10-20 member savings and credit groupIAD Internal Audit Department SIDBI Small Industries Development Bank of IndiaIDPD Interest Due Per Day: the interest amount due each day as TA Transaction Assistant: Samruddhi’s data entry operator calculated by the Samruddhi MIS UH Unit Head: Samruddhi’s senior manager at a field/unit office.ILA Independent Local Auditor USP Unique Selling PropositionIRDP Integrated Rural Development Programme
PROGRAM PARTNERSEND POVERTY FOUNDATION MICRO-CREDIT RATINGS INTERNATIONAL LIMITEDOur mission at End Poverty Foundation is to eradicate poverty by apply- Micro-Credit Ratings International Limited (M-CRIL) is a specializeding capital and free enterprise tools to empower entrepreneurs in develop- microfinance credit rating and research institution. Within four yearsing countries. We focus on innovation and leveraged solutions by of operations, since 1998, M-CRIL has undertaken more than 135identifying and addressing unmet opportunities within the poverty credit ratings and other assignments in various Asian countries. Thesereduction field, promoting and accelerating global efforts that allow include Bangladesh, Cambodia, East Timor, India, Indonesia,impoverished people to lift themselves out of poverty, and advancing sus- Myanmar, Nepal, the Philippines, Kazakhstan and Sri Lanka.tainable entrepreneurship worldwide. M-CRIL’s activities are based on the perception that with a greater flow ofBorn at an intersection of high-technology business entrepreneurship and reliable information between the microfinance and the formal financialsocial investment, End Poverty Foundation utilizes an entrepreneurial sectors, MFIs would be better placed to access wholesale finance for on-vision and business expertise. We identify, develop and refine techniques lending to the poor. In line with this mission, M-CRIL also undertakesfor self-sustaining solutions to global poverty. We build on the success of proprietary sectoral research and contributes to the setting of professionalothers and work with them to improve and extend the solutions. Our benchmarks and operating standards for MFIs.principal efforts promote strategic partnerships and coordinate the intel-lectual and financial capital necessary to develop practical projects, pro- M-CRIL’s microfinance rating service is aimed at providing a professionalmote awareness, and advance research that is action-oriented. and rigorous opinion on the relative ability of an MFI to make timely and complete payments on obligations to investors.We recognize that “ending poverty” is an extremely ambitious goal. Butwe believe that eliminating extreme poverty is indeed possible and will be M-CRIL’s rating provides a risk outlook of the rated MFIs and its assess-ultimately accomplished worldwide because of the ideas and efforts of ment of strength and weaknesses serves as a tool for MFIs and their fund-many people and organizations implementing systemic, self-sustaining ing partners/ investors to work together to build capacity.solutions. We accept the challenge inherent in our name, End Poverty, aswe strive both to alleviate poverty and to develop and apply techniques 104 Qutab Plaza, DLF City -1, Gurgaon 122002, India.for the eventual elimination of extreme poverty throughout the world. Fax +91 124 6352439 • Tel +91 124 6563172 e-mail: email@example.com Adams Drive, Menlo Park, CA 94025. USA website: www.m-cril.comFax 650.688.5701 • Tel 650.566.8811e-mail: firstname.lastname@example.org: www.endpovertfoundation.org