Indian Microfinance after Andhra Pradesh looks to rebuild “brick by brick”

By Lauren Burnhill aka @LaurenOPV

In India, you have to deal with the question of scale whether you want to or not. The geography and the population are just too vast to think small. When we talk about scale in pro-development or anti-poverty sectors, the challenges of managing growth move from a question of corporate success to more profound philosophical questions. In no sector are these tensions more evident than in microfinance. If a pro-poor microfinance institution (MFI) wants to make larger loans to its successful clients, is that smart business or “mission drift”? If an MFI offers good benefits and a professional development track for staff, is it practicing smart human capital management or exploiting poor clients?

I recently had the good fortune to travel to India to talk about Board of Directors’ level Risk Governance for MFIs. That happy invitation from the IFC grew to include a panel on Human Capital Management at the Microfinance India Summit 2012, which took place immediately after the Risk Governance workshop. I haven’t set foot in India for several years and was curious to see how the “crisis in Andhra Pradesh” (October 2010) had played out over time.

Here’s the current situation. The Indian economy “only” grew by 6.5% in 2011, dropping to 5.8% estimated for 2012. Including both self-help groups (SHG) and commercial microfinance, more than 68 million Indian microentrepreneurs received financing in the year 2011-2012. If one includes small loans made by commercial banks, that number rises to 168 million, according to the Microfinance India State of the Sector report for 2012. The long-awaited Microfinance Institutions (Development and Regulation) Bill was tabled by Parliament in May 2012 and remains in limbo. At least one significant regulatory change has taken place, namely that MFIs organized as non-bank financial corporations (NBFCs) must register with at least one credit information company. Highmark Microfinance Credit Bureau was established in March 2011 and recent information shows that 74 institutions regularly provide data. Highmark’s database now covers 80 million loans to over 45 million clients, making it easier for MFIs to monitor potential over-indebtedness of their clients.

By the numbers, Indian microfinance is alive and growing rapidly, but in practice, the industry is plagued with doubt and uncertainty. Greater emphasis is being placed on monitoring social performance, alongside financial performance, but the multiplicity of potential standards and indicators makes it difficult for Boards and MFIs to chart their paths. According to the Microfinance Information Exchange (MIX), only 23% of 71 registered MFIs have submitted 2010 and/or 2011 client poverty measurements. Available data shows that the majority of Indian MFI clients earn less than US$2 a day. Indian MFIs are thus reaching the poorest segments of the market, but they must now figure out how to measure and monitor the social impact of their microfinance products and then communicate this information to current and potential investors.

Clearly, the fact that the IFC’s Access to Finance Advisory Group was offering a full day on Risk Governance for MFI Board Members is a sign that risk management and good governance have risen higher on the poverty alleviation priority list. For too many years, we’ve assumed that the ability to get increasing amounts of cash into the hands of microentrepreneurs and then get it all back (or at least most of it) later was sufficient evidence that an MFI was well-run and producing social impact.

As it turns out, the ability to make money on microlending is key to institutional sustainability, but says nothing about an MFI’s ability to foster social change or to grow and thrive in a complex and uncertain environment. Risk management – first understanding what the risks are and then figuring out what, if anything, can be done about them – has been gradually filtering into the organizational structures of leading MFIs, impelled perhaps by the regulatory requirements facing newly chartered Microfinance Banks. Risk management culture needs to include the Board of Directors too, hence the emergence of “risk governance”.

Based on participant feedback, I’d have to conclude that India is making wider use of Independent Directors on MFI Boards than either Latin America or Africa, the two regions with which I am most familiar. This is a good thing and important for sound governance in an increasingly commercial but fundamentally “double bottom line” sector. At the same time, I sensed frustration that “directors don’t know enough about microfinance”. Little in the way of training and education for Board Members seemed to be on offer, and appropriate compensation for Board Members remains an issue. The sheer size of the Indian marketplace, however, means competition for good Directors will increase and ensures that MFIs will figure out how to compensate Board members for their time and services sooner rather than later.

What struck me first when I reached the Microfinance India Summit was the slogan that had been chosen: “Rebuilding the Sector, Brick by Brick”. Some of the panelists I listened to spoke of “Microfinance 2.0” by which they meant whatever comes next for the microfinance industry. Intriguingly, the world’s largest funder of microfinance, German development agency KfW, had slated it’s Access to Finance workshop shortly after the India Summit – but there the talk was of “Microfinance 3.0”. What’s going on here? Everyone seems to be looking for an industry “reboot”, but just how much and what kind of a reboot remains murky.

In reconnecting with colleagues at the summit, I was impressed by how the microfinance market, broadly defined, had deepened and matured since my last visit. Local specialized service providers are helping MFIs with fundraising, organizational development and strategic planning. Leading local rating agency M-CRIL is even serving markets beyond India these days. The SMART Campaign started by the World Bank and ACCION’s Center for Financial Inclusion gave birth to SMART Campaign India, which released a new MFI consumer protection toolkit at the Summit. Kudos to my former staffer Hema Bansal for her excellent work in making this happen!

Microfinance will continue to play an important role in the Indian economy. Market size estimates range from 300 million to 600 million potential clients which leaves considerable room for MFI growth. Branchless banking, mobile payment systems and Business Correspondent networks are exploring new ways of reaching both urban and rural poor. Self-reflection and the notion that “rebuilding brick by brick” is both feasible and desirable should contribute to healthy, consumer-friendly growth for the microfinance industry. At least, I hope this is where things are heading.

What are you seeing in Indian microfinance? I’d love to hear comments and insights from those who’ve spent more time in country than I have!

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One response to “Indian Microfinance after Andhra Pradesh looks to rebuild “brick by brick”

  1. Dear Lauren,

    A very insightful post indeed. I was eagerly waiting to read this.

    As you brought out, there is a lot of tangible effort being put in to re-shape the microfinance field in India. It is someway good that government has yet not heavily regulated the industry, as doing so may definitely standardize practices (at least the reporting requirements) but will also cut down on interesting innovations happening at the grassroots to try new and better means of practicing microfinance.

    I completely agree with you about the need for organizations to adopt robust ‘Social Impact’ evaluation matrix. This seems to be a challenging or rather an illusionist aspect of the field at present.

    Many thanks for the wonderful post.

    Vivek

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