Bhalchander: It is my great pleasure to have with us on email Mr. N Srinivasan, author of the ‘Microfinance in India: State of the Sector Report 2008’. The unabridged report is also available in several bookstores including amazon. Mr. N Srinivasan is a development economist and a career development banker. A postgraduate in economics from Madurai Kamaraj University, he also has a certificate in training and development from the University of Manchester. He served National Bank for Agriculture and Rural Development (NABARD) for about 25 years of which last six years were in the capacity of Chief General Manager.
After leaving the bank, he is pursuing a career as a freelancer and has been a consultant to World Bank, IFAD, UNDP, UNOPS, GTZ, Frankfurt School, Sir Ratan Tata Trust, Access Development Services and Government of India.
And thank you very much for taking time from your busy schedule to be with us.
Bhalchander: The Microfinance in India: State of the Sector Report 2008 is a very comprehensive report. Could you tell us in brief about the methodology you used for the survey?
N Srinivasan: It is difficult to fit in the preparation of the report to a defined methodology given the size, complexity and multiplicity of stakeholders in the sector. Interviews, surveys, dip stick studies, focus group discussions and literature reviews were all used. Mostly secondary information made available by NABARD, Sa dhan, Reserve Bank of India (RBI), Insurance Regulatory and Develoment Authority (IRDA) and others were used to analyse macro trends. Study and research outputs of several individuals and organisations were also examined and used to validate the voices from the field. Primary information and client/practitioner views were gathered during field visits – I was on the road for more than eight weeks. About ten seminars and conferences gave insights in to certain aspects of the sector. UN Solutions Exchange ran two questions on their web platform which produced information from different sources. Weaving all the information from different levels and sources in to a cogent report was the tricky part.
Bhalchander: The title slide of your presentation is very interesting. It says “In Search of a ‘mission beyond growth’”. Could you please elaborate on that?
N Srinivasan: The last two years saw vigorous growth. But growth cannot be not an objective; it is a path to somewhere. Where- is the question that the sector needed to ask. With all the efforts and resources are we serving “our customers” well and effectively is the question. Most growth has been planned in pursuit of institutional aspirations – not necessarily for improving quality and effectiveness of services to the clients. Hence the need for “mission beyond growth”.
Bhalchander: You state that the intensifying competition is not entirely leading to positive results. Could you please elaborate on that?
N Srinivasan: Competition has pressurized MFIs in to cutting corners in client acquisition, servicing and monitoring processes. Offering higher loan sizes just as a competitive response without an appropriate appraisal, financing of existing clients of other MFIs without considering their repayment capacity, poaching clients from others by making enticing offers thereby introducing clients to shopping and MFI hopping and a focus on increasing client and loan base without adequate risk management systems are some of the consequences of escalating competition. Competition is good for the customer as it improves product quality and reduces costs in the short term. But these improvements may be temporary, if unfair competition destroys some of the competing institutions. The customer would tend to suffer in the long run.
Bhalchander: The presence of MFIs is concentrated in regions which are well endowed and where the entrepreneurs (clients) are relatively better off, while the less endowed regions and the poorer clients do not have access to microfinance. Do you think increasing competition will eventually make sure that all regions and all entrepreneurs are reached or would we need additional incentives or policy measures to make that happen?
N Srinivasan: Competition is limited – almost non-existent- in the less endowed regions. Poorer people are last choice clients and do not gain easy access to finance. Competition would fill in gaps in well endowed areas and among better off clients. For the less endowed areas policy interventions and financial incentives are needed. The financial inclusion campaign with the support of two funds can play a very significant role in extending frontiers of microfinance to remote and underserved areas. But policy push should result in banking system and MFIs making inclusion a “ business prospect” rather than a CSR obligation.
Bhalchander: India is perhaps unique in having two major models of microcredit. One is the traditional Bank- Self Help Group (SHG) model and the Grameen replicator model followed by most MFIs. Based on your experience and recent observations which model is proving more effective in lifting people out of poverty?
N Srinivasan: Studies show that SHG model where it has been in existence for a long time (five years or more) has an impact on poverty. The NCAER study finds evidence that savings income, expenditure on education and health have all increased. I would believe that MFIs would also have a similar effect where they have provided loans to same clients over a period of time. But given the present small size of loans in both the models, it is difficult to envisage a rapid decline in poverty. The loans are not sufficient to cover investment in livelihood assets that can produce a poverty mitigating income. In fact the loan sizes need to be about ten times the present average to provide a base for poverty alleviating income for a family. Credit, we are reminded is not a solution to poverty. There are other enablers necessary such as access to markets, appropriate technology, skill sets, input availability and infrastructure. Institutions that have managed to provide/ensure these linkages in addition to finance have been more successful in addressing poverty.
Bhalchander: There has been huge and rapid growth of the larger for-profit MFIs. Many of them seem to have adopted a strategy of touch and move. i.e. They make microloans to a few people in a locality and then move on to another locality, rather than truly get involved and penetrate a given locality. What is the impact of this strategy on the clients and the MFI?
N Srinivasan: The “touch and move” models result in high transaction costs, low revenues per client, low ability to manage risks, render monitoring and supervision of operations difficult due to the expanded span of control and impose higher costs on the customer. Small loans leave the customer open to poaching by other lenders. While widening is necessary for inclusion, deepening of services would lead to greater customer loyalty, higher revenues per client and lower transaction and risk costs. Consolidation of business in each location before moving to new locations would better serve the interests of MFIs.
Bhalchander: Most of the funds go to a select few for-profit MFIs who are on a rapid expansion path. They get equity more easily from investors as they have the potential to go IPO. Since they have access to equity, they are also able to access bank loans on favorable terms and grow very rapidly. On the other hand, smaller MFIs that are more localized find it very hard to raise funds. Given that capital is limited, is there any reason why smaller, more localized MFIs should be supported rather than only support the larger ones as seems to be the trend today?
N Srinivasan: A good question. First of all the notion that an MFI needs to be very large to be effective has to be dispelled. The paradigm relevant in banks that have multi-location, multi-business clients is not relevant to MFIs where clients are small and ticket sizes are also small. Most pan-Indian MFIs would tend to increase their costs of management and control on account of extended spans and large complement of staff. The standardization that takes place to make the business manageable would leave little scope for innovation and no flexibility to respond to client specific requirements. In many ways such large organizations would be software driven and not by local human intellect. Microfinance is relationship banking to the core. Hence I would venture to say that small MFIs should be supported to find the right size. Equity, quasi-equity, long term loans and guarantees are tenable ways of financing such institutions.
Equity as the dominant option requires large MFIs so that the investor gets a viable exit strategy; hence there is a mutuality of interests among those wanting to grow huge and those wanting to invest in equity with a ‘return’ consideration.
Finding the right size is the challenge – one of the issues is sustainability, another risk management across clients and activities in the loan portfolio, a third is the absolute cost of regulatory/supervisory compliance which is the same regardless of size. But a critical consideration should be at what size the MFI could still be sensitive to the client’s needs. The short answer is that we should prioritise small localized MFIs for all support.
Bhalchander: What strategies should smaller MFIs which are either NGOs, societies, S.25 companies or cooperatives adopt given that they are likely to find it very difficult to transform into for-profit Non Banking Finance Companies(NBFCs) with the financial crisis and still continue to serve their clients? Is member owned co-operative which can also mobilize its own savings a feasible option?
N Srinivasan: Member owned forms are feasible, but slightly difficult option. There are member owned and managed for profit companies, Mutually Aided Credit Societies, conventional cooperative societies that are successful. There are a dozen examples of member-owned MFIs that work successfully. These could be the models that other transformation candidates could emulate. An important caveat is that such institutions take three to five years to stabilize; so the threshold of patience should be high to give such institutions the space to grow and psopper.
If transformation is to ensure continuity and sustainability of access to finance, the NGOs could also think of becoming Banking correspondents of banks. With more technology entering microfinance space, banks are willing to use NGOs to service microfinance clients.
Bhalchander: Some of the large MFIs in India have reached sizes which are not common in other parts of the world. Moreover they are purely microcredit institutions with no access to internal funds unlike Grameen Bank for example. And further they are for-profit entities with investors which also include Private Equity funds and Venture Capital apart from a few socially responsible investors. Such scale and structure is not found anywhere else in the world. What do you think are the emerging risks to banks which lend to them, their clients and to the organizations themselves because of this aspect which is so unique to India?
N Srinivasan: We might find a few large MFIs in other countries too. Some MFIs have targeted growth and size and have moved ahead. They have the appropriate models for expansion of business. But customer comfort may not always be a priority. They offer uniform products regardless of clients’ livelihood investments and cash flows. Sustainability of fast paced growth and retaining clients after three or four cycles of lending with the same loan product are concerns that would have to be addressed. The high profits come out of an ability to price the loan – poor clients pay out from their capital or a new loan. Whether borrower would be sustainable at any level of interest rates? – the long term future of the MFIs depends on a study of interest rates on loans taken out of desperation and loans taken for livelihood activities.
Bhalchander: What can the microfinance sector in India learn from other countries?
N Srinivasan: Capacity building approaches, induction of relevant technology, regulatory practices and building the profile of microfinance are some of the areas where we can learn from others.
Bhalchander: If you were to suggest 5 policy measures to the new government which have to be implemented in the next five years to improve the lives of the poor through microfinance, what would those be?
- Targeting livelihoods and incomes among the poor so that financial services can offer relevant services that address poverty.
- A new microfinance bill that would focus on sector regulation – not institutional/model regulation.
- Enabling savings mobilization by the sector either on own account or as correspondents, with the backing of deposit insurance through Deposit Insurance Corporation.
- Funding for investment in new customer acquisition for MFIs and banks to achieve financial inclusion objectives
- A low cost bulk funding facility that would finance MFIs for on-lending to defined microfinance clients so that interest rates to the borrower could be kept affordable and MFIs themselves would remain sustainable.
Bhalchander: Mr. Srinivasan, thank you very much for being with us. We wish you success in your efforts to educate all stakeholders in microfinance and in the process building a vibrant microfinance sector which offers a hand up to the poor.
Mr. Srinivasan will be taking additional questions from readers posted in the comments, so please feel free to pose your comments and questions.