Best practices

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

1.1 FINANCIAL SERVICES FOR THE POOR...

As elsewhere in the world, informal financial services have always beenan integral part of the traditional economy of India.1 Even semi-formaland formal financial services, through agricultural cooperatives andbanks, are within physical reach (less than 5 km) of perhaps 99% of thepopulation of the country. A vast network of commercial banks, cooper-ative banks and regional rural banks (RRBs) as well as other financialinstitutions provide such services. Other financial institutions includenon-bank finance companies (NBFCs), insurance companies, providentfunds and mutual funds. There are more than 160,000 retail credit out-lets in the cooperative and banking sectors, augmented by another37,000 NBFCs. These include around 60,000 branches of 27 publicsector commercial banks and 196 RRBs and another 4,700 branches of55 smaller private banks providing financial services in India. There arealso a growing number of foreign banks operating but their reach,through some 200 branches, is limited to the main cities.2

Formal financial services are, in theory, available to low income familiesmainly through 33,000 rural and 14,000 sub-urban branches of themajor banks and RRBs and 94,000 cooperative outlets – either bank

branches or village level societies. Financial services to the poor are alsoavailable from the village or (town) neighbourhood-level agents ofNBFCs. The RRBs, in particular, were established specifically to meetthe credit requirements of the poor – small and marginal farmers, land-less workers, artisans and small entrepreneurs and should, therefore,have emerged as a major source of microfinance. Over 140,000 institu-tional outlets serving the rural sector and the poor implies the availabil-ity of one outlet for every 5,600 persons – in theory, a very favourableratio for catering to the financial needs of the poor.

1.2 ARE HINDERED BY THE PROBLEM OF ACCESS

For many years, bankers and senior government officers were fond ofdescribing the Government of India’s main poverty alleviation pro-gramme, the Integrated Rural Development Programme (IRDP), as“the world’s largest microfinance programme”. And so it was. Itinvolved the commercial banks in giving loans of less than Rs 15,000 topoor people and, in nearly 20 years, resulted in financial assistance ofRs 250 billion to 55 million families.3 The problem with the IRDP wasthat its design incorporated a substantial element of subsidy (25–50%of each family’s project cost) and this resulted in extensive malpracticesand misutilisation of funds. This situation led bankers too to see theIRDP loan as a politically motivated handout and they largely failed tofollow up with borrowers. The net result was repayment rates estimatedat 25–33%. Not surprisingly, the two decades of IRDP experience – inthe 1980s and 1990s – affected the credibility of micro-borrowers inthe view of bankers and, ultimately, hindered access of the poor tobanking services.

1 Introduction – why “best practices”?

1 See Ghate, P., 1992. Informal Finance. Oxford: Oxford University Press and Rutherford, S

and Arora, SS, City Savers, New Delhi: DFID, 1997 amongst other sources of information

on ROSCAs, Chit Funds and other informal means of obtaining finance.2 Reserve Bank of India, Report on Currency and Finance, 1997–98.3 This suggests that virtually all the 60 million or so poor families were covered by the

IRDP. Alas, this was not the case as the numbers include many cases of repeat assistance

(deliberate) and perhaps even more cases of unjustified selection of ‘beneficiaries’.

Similarly, the entire network of primary cooperatives and RRBs in thecountry – both sets of institutions established to meet the needs of therural sector in general and the poor in particular – has proved a colossalfailure. Saddled with the burden of directed credit and a restrictiveinterest rate regime, the financial position of the RRBs deterioratedquickly while the cooperatives suffered from the malaise of mismanage-ment, privileged leadership and corruption born of excessive statepatronage and protection.4

1.3 SO THE SEMI-FORMAL NGO SECTOR HAS STEPPED IN...

Over the past 20–25 years, the resultant vacuum in the financial systemhas started to be filled, initially with the pioneering efforts of organisa-tions such as the SEWA Bank (Ahmedabad) and Working Women’sForum (Madras) but, more vigorously during the 1990s, by theentrance of significant numbers of non-government organizations(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-formalchannels through which the bulk of micro-financial services currentlyreach the poor are illustrated in Figure 1.1.

Initially, many NGO microfinance institutions (MFIs) were funded bydonor support in the form of revolving funds and operating grants. Inrecent years,6 development finance institutions such as NABARD,SIDBI and micro-finance promotion organisations such as theRashtriya Mahila Kosh (RMK – the National Women’s Fund) have alsostarted to provide bulk loans to MFIs. This has resulted in the MFIsbecoming intermediaries between the largely public sector develop-ment finance institutions and retail borrowers consisting of groups ofpoor people or individual borrowers living in rural areas or urbanslums. In another model, NABARD refinances commercial bank loansto self help groups (SHGs) in order to facilitate relationships betweenthe banks and poor borrowers.

Though the (mainly) NGO micro-finance sector has made a start in pro-viding “user friendly” formal financial services to the poor its outreach is

M I C R O F I N A N C E B E S T P R A C T I C E S

3Introduction – why “best practices”?

SHG LINKING

IRDP-TYPE

4 See Sinha, 2000, India Country Study in Asian Development Bank 2000. The Role

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

intermediaries. It specifically excludes unregistered self help groups that are usually

established and facilitated by the NGOs; and it also excludes conventional cooperatives.6 Roughly since 1994

BANKS

APEX OR COMMERCIAL

NGO/MFIS

JOINT LIABILITY

GROUPS

MEMBERS/CLIENTS

BORROWERS

SELF HELP GROUPS

FIGURE 1.1 – CHANNELS OF DELIVERY OF MICRO-FINANCIAL SERVICES IN INDIA

still miniscule in comparison with the need. A compilation of supportprovided by major institutions to microfinance in India shows that thecumulative 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 than5% of the poor in India. Even allowing for a significant volume of donorgrants, the total coverage is likely to be under 3 million families.

This includes the NABARD-refinanced scheme for linking self-helpgroups (SHGs) directly with banks. Progress and outreach in thescheme amounts to Rs 4.8 billion (US$99 million) disbursed and cov-ering, at most, 1.5 million families.7

At the same time, the involvement of commercial banks in microfi-nance is negligible both in relation to the current volume of microfi-nance and (even more so) to their broader engagement in rural areas.8

Direct finance to MFIs is limited by continuing widespread scepticismabout the credibility of micro-borrowers and, by extension, of MFIs.The problem is compounded by the lack of exposure of most bankers

to NGOs and MFIs and their consequent difficulties in assessing ade-quately the latter’s implementation capabilities.

1.4 ...AND MUCH INNOVATION HAS TAKEN PLACE

Nevertheless, in recent years, microfinance has been among the fastestgrowing poverty focussed development activities in India. This hascome about with an increasing realisation that, in order to be successfulboth in outreach and sustainability, microfinance must move out of thetraditional low equilibrium, welfare mode of much NGO activity andbecome a professional service. A number of the leading microfinanceinstitutions in India have started to move out of the established mouldsof activity based on the Bangladesh Grameen Bank model, cooperativecredit societies and self-help group (SHG)-based financial services. As aresult, there has been a considerable amount of innovation not only inthe design of financial products/services and delivery systems employedby MFIs,9 but also in other operational practices including

• Institutional arrangements• Governance• Management information systems• Financial management and accounting systems• Internal control and external audit• Human resource management and staff incentive systems.

Not all the innovation has been successful, but M-CRIL’s rating experi-ence shows that significant progress in the evolution of “best practices”has been achieved in the past 3–5 years. The more progressive MFIshave become successful partly through the development and adoptionof systems that are not only appropriate to their own particular condi-tions but also to the practice of microfinance in general.

Introduction – why “best practices”?

7 Authors’ estimate for the number of families. The information available on this

programme does not cover amounts outstanding or the number of SHGs with

outstanding loans.8 Bankers’ attitudes which limit commercial bank exposure to microfinance are

extensively discussed in Goodwin-Groen, Ruth, The Role of Commercial Banks in

Microfinance: Asia Pacific Region. Brisbane, Australia: Foundation for Development

Cooperation, 1998.9 Some of which were documented in the work of M-CRIL’s parent company EDA Rural

Systems in 1999 – EDA, 2000. Innovations in Microfinance Products and

Delivery Systems in India. Dhaka: SANMFI.

The objective of this document is to identify and disseminate informa-tion about some of the key “best practices” that have come to beadopted by the more successful institutions in Indian microfinance.

The aim is to provide this information to a wide cross-section of stake-holders, in the microfinance sector in India and elsewhere, to facilitatethe adoption of better practices by the sector as a whole. It is predicatedon the assumption that greater professionalism is an essential pre-requi-site to the substantial expansion of outreach and achievement of sus-tainability in the delivery of microfinance services.

Towards this end, a selection of information on “best practices” andsystems collected from nine of the leading microfinance institutions inIndia has been compiled and presented in this document in a simple,readable format. The selection of practices is based on M-CRIL’s expe-

rience in rating Indian MFIs and on the willingness of institutions to beincluded in the study. Thus, the practices documented here constitute aselection of the best practices employed by the sector at present.Inclusion in this document implies that M-CRIL considers the prac-tices adopted to be worth consideration by other institutions engagedin similar activities. Exclusion is not a reflection on the quality of anMFI’s operations. Some MFIs following similar practices have beenexcluded to avoid duplication. In a few cases, exclusion could be anindication of an MFI’s unwillingness to be included in this study or M-CRIL’s lack of knowledge of specific practices.

Inevitably, in an exercise of this type the results are illustrative ratherthan definitive. M-CRIL commends the report to the reader as acontribution to the growth and development of sustainablemicrofinance.


5

2.1 INTRODUCTION

2.1.1 DEFINITION AND OVERVIEW

A governance system can be defined as “what manages the relationshipof an institution with its stakeholders or, more broadly, its relationship tosociety” 10.

The governance system determines how institutions are directed andcontrolled. It specifies the distribution of rights and responsibilitiesamong different participants in the institution, such as, the governingboard, managers, shareholders and other stakeholders, and spells outthe rules and procedures for making decisions on corporate affairs. Bydoing this, it also provides the structure through which institutionalobjectives are set and the means of attaining those objectives and mon-itoring performance.

How an organisation functions and the relationships it builds with itsstakeholders and the community at large are direct outcomes of its gov-ernance system. Further, the aim of an effective governance system is toensure that the organisation is prudently managed to provide optimumbenefit to its stakeholders.

The governing board is the strategic apex of an organisation and is,therefore, the primary determinant of its governance system. The boardcomposition, the framework it sets for itself and the way it functionsform the basis of the governance system.

Institutional linkages constitute another important factor that affects

how an organisation is governed and managed. Institutional linkagesare the unique systems and arrangements that help an organisationoperate, evolve and grow in an efficient manner. These range from theformal subsidiary-parent relationships and contractual agreements forthe provision of certain services, to an informal understanding oncooperation between several entities. In cases where the institutionallinkages are well defined and developed, they have a direct bearing onhow the organisation is governed and how it functions.

A study of these linkages also becomes important because an organisa-tion’s core competence in separate operational activities may provide itwith a relative competitive advantage, but they can be imitated overtime. However, core competencies that emanate from institutionallinkages are less likely to be imitated.

For the purpose of this study, governance systems in the Indian micro-finance sector have been studied in two distinct but closely interlinkedcomponents. These are

• institutional linkages• role of the board.

2.1.2 SECTOR PROFILE

INSTITUTIONAL LINKAGES

Many MFIs have evolved either as offshoots of older developmentorganisations or are the result of projects being formalized into an

2 Governance and Institutional Linkages

10 Adapted from an article that appeared in the Financial Times, 1997

organisation. A large number of such institutions have been started bypeople with prior experience in the development sector. There are stillothers, though fewer, who have emerged to deal exclusively with thecredit needs of a particular area/community. This varied evolution hasled to the many formal/informal institutional linkages that MFIs havewith their parent organisations.

This link between parent NGOs and MFIs is also reflected in themethodology and use of resources. A large number of MFIs use thegroup model for providing financial services and, often, these financialservices are extended to groups promoted by the parent for some otherdevelopment activity. The MFIs also use the parents’ resources to pro-mote financial services, identify areas with potential for expansion and,sometimes, even cover operating costs.

Given the human, financial and knowledge resource constraints as wellas the nature of work, developmental organisations in India have partlydeveloped formal/informal networks amongst themselves for sharingresources and participating in joint dialogue with the formal sector.The linkages that have developed are often used by the MFIs for lever-aging resources. For example, Swayam Krishi Sangam (SKS) during itsinitiation, informally networked with Cashpor Financial & TechnicalServices (CFTS) to gain microfinance exposure and, later, to share MISresources. Sa-Dhan, an association of MFIs, working in the areas ofpolicy, standards setting and capacity building is another illustration ofa formal apex network being promoted to facilitate, amongst otherthings, such interaction.

The older NGOs (or other parent organisations) have also been able tobuild relationships with the formal sector during the course of theirwork. These relationships are often inherited by the offshoot MFIs and

used for their benefit. From this phenomenon, some interesting exper-iments have developed. The Indian Association of Savings and Credit(IASC) – a partnership between an NGO and a housing finance com-pany – is one prominent example.

THE ROLE OF THE BOARD

In Indian MFIs, typically, the members of the board comprise the pro-moters, a few local academics or social workers and some representa-tion from the executive in the form of the Chief Executive Officer(CEO). Some MFI boards also have member representatives.

Given that many MFIs have evolved from social development pro-grammes, more often than not, the composition tends to be skewedtowards people with a social development outlook. While such a repre-sentation is important, the composition of the board is often imbal-anced with limited financial and technical skills available amongstboard members.

The MFI board’s expected role has been to lay down the framework foroperations, meet regularly to review performance and decide on keyissues. However, the fulfilment of this objective has, so far, been lim-ited. Usually, the operations run on the basis of a loosely defined frame-work that is firmed up when specific issues emerge.

On policy issues, the boards of many organisations are known to take a‘developmental’ view that is almost exclusively focused on the short-term interests of their clients while not taking into account the longer-term sustainability of the organisation. This results in the creation ofinstitutions that do not perform efficiently or sustainably, and, in themedium to long run, tend to stagnate or close down. Therefore, from a


7Governance and Institutional Linkages…

broader perspective, such inputs by MFI boards do not serve eitherclient or organisational interests in the long term as they prevent thecreation of MFIs that can balance client and institutional objectiveswhile increasing outreach.

Another factor that contributes to the lack of sufficient inputs from theboard arises from the low level of interest in MFI operations that manyboard members display. In the overall operations, except for the CEOand in some cases the Executive Secretary/Chairman, the other mem-bers often have very limited interest and involvement.

However, this situation in governance is evolving and a number ofMFIs are now putting in place governing boards that have a balance ofsocial development and financial management skills. This trend hasarisen out of increasing pressure to make operations sustainable, con-vert to more commercial and legally appropriate forms for undertaking

financial service provision (such as Non Banking Finance Companiesthat are regulated by the Reserve Bank of India) and a realisation thatthe complexities of managing operations and finances are facilitatedgreatly by a board with the requisite technical and financial skills. As aresult, boards are now becoming increasingly active and laying downguidelines with respect to managerial functions. Overall, there is agradual shift in the focus of board members towards sustainable devel-opment rather than just altruistic lending. The following sections illus-trate different forms of institutional linkages and how the governancestructure can represent such linkages effectively.

2.2 ILLUSTRATIONS OF BEST PRACTICE: INSTITUTIONAL LINKAGES

2.2.1 INDIAN ASSOCIATION OF SAVINGS AND CREDIT (IASC)

IASC, an MFI based in the Nagercoil district of Tamil Nadu, has estab-lished unique backward and forward linkages with its parent organisa-tions and clients (Figure 2.1). The Palmyra Workers DevelopmentSociety (PWDS), a prominent local NGO and the HousingDevelopment Finance Corporation (HDFC), India’s premier housingfinance company have jointly promoted IASC. The MFI is a companyregistered under Section 25 of the Indian Companies’ Act, 1956. IASCwas started to provide credit services in its operational area at the south-ern tip of the Deccan peninsula.

The association of PWDS and HDFC dates back to 1986, when theformer applied to HDFC for a housing loan for its members. HDFCwas impressed by the work done by PWDS but both the organisationsagreed that providing credit services required totally different skills that

Governance and Institutional Linkages…

NGO

GROUPS

microfinance services

promotion

capacity building

PWDS– GOODWILL

HDFC– PROFESSIONAL FINANCIAL SKILLS

IASC

FIGURE 2.1 – LINKAGES IN THE IASC MODEL OF MICROFINANCE DELIVERY

were beyond the mandate of PWDS. Thus began IASC, a uniqueexperiment of corporate and social partnership in India.

From both its parents, IASC has derived significant synergies in differ-ent aspects of its operations. IASC benefits from the goodwill createdby PWDS and also uses its experience to understand the local market.From HDFC, it has obtained loan funds and skills required for the pro-fessional management of a credit programme.

The support of these two established organisations has helped IASCmanage its external environment and has provided it with the freedomand self-assurance to experiment with a low cost business model.

In its credit operations, IASC relies on building and managing linkageswith local NGOs. These linkages are the foundations of its operationalstrategy. The company is only the credit provider and does not formgroups. It is the NGOs that promote the groups and provide them withthe management skills necessary to undertake financial services fortheir members. IASC thus circumvents the need to develop group pro-motion skills and incur expenses on this activity. Instead it can focus onits core competence as a financial service provider.

By working with groups that have been formed by NGOs, IASCreduces its costs and the risks associated with lending to new clients.However, to maintain operational flexibility and retain a relationshipwith the NGO as a linkage partner rather than a channel for delivery,IASC takes on the responsibility of loan monitoring and recovery.

This structure is an example of how an institution, jointly promoted bytwo organisations, with different but converging skills, can be estab-lished and governed. Both the promoters have a system of expressing

their expectations from IASC without one taking precedence over theother or trying to skew IASC’s objectives towards its own.

The association with HDFC and the representation of HDFC on theboard has given a fillip to a professional work culture within IASC andalso enabled the organisation to access HDFC’s excellent financial sup-port services, including the services (audit and advisory) of a charteredaccountant. On the other hand PWDS’ objective of sculpting IASCinto a social development organisation has also been achieved as IASChas used the goodwill and experience of PWDS to build its client base.

Overall, the marriage of corporate and social sector institutions hasresulted in a unique structure focused on the provision of financial ser-vices for sustainable development. This has been discussed further inthe following sub-sections.

2.2.2 SIFFS

The South Indian Federation of Fishermen Societies (SIFFS), locatedin the South Indian state of Kerala, is based on the three-tier commod-ity co-operative model pioneered in India by the famously successfulNational Dairy Development Board. SIFFS is the apex federation (seeFigure 2.2) of district federations of fishermen’s Primary Co-operativeSocieties (PCS). The ownership is from the bottom up – fishermenown the primary societies, which own the district federations. The dis-trict federations in turn own the apex federation. Effectively, SIFFS is aproducer-member owned institution.

The PCS provides credit to members and facilitate fish sales byappointing auctioneers to undertake fish auctions on their behalf. Theauctioneers are responsibile for collecting payments due from traders.



The PCS pays its members, deducting savings contribution and anyloan repayment as a fixed percentage of the daily catch.

The district federations provide support services like accounting andadministration. They also arrange loan finance for the societies throughlocal banks, provide inputs for fishing and lobby locally on behalf ofthe societies. In the 1980s, when there was a shortfall of credit from thebanks, the district federations formed revolving funds and lent to thesocieties. They continue to do so through their corpus funds and byarranging loan finance from SIFFS.

The apex federation – SIFFS – started as the Trivandrum district feder-ation (TDF). As other federations were formed, the need for an apexbody was felt and the TDF evolved into the SIFFS. The initial mandatewas to undertake bulk marketing, processing, developing/adapting newtechnologies and systems through research and development and advo-

cacy and liaison work on a large scale. When the local markets strength-ened in the late 1980s, price realisations in these markets increased andthe marketing role of SIFFS became secondary, while the focus shiftedto technology development and advocacy.

SIFFS is now one of the largest suppliers of outboard motors in south-ern India and also owns and manages a large number of boat servicingyards. From 1991, after the process of economic liberalisation started,there was a spurt in the motorisation of fishing boats and, therefore, thecredit needs of fishermen increased. To fill this gap, SIFFS started pro-viding microfinance services in 1996.

In the SIFFS system, each tier carries out a role that is best suited to itsposition in the hierarchy. These distinct roles complement each otherto create operational convergence.

The governing bodies of each of these tiers are elected from the rele-vant general body of members. For example, all the member fishermenelect the PCS governing body. These governing bodies lay down guide-lines and appoint staff for operations.

The institutional linkages at SIFFS give rise to a governance structurein which professional managers, appointed and supervised by theelected representatives of member-owners of the PCS, handle opera-tions. This enables the member-owners to assert their demands fromthe institution. However, to balance member needs with growth ori-ented and sustainable management, decisions are taken in consultationwith the apex body and relating member demands to the institution’sobligations and constraints.

This case provides an illustration of how a member-owned institutional

…

2.2

INSTITUTIONAL

LINKAGES


SIFFS

PRIMARY CO-OPERATIVE SOCIETY (PCS)

DISTRICT LEVEL FEDERATIONS DISTRICT LEVEL FEDERATIONS

(PCS)

FIGURE 2.2 – THE COMMODITY COOPERATIVE MODEL UTILISED BY SIFFS

FISHERMEN FISHERMEN

structure for governance can be established. The institutional linkagesprovide strategic operational advantages for the organisation in thecontext of its member-oriented objectives.

Apart from a unique governance structure, the institutional linkagesprovide other advantages to SIFFS:

• The need for direct support from SIFFS is limited and opera-tions can be conducted in far-flung areas at low cost

• A number of PCS have had commercial interactions with theirmembers for 10–20 years. The apex federation, SIFFS, cantherefore, assess the creditworthiness of individual fishermenbased on the records of their credit history that are kept withthe PCS

• Since the PCS also controls the marketing of each member’sfish catch, it can track repayment ability

• SIFFS gets loan repayments through the deduction of a speci-fied percentage of realisations from sales marketed via thePCS. This system ensures repayment linked to actual cashflow,but gets affected by seasonal lows in fishing.

SIFFS represents a sector specific model of microfinance. It is an inte-grated system wherein the MFI leverages the relationships of its insti-tutional components with the borrowers. Credit assessments can bebased on the prior experience of its components, the supply of othertechnical inputs assures the efficient utilisation of the credit and repay-ment is linked to the marketing services provided to members.

This framework of institutional linkages and governance enhances

client retention due to its centrality to member needs, while facilitatingregular loan repayment despite flucuating production cycles. It is astructural arrangement relevant to any member owned organisationthat is vertically integrated.

2.2.3 SAMRUDDHI

Bhartiya Samruddhi Finance is part of a consortium of companies pro-moted and controlled by Bhartiya Samruddhi Investments andConsulting Services Limited (BASICS). This Hyderabad based organi-sation operates in Andhra Pradesh and several neighbouring states. Thegroup’s mission is to promote sustainable livelihoods, by providing anintegrated set of technical and financial services. To fulfill its mission,BASICS has assumed the role of a holding company, owned by a groupof eminent professionals who have a commitment towards develop-ment.

The capital11 of these founder-promoters was augmented by loan fundsthat were then down-streamed as equity into Samruddhi, which is themain operating company. This mechanism has enabled BASICS toretain the majority shareholding in Samruddhi while increasing itsability to raise equity from other sources.11 The holding pattern of theBASICS group of companies is illustrated in Figure 2.3.

The rationale for this structure is that it allows the constituent busi-nesses to operate efficiently in their individual lines while allowingBASICS Ltd to focus on raising resources and providing strategic direc-tion. In this structure, Samruddhi is an NBFC with a focus on micro-loans, Indian Grameen Services (IGS) is the technical supportorganisation that also provides microfinance and micro-enterpriseresearch and consultancy services and the Local Area Bank provides



11 As discussed in Section 7, Samruddhi now has the largest capital base of all the MFIs in

India.

both savings and credit facilities in its delimited operating area of threedistricts. Each of these members benefit from being part of a groupthrough pooled financial resource generation, the sharing of knowledgeand technical resources and through a coordinated approach to devel-opment finance. The parent also benefits because it diversifies its riskacross entities designed to concentrate on specific activities. The risk inthis structure lies in the possible duplication of activities and sub-opti-mal utilization of resources if the managements of each of the operatingcompanies do not clearly understand and subscribe to the strategicobjectives of the group as a whole.

In Samruddhi’s case, the design seems to have worked until now. Insummary:

• The holding company has successfully raised external finance. Ithas mobilised both equity and loan funds for its group companies.

• The consulting arm, IGS has undertaken research and techni-cal support projects that have enabled Samruddhi to develop

products and operating systems at low cost. • Samruddhi has been able to leverage a host of institutional

relationships that the holding company has built up. Forexample, BASICS’ ability to mobilise equity from the FordFoundation and SDC and its relationships with the WorldBank (and International Finance Corporation) has leveragedsubstantial investments directly into Samruddhi.

2.3 ROLE OF THE BOARD

Prudent, ethical and effective governance is the cornerstone of any pro-fessionally managed financial service enterprise. In financial serviceenterprises, the role and constitution of the governance system of MFIsshould be properly defined to address the concerns of various stake-holders and ensure prudent and sustainable management. The Boardcan play a key role in such a system.

At Samruddhi, the governing board is comprised of the board mem-bers of the holding company (BASICS Ltd) and the nominees of vari-ous financial institutions that have invested equity in it. As a result,Samruddhi’s board composition represents a fine balance between cor-porate and development management expertise. Eminent profession-als from both these fields find place on it alongside renownedacademics. This is how the company retains its development focuswhile operating as a professional financial service provider.

The company has also issued sweat equity 12 to its manager promoterswith the objective of aligning the long-term interests of the promoterswith the interests of the shareholders.

The board has two committees for Audit and Finance with clearly


…

2.2

INSTITUTIONAL

LINKAGES

Indian GrameenServices

Sec 25 company

Krishna BhimaSamruddhi

Local Area Bank Ltd

BASICS LtdHolding company

FIGURE 2.3 – HOLDING PATTERN OF THE BASICS GROUP OF COMPANIES

Bhartiya SamruddhiFinance Ltd

NBFC

defined roles and responsibilities. The Managing Director (MD) alongwith three independent directors with expertise in finance constitutes theAudit Committee. Similarly, the Finance Committee includes the MDand two independent directors with financial management backgrounds.It is entrusted with the task of laying down financial management poli-cies related to the extension of loans, raising of capital, management ofcash, accounting, reporting of financial information, making invest-ments and for taking any non-routine financial management decisions.

In order to obtain inputs from other stakeholders, Samruddhi con-ducts quarterly review meetings (BASIX Quarterly Reviews or BQRs).It invites a number of people representing stakeholders from differentinstitutions for these meetings. The mix of invitees to each BQRincludes donors, potential investors and lenders, interested MFI repre-sentatives/teams and staff members from regulatory agencies. Dates forthis quaterly interaction are fixed well in advance and are linked to thedates of board meetings. This facilitates easy attendance at the meetingsand maximises the board’s participation. Typically a field visit is organ-ised for groups of participants, led by the senior management staff atSamruddhi, to observe and comment on its operations. Following thevisits, a detailed feedback session is held. During this, discussions takeplace on issues related to strategy, operations, products and impact. TheBQRs feed into the board meeting that is conducted immediately afterthe completion of the feedback session.

This formal mechanism for obtaining feedback from stakeholders rep-resenting different sets of interests has proved to be very useful. It hascontributed significantly to policy decisions taken by the board towards

improving operations and maximising the benefits derived from thepresence of the board members.

With regard to the shareholding structure, although the holding ofBASICS Ltd in Samruddhi is now below 51%, it continues to exercisemanagement control by virtue of being the largest single shareholderand retaining the confidence of institutional and other minority share-holders. In order to do this, the management has put in place a growth-oriented enterprise with prudent management systems from which theinvestors hope to earn attractive returns in the long term.

At IASC, as the board is drawn from both parent organisations, PWDSand HDFC. IASC is able to combine the developmental perspective ofPWDS with prudent financial management skills provided by HDFC.The board meets regularly and directs the MFI management on criticalissues keeping in mind both perspectives. This governance systemensures that IASC operates as a sustainability-oriented professionallymanaged MFI that is conscious of its developmental goals.

SKS, an MFI based in the state of Andhra Pradesh, has a board com-prising eminent professionals who also serve on the board of SKSFoundation – the parent organisation based in the United States ofAmerica. This arrangement provides SKS access to the expertise of peo-ple who occupy responsible positions in management and finance. LikeSamruddhi, this organisation has also formed committees within theboard to oversee various aspects of governance and operations. Thisenables clear demarcation of specific responsibilities within the board.Besides this, SKS also has a system of empanelling advisors who arecalled on to provide inputs when required. Advice on issues such asexpansion and competition strategy as well as operational policies isobtained in this way.



12 Equity acquired by a company’s executives on favourable terms to reflect the value the

executives have added and will continue to add to the company.


2.4 EXCELLENCE IN GOVERNANCE

The illustrations in the previous section highlight that the primarydeterminant of a governance system is the strategic apex – the govern-ing board. The board composition, the framework it sets itself and theway it functions forms the basis of the system. In addition, institu-tional linkages influence governance issues and vary vastly based on thetype of organisation. The following lessons on governance and institu-tional linkages emerge from the sample institutions

INSTITUTIONAL LINKAGES

MEMBER BASED ORGANISATIONS

• Clear procedure to exercise owner control for example at SIFFSthe fishermen own the primary societies, which further own thedistrict federation

• Specific roles assigned to that tier in the hierarchy best suited tothe role; these distinct roles complement each other to createoperational convergence

• Operations managed by professionals who are appointed andsupervised by an elected board

• Integrated systems wherein the MFI leverages the relationshipsthat its different arms have with the borrowers

CORPORATE AND SOCIAL SECTOR PARTNERSHIP

• Benefits from both parents – local development knowledgefrom the social partner and professional managerial expertisefrom the commercial partner

• Leveraging the goodwill of both partners to form local alliancesand mobilise funds

NEW GENERATION FINANCIAL INSTITUTION

• The holding company, being a larger entity, is able to mobiliseexternal sources of finance

• Leveraging a host of institutional relationships that the holdingcompany and other subsidiaries have built up with the externalagencies

• Utilising business synergies with the various sister companies.For example, Samruddhi uses the technical skills of IGS to trainits micro-entrepreneur clients.

ROLE OF THE BOARD

• Balanced board composition with representation from corporateand development management experts

• Ensuring the stake and role of managers in organisational gover-nance and development, by employing innovative measures suchas sweat equity

• Clear functional responsibility centres within the board –Samruddhi has an Audit and a Finance Committee constitutedby board members

• Systematic mechanism to provide the board with feedback froma broad range of stakeholders through exercises such as theBQRs.

2.5 EMERGING TRENDS

As discussed in the illustrations and analysis, the overall trend withinMFIs in India is to move from an altruistic approach to a professionaland sustainability-oriented approach. Some of the emerging waysthrough which MFIs are trying to achieve this are

• More active boards: The governing boards of MFIs are becom-ing increasingly active not only in shaping institutional direc-tion but also in ensuring that their directives are implementedthrough the board members’ direct oversight of day-to-dayoperations.

• Composition of the board: MFIs are now consciously tryingto induct finance professionals and eminent practitioners asboard members. Overall, this has the effect of injecting a pro-fessional culture into the organisation and the microfinancesector as a whole. It also enhances the leveraging ability of theorganisation in relation to its external environment.

• Separate organisations/divisions for undertaking differenttasks: More and more multi-service organisations are movingtowards the separation of microfinance divisions or even sepa-rate organisations for undertaking non-core activities. Thus,what has traditionally been called the “credit and savings pro-gramme” is now becoming an MFI in its own right or an inde-pendent microfinance profit centre.

• Building external arrangements to leverage local knowledgeand operating systems for generating revenue streams: A fewMFIs are leveraging their local knowledge and networks todevelop arrangements with large financial service providers forselling specialized products and services. Selling insuranceproducts is a very good example of this trend. Other MFIs aretrying to become agents of commercial banks, for onlending.Under this arrangement, the bank appoints the MFI as itsagent who in turn does the lending for the bank and earns acommission on it. These arrangements are covered in the fol-lowing sections.


15Governance and Institutional Linkages.

3.1 INTRODUCTION TO OPERATIONAL STRATEGY


“Strategy is the direction and scope of an organisation over the long termwhich achieves advantage for the organisation through its configuration ofresources within a changing environment, to meet the needs of marketsand to fulfil stakeholder expectations.” 13

The discussion in this section documents best practices based on theelements that define strategy

• Long term direction and scope• Allocation of resources • Advantage emerging from the chosen strategy• Ability to cater to markets• Ability to adapt to a changing environment• Meeting stakeholder expectations

In this section, the focus is on operational strategy. Financial strategy isdiscussed in Section 7. The three aspects of operational strategy, criticalfor microfinance, that have been discussed are

• client development & expansion • competitive response• organisational structure

Client development and expansion strategy impacts the type of clientsof the MFI, the retention rate, portfolio quality and the organisation’scost 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 suppliersof financial services. To analyse competitive strategy, in addition to theabove parameters, the “five forces” framework developed by MichaelPorter (Figure 3.1) has been used.

3 Operational strategy

COMPETITIVE

RIVALRY

POTENTIAL ENTRANTS

threat of entrants

threat of sustitutes

SUBSTITUTES

SUPPLIERS

Bargaining

power

BUYERS

Bargaining

power

FIGURE 3.1 – PORTER’S “FIVE FORCES” FRAMEWORK

Organisational structure is important as it affects the ability of the MFIto take decisions and run operations efficiently. This is particularly sig-nificant since people are the most important resource of an MFI, andtherefore, the manner in which people are organised is critical to theeffectiveness of strategy. The organisational structure of best practiceMFIs is discussed in this section in the context of strategic management.


Many MFIs in India do not have a well-defined client developmentand expansion strategy. As microfinance is still largely donor driven,the client-targeting strategy is generally laid out clearly, is long termand specific in nature and defines target client groups in terms of eco-nomic or social classes. However, despite this, most MFIs have not for-mulated coherent strategies that enable client promotion in such amanner that it results in systematic expansion. By contrast, best prac-tice MFIs have a well-defined strategy that not merely lays out the tar-get clientele but also defines the path to the systematic scaling up ofoperations.

With regard to competition, MFIs are prone to ad hoc reaction drivenstrategy rather than to proactive pre-planned measures. Only a fewMFIs build elements of competitive strategy into their client promo-tion and organisational activities. The deployed strategy includes theuse of appropriate communication tools for client promotion, respon-sive, client friendly and competitively designed products and othermeasures to tackle competition. Such practices lead to the ability togrow faster and increase the outreach of the MFI’s financial services.

Organisational structuring is an aspect that is given some attention bythe most focused MFIs. However, in a typical MFI the structures androles within the organisation are not clearly defined and do not func-tion well, leading to inefficiencies in operations. In a number of cases,the organisation structure emerges out of a trial and error approachrather than as a well-planned process. There are only a few MFIs thathave been able to re-orient their structures to address areas of potentialweaknesses in operations.

This section documents the practices of MFIs that have formulatedoperational strategies in any one or more of the three areas of focusindicated above. As in other sections of this report, the organisationschosen here do not represent all the cases of best practice – they aremerely illustrations of some instances where best practice elements havebeen identified by the study team. Moreover, even in some of the illus-trated cases, while they may represent best practice in the Indian micro-finance sector, there is still potential for improvement.

3.2 ILLUSTRATIONS OF BEST PRACTICE: CLIENT DEVELOPMENT AND EXPANSION STRATEGY

3.2.1 SPANDANA

Spandana is an MFI working in the state of Andhra Pradesh, the hub ofmicrofinance in India. Within the state, its operations are concentratedin the urban slums of Guntur city and rural areas of Guntur districtthat surround the town. Spandana’s client promotion and expansionstrategies are well defined and interlinked. This interlink is evidentfrom Table 3.1 that describes the client/group formation process whichtakes place over a period of 10–15 days.


17Operational strategy…

13 Johnson G, and Scholesk,1998. Exploring Corporate Strategy. Prentice Hall of India

Private Limited

Operational strategy…

STAGE

VILLAGE SELECTION

SLUM SELECTION

INTRODUCTORY PHASE

MEMBER SELECTION

GROUP FORMATION

TRAINING

PROCESSES/CRITERIA

Lies within 20 km of an existing branch office (reduced from 30 km limitused earlier)

Has the potential to provide the organisation with a minimum of 60clients

Potential for at least 3,000–4,000 clients

Open to all the slum/village dwellersOrganisation and branch profile and overview of credit policies explained

to target clientele

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 group

Specific inputs provided to potential members on the ideal characteristicsof other members and the leader

5-day training in the local language with easy, numerical illustrations onproducts and use of multiple communication tools

Group recognition test including process, policy and control aspects

FOLLOW-UP ACTION

Women who are interested approach the branchmanager (BM) to form groups

Groups with leader formed in one day

Groups formalised

TABLE 3.1 – SPANDANA’S CLIENT DEVELOPMENT PROCESS

Each stage in the client formation process is carefully structured. Aftermember selection, there is considerable emphasis on communicatingthe rules that govern organisational practices, including those related togroup behaviour and products. Credit discipline is emphasised at allstages as is the organisation’s background and philosophy.

Thus, right from the formative stages, Spandana focuses on clients get-ting a sense of its guiding principles of being a dynamic, responsive,trustworthy and disciplined MFI. This strategic positioning enhancesits ability to expand. While being comprehensive, the entire process ofclient/group formation is quite quick. This agility, apart from limitingthe costs of promotion, has obvious benefits for potential to expandoperations and penetrate markets.

Applying the elements that define any strategy, it is clear that Spandanafares well. The client promotion and expansion strategy has directionand purpose, long-term implications in terms of expansion and abilityto cover markets and it meets the needs both of the new clients formicrofinance services with low transaction and opportunity costs andof the MFI for volumes of business and additional outreach.

In addition to using the client development process to enable it toexpand operations, Spandana has other elements that define its expan-sion strategy. These are

• Vertical concentration: Expansion to areas adjacent to anexisting branch (maximum distance is 20 km) and market size(60 per village and 3,000–4,000 per slum); based on experi-ence, Spandana estimates a conversion rate of 25% per villageand, therefore, focuses on villages that have a target populationof at least 240 households

• Splitting existing branches: A new branch is created out of an



FIGURE 3.2 – RESPONSE TO COMPETITION – SPANDANA

COMPETITION

ANALYTICAL REVIEW OF OPERATIONS AND PRODUCTS VIS-À-VIS COMPETITORS

ACTION TAKEN

• Review of product design (lower interest rate, larger loan size)• Business analysis of changes in interest rates • Increased communication with clients by actively promoting

Spandana’s advantages relative to the competition through pamphletshighlighting process and product differentiation (operationalprocedures; Spandana’s voluntary savings and social security productversus competitor’s compulsory savings)

• Piggy backing promotion efforts of the competitor while drawingclients away

• Intense marketing and relationship building exercises in areas ofcompetition

• Close monitoring of competitor’s performance

IMPACT

• Increase in staff motivation and drive • Retention of clients in operational areas and strengthening of

organisation’s brand • Rapid growth due to better designed products and procedures and

increased efficiency• Attempts by Spandana to network to encourage cooperation amongst

MFIs

existing branch only when the number of clients in the latterexceeds 3,000; a senior officer is transferred to manage the newbranch, with the older branch being run by a relatively juniorteam

• Gradual allocation of resources: Only one senior credit officeris assigned till disbursements reach Rs20 lakhs (US$40,000);only then is a branch created physically; with growth, morestaff resources are allocated; all such decisions are based on acareful business analysis of new branch economics

Since the new branches evolve organically from an existing branch, noincremental overhead costs are incurred until the new branch is createdphysically. As a result, the branch breaks even with a smaller portfolio.If the branch were to start afresh, significant costs would have to beincurred in terms of overheads and search cost, before the branchstarted yielding returns.

The resultant concentrated and low cost operations, coupled with otherfactors such as time saving procedures and cost-effective MIS, hasenabled Spandana to reach high levels of financial sustainability and out-reach in a relatively short time span of four years. Growth continues to befast with the organisation increasing its member base between March andSeptember 2002 from 16,400 to 23,500 members (43% growth over thisperiod) even while operating in a geographically concentrated area.Spandana is sure that the market potential within Guntur district isimmense and that this strategy can be sustained in the future.

3.3 RESPONSE TO COMPETITION

3.3.1 SPANDANA

Competition for Spandana comes from the many other MFIs as well asfinance companies in its area of operation. Spandana views competi-tion as a positive factor. It believes that competition spurs the organisa-tion to attain better performance and meet client needs in a morecomprehensive and efficient manner. Faced with a high growth ori-ented, aggressive supplier of microfinance services in the recent past,the organisation emerged successfully in the battle for the urbanGuntur market. Figure 3.2 depicts the response of the organisation inthis situation.

An analysis (using Porter’s five forces framework) of the competitive sit-uation and Spandana’s response to it is presented in Table 3.2

While much of Spandana’s success is due to competitive strategies con-ceived and deployed after the onset of competition, the managementnow believes that it needs a more comprehensive strategy that willenable it to cater to competitive situations more proactively. As the fiveforces analysis in the table indicates, the competitive situation maychange radically in the future. Therefore, plotting the organisation’sposition vis-à-vis its competitors on parameters such as marketingintensity versus depth of coverage or undertaking a SWOT analysis aremethods 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


finance companies (including the omnipresent Sahara group), chitfunds, urban cooperative banks and commercial banks all operate inthe city. In this environment, SEWA Bank has managed to compete indeposit mobilisation by increasing the amounts and numbers of small,self-employed depositors.

The main threat to SEWA Bank is the low barriers to entry though thepower of buyers and suppliers and the threat of substitutes is low.

SEWA Bank’s response to competition has been through a three-pronged approach

• Deeper product mix including daily savings as well as quicklydisbursed daily (instalment) loans and greater product differ-entiation

• Renewed efforts at brand positioning as a “trustworthy bankfor the self-employed poor” – invitations to new clients to visitSEWA Bank’s branch

• Better client services including doorstep collections by trainedcommunity workers (Bank Saathis) and bank field staff(“Handholders”)

Over the last three years, SEWA Bank’s response to competition on thedeposit mobilisation front has yielded good results

• Total savings (from individual accounts only) grew by animpressive 21% between 31 March 2001 and 31 March 2002to reach Rs176 million

• Of this, high cost savings (average cost 10.5% pa) grew by23% and low cost savings (average cost 4.5% pa) by 17% pa –though the faster growth of high cost savings is an issue of con-cern and the bank is considering ways to lower its overall costof funds



SPANDANA’S RESPONSE

Barriers to entry to Spandana’s market are relatively low - withcomparatively small scale & low capital costs MFIs can gainentry though Spandana’s established presence, productdifferentiation & cost advantage do impose some barriers

There is no formal organisation of buyers but buyerbargaining power could increase in the medium term ifcompetition increases

The power of suppliers is low as Spandana is one of the fewMFIs enjoying a high credit rating; moreover, there are severalsuppliers for such MFIs

This threat is low as there is only a marginal level ofinvolvement in microfinance from the formal financial sectorand even where other MFIs might become interested, thereare not many substitutes for the financial products andservices being offered by Spandana; however, alternative savingoptions for clients from banks and non-bank financecompanies are threats that may become more significant inthe future

Potential intensification of competition from large and smallMFIs is possible due to the relatively low barriers to entry;price wars are possible and the advantage of productdifferentiation may diminish as competitors develop newproducts or copy those of Spandana

FORCES

POTENTIAL

ENTRANTS

POWER OF

BUYERS

(CLIENTS)

POWER OF

SUPPLIERS

(LENDERS)

THREAT OF

SUBSTITUTES

COMPETITIVE

RIVALRY

TABLE 3.2 – SPANDANA’S RESPONSE TO COMPETITION – IN THE ‘FIVE FORCES’ FRAMEWORK

• The number of depositor accounts grew by more than 52% toreach 172,010 by end March 2002.

To build upon these achievements in deposit mobilisation, the organi-sation is now considering ways to consolidate its competitive positionand to develop a comprehensive strategy to address the competition.Targeting new market segments, decentralising operations by increas-ing the outreach of doorstep services, increasing the number of exten-sion counters, linking with other institutions such as the AhmedabadMunicipal Corporation and SEWA Bharat Trust in financial serviceprovision are some of the measures that the bank has begun to use.

3.4 ORGANISATIONAL STRUCTURE

3.4.1 SAMRUDDHI

Samruddhi has a decentralised organisational structure (Figure 3.3).The organisation is divided into units that have been formed on thebasis of geographical areas.

In this decentralised structure each Unit functions as a profit centrewhile Samruddhi’s Head Office is essentially responsible for strategy.The Head Office particularly defines strategy related to fund mobilisa-tion and expansion. It also defines the operational policies such as thoserelated to portfolio management, recruitment, staff training and com-pensation. These roles are not fulfilled through a master plan, butrather 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 thathelp both entities function efficiently and work towards achievement oforganisation’s mission.

Strategically, the main advantages of Samruddhi’s structure are• Each unit is able to concentrate on the problems and opportu-

nities of its business area. These could vary vastly asSamruddhi works in a number of different regions and states –Rayalaseema and Telengana regions of Andhra Pradesh,Maharashtra, Madhya Pradesh and Orissa. The units areencouraged to innovate to attract untapped potential marketsegments of clients.

• The Head Office focuses on the measurement of unit perfor-mance and has put in place a comprehensive incentive systemfor all levels staff. This incentive system is discussed in Section 8.


…

3.3

RESPONSE TO

COMPETITION

FIGURE 3.3 – SAMRUDDHI’S ORGANISATIONAL STRUCTURE

TRANSACTION

ASSISTANT

FX 2

CSA 2 CSA 3

FX 3 FX 4FIELD EXECUTIVE FX 1

CUSTOMER SERVICE AGENT CSA 1

COMPANY SECRETARYMANAGER

FINANCE & ACCOUNTS

MANAGER

OPERATIONS & HR

GROUP CEO

UNIT HEAD

CHIEF OPERATING OFFICER

• As the Head Office is not involved in day-to-day operations,the senior management is able to focus on strategy and policyissues.

• This structure encourages managerial development, as theunits are the training ground for undertaking senior manage-ment functions.

However, this decentralised structure has some inherent disadvantagesthat Samruddhi’s operational procedures attempt to mitigate. A decen-tralised structure could result in confusion over the locus of responsi-bility. To prevent this, the organisation has clearly defined anddocumented the roles and responsibilities of each staff member.

Additionally, to ensure co-ordination and the smooth flow of informa-tion between the Units and the Head Office, Samruddhi has investedsignificantly in its MIS and human resources. These in turn facilitatethe efficacy of the internal control systems of the organisation (seeSection 6.3.2). The latter plays a vital role in ensuring the smoothfunctioning of Samruddhi as the leading Non-Bank Finance Company(NBFC) engaged in microfinance in the country.



3.5 LESSONS IN OPERATIONAL STRATEGY

While operational strategy can vary depending on environmental fac-tors and organisational objectives, the illustrations highlight the keyelements that are required for the successful implementation of allmicrofinance operations. Strategies developed by MFIs must providelong-term direction and be adapted to environmental conditions.They should also yield some advantage through the efficient alloca-tion of resources while catering to market demand and stakeholderexpectations.

The key features of good practice in operational strategy identified bythis research are

CLIENT PROMOTION AND EXPANSION STRATEGY

• Expansion strategy has long term direction and is integratedwith client promotion strategies. It has specifically definedconditions that guide decisions related to expansion and isgeared towards yielding competitive and other advantages tothe organisation – Spandana’s use of conditions related topotential market size and distance from existing branchesgovern expansion decisions

• Strategy related to the allocation of resources for expansion isbased on a careful resource needs analysis and is in line withthe business plan of the organisation – Spandana allocateshuman resources based strictly on staff productivity andanalysis of basic branch economics; branches evolve organi-cally from existing branches

3.6 EMERGING TRENDS

MFIs are becoming increasingly aware of their external and internal envi-ronments and are gearing up professionally to manage them better. Thetrend is to move away from an attitude of grant-dependent survival tobecoming more proactive in working for sustainability.

In this context, some trends that are gradually emerging in the microfi-nance sector in India are

• Treatment of microfinance divisions as Strategic BusinessUnits: Overall, multi-service organisations are now makingthe strategic move of treating their microfinance programmesas strategic business units with a distinct purpose and clientele.This is leading towards organisational restructuring and thecreation of separate staff functions and roles with properresponsibility assignment to staff/units. There is a distinctincrease in professionalism in the management of microfi-nance institutions.

• Paradigm shift in target clientele definition: Part of theprocess mentioned above involves expanding and redefiningthe target group. MFIs are realising that it would be difficultfor them to achieve sustainability if they serve a small commu-nity with relatively limited and homogenous needs. Therefore,a number of MFIs now choose to define their clients as “ thepoor” instead of a smaller caste or occupation-based sub-set.

There is also a marked shift away from the member-based par-adigm, wherein a client had to become a member first, thensave and then take a loan. MFI programmes are now based on

COMPETITIVE STRATEGY

• A comprehensive analysis of competitive position, SWOTanalysis and use of the five forces framework that ensures acontinuing ability to cater to growing markets – Spandana’sactions have elements of such a strategy and it plans now todevelop a comprehensive strategy that will proactively place itahead of its competition

• Client needs, product analysis and review, new productdevelopment or product differentiation and cohesive com-munication/promotion strategies yield competitive advan-tage – SEWA Bank’s response to competition focused onclient needs analysis leading to new deposit products; furtherit undertook an organisational branding exercise through awell-conceived promotion programme

ORGANISATIONAL STRUCTURING

• A decentralised structure for organisations with widely dis-persed operational areas to provide operational flexibility forquick decision making – Samruddhi works in a number ofstates and has, therefore, made the Unit Head responsible forthe Unit’s operations with the authority to make day-to-daydecisions

• A standardised structure with well defined roles and respon-sibilities of staff and line functions. At the same time it allowsfor flexibility given that different branches work under differ-ent market conditions

• The role of the head office is planning, monitoring and co-ordination thereby allowing it to focus on strategic issuesrather than operational decisions.

credit-needs whereby a client can become a member to take aloan and remain dormant after repaying the loan till she needsa loan again. MFIs realise that credit needs are not permanentand a fixed membership base is harsh on members – in termsof opportunity cost – on the one hand, and restricts the growthof the MFI, on the other.

• Planned growth: Most MFIs are moving from supply depen-dent to demand based growth. Disbursements are planned andmanaged instead of being sporadic and dependant on incomingfunds. This is resulting in improvements in business planningand client communication . These plans are not only for cashmanagement but also have a bearing on the sustainability of theMFI. This trend has impacted the mindset of lenders who nowsee MFIs as commercial ventures with social objectives.

• Increased focus on competition management: A few years agoMFIs thought of competition only in terms of the localmoneylenders and other MFIs. Now they are increasinglyredefining competition to include all financial serviceproviders in their work areas. As government programmes arelargely under-cutting MFI operations, organisations are look-ing at their services and operating procedures to establishthemselves as efficient service providers with low opportunityand transaction costs. As most clients are becoming price-con-scious, MFIs – as a strategy to manage competition – arefocussing on communication with clients as a preventive andcorrective measure to reduce dropouts.


25Operational strategy

4.1 INTRODUCTION


“Products are anything that can be offered to a market to satisfy a want orneed” P Kotler14

Small (micro-) financial products are, in one sense, the reason for theexistence of microfinance institutions as well as the basis for the gener-ation of revenue from the services provided.

MFI products include mainly loans and savings, increasingly insuranceand, occasionally, also other financial services. Products must bedesigned to address the needs of clients while simultaneously meetingorganisational objectives. These twin goals often involve trade-offs.

4 Products and delivery

FIGURE 4.1 – PRODUCT DEVELOPMENT SYSTEM

IF THE ANALYSIS/RESPONSE IS NEGATIVE – DROP THE PRODUCT

IDEA GENERATION

& SCREENING

CONCEPT

DEVELOPMENT

MARKETING

STRATEGY

DEVELOPMENT

& BUSINESS

ANALYSIS

PRODUCT

DEVELOPMENT

FUTURE PLANS

PRODUCT

DEVELOPMENT

MARKET

OR PILOT TEST

PRODUCT

LAUNCH AND

COMMERCIAL-ISATION

CUSTOMER

FEEDBACK TO

MODIFY

MODIFY PRODUCT

OR MARKETING

Thus, products drive the growth and sustainability of an organisationand form the basis for determining the quality of the interface betweenthe MFI and its clients. The design and introduction of products needscareful handling because of these factors. Further, products need to becomplemented by an MIS that is able to monitor their status efficientlyand provide information on the characteristics of clients. Productsform a critical part of the competitive strategy of MFIs and variation inproduct features and promotional strategies is the key determinant ofmarket share.

Product design, introduction and delivery can be analysed in terms ofthe 4Ps of marketing:

• Product features • Price• Placement• Promotion

In addition to the above parameters, the process of new product devel-opment can be analysed via the system depicted in Figure 4.1


Most Indian (and indeed international) MFIs, tend to offer productsand services that are derived from the basic microfinance model that theorganisation follows. Thus, SHG-based MFIs facilitate savings rotationat the group level and focus mainly on credit products, whereasGrameen model MFIs generally collect compulsory savings and offertwo or three standardised credit products.

However, recent times have seen a trend towards more innovation inproducts. Eclectic models such as Samruddhi in India, and many of themore progressive MFIs that may be based on either the SHG orGrameen models, have also begun to experiment with innovations inproducts. Thus, a wider range of products in savings and credit is nowbeing offered. This includes various kinds of deposit facilities, lines ofcredit and individual cash flow linked loan products. In addition,insurance facilities are now being offered by several MFIs.

One drawback in MFI operations is that most saving products offeredby MFIs, including the illustrations below (other than SEWA Bank), areextra-legal as the regulatory framework does not permit deposit mobili-sation by institutions other than banks or RBI-registered NBFCs.Nevertheless, in recognition of the paucity of such services for micro-depositors, regulators have not disallowed savings mobilisation fromclients of MFIs. The focus on savings products, in this section of thereport, is on the design features to the exclusion of their legal implica-tions. In the medium term, MFIs will need to reassess their savingsproducts to ensure that they are in compliance with the regulations.

Another aspect that needs consideration is that products offered byMFIs are often not backed by an appropriate MIS. This can lead to inef-ficient recording and poor monitoring of product performance.

For the sector as a whole, the development and marketing of productsoffered by MFIs is still evolving. Product promotion strategies (beyondbasic information about product features), product costing and posi-tioning are generally not given due consideration. As the sector matures,MFIs will increasingly need to give these aspects greater priority.

This section provides illustrations of a few institutions that are setting


27products & delivery…

14 Kotler, P, 2001. Marketing Management. Prentice Hall of India Private

Limited

the trend for the sector in terms of product offerings and new productdevelopment. Three of the following MFIs (Spandana, SEWA and ASA)specifically target women; Samruddhi and VSSU cater extensively tomen clients.

4.2 ILLUSTRATIONS OF BEST PRACTICE

4.2.1 SPANDANA

Spandana offers its members savings, loan and insurance products.Each of these has been developed and modified based on client feed-back and the organisation’s assessment of its funding and portfoliorequirements.

SAVING PRODUCTS

Spandana has an interesting timeline with regard to the evolution ofsavings products – Figure 4.2. It experimented with various savingsproducts, eventually settling on a product that functions like a pass-book savings bank account along with a loan-linked savings product.

The transition from internal circulation to mainly voluntary savingsoccurred largely on the basis of client feedback. The voluntary savingsproduct, despite a zero interest rate for the depositor, has shown morethan a four-fold increase between March and September this year. Thisreflects client acceptance of and trust in Spandana’s services (on 30September 2002 the voluntary savings deposited with Spandanaamounted to Rs40 lakhs representing around 4% of total assets).

In addition to the main savings products, described in Table 4.1,Spandana also facilitates “house owner savings”. This essentiallyoperates as a chit fund for participating members, and promotes ‘dreamsavings’ under which husbands are encouraged to save to fulfil any assetpurchase dreams of members of Spandana. All the savings productfeatures are actively promoted. Notably, the organisation highlights itssavings products (and loan and social security products describedbelow) in a pamphlet, produced in Telugu (the local language),depicting a comparison of features with similar products offered byother MFIs. This promotion strategy – similar to the B segment car andthe white goods industry – is an important element in tackling a highlycompetitive situation that could otherwise lead to an erosion of marketshare.

products & delivery…

FIGURE 4.2 – TIMELINE: EVOLUTION OF SAVINGS PRODUCTS

INTERNAL CIRCULATION

AT GROUP LEVEL

•PRE 1998

COMPULSORY

SAVINGS

•1998–2000

MAINLY COMPULSORY WITH

INTRODUCTION OF VOLUNTARY

•2001

MAINLY VOLUNTARY THOUGH

LOAN LINKED SAVINGS CONTINUES

•2002 ONWARDS

LOAN PRODUCTS

The main loan product of Spandana is the general loan that has stan-dard features. Loan amounts range from Rs5,000–12,000 in ruralareas. In recognition of the higher absorptive potential in urban areas,the upper limit there is Rs15,000. The interest on loans is 15% pa flatand a 1% fee is deducted up-front. The loan period is 50 weeks exceptin the rural areas where a monthly system is used. Prepayments onloans are allowed primarily to enable members to graduate to the nextloan cycle if they have the capacity to absorb a new loan.

While credit products are standardised with Spandana retaining themain product associated with Grameen MFIs, the following productfeatures are noteworthy

• Only 50-week loans are given – this enables quick recording ofdata and easy tracking of dues and recoveries. It also ensurescompatibility with the MIS. Weekly instalments, based onhousehold cash flows, lower the amount of each instalmentand make repayment easier for poor clients. Since prepay-ments are allowed, clients can, if they have the capacity, useshorter terms for repaying loans.



PRODUCT

SPHOORTHY

(VOLUNTARY)

SAVINGS

SIRI

SAVINGS

INTEREST RATE

No interestpaid

9% pa

FEATURES

• Any amount can be deposited duringweekly centre meetings

• Withdrawable savings – withdrawals canbe made at centre meetings

• Loan linked savings product – afterthe 2nd loan cycle, 10% of the loanamount has to be maintained withSpandana

• Amount accumulated weekly atcentre meetings; not deductedupfront from disbursement

• Amount returned if memberwithdraws from organisation

TARGET CLIENTS

All members

All borrowers

ORGANISATION’S PERSPECTIVE

• Marginally higher transaction costs offset by increase insavings per member & boost to competitive strengthderived from the flexibility to deposit and withdraw freely

• Supports delinquency control – used to repay loaninstalments during times of low cash inflow for theborrower

• Profitable due to low transaction costs• Positive impact on asset-liability structure & ability to

revolve funds• Form of collateral even while getting members to save• Generates goodwill & positive referrals from exiting

clients since such members exit after getting the depositback

TABLE 4.1 – SPANDANA’S SAVINGS PRODUCTS

• Loan ceilings by cycle have been increased to accommodateclient needs for larger loans; this has also improved Spandana’sfinancial performance

• Larger loans are for clients with good credit histories (“starborrowers”) and higher absorptive capacity; also, special loans,at lower interest rates (12% flat pa) are for HIV positive mem-bers – this differentiation serves as a good promotion tool forSpandana

• Other loan products offered at interest rates of 12–15% painclude an education & infrastructure loan – however, theseare a very small part of the portfolio

• Pricing of loans is marked to the market and is competitivewith respect to other MFIs that have aggressive growth plans;it enables a comfortable margin over costs.

SOCIAL SECURITY/INSURANCE PRODUCTS

With risk mitigation and borrower welfare in mind, Spandana offersinsurance to its members. While Spandana has experimented withvarious schemes, it now offers a standardised product that is manda-tory for all borrowers – Table 4.2.

NEW PRODUCT DEVELOPMENT

Over the last two years, Spandana has been following a tried and testedmethod of new product development and introduction. While adher-ence to the new product development process depicted in Figure 4.1 isnot strict, Spandana broadly follows the steps shown in the figure. Themain features of this process at Spandana are:

• An evaluation of the overall product mix and potentialmarket niches

• Priority to ideas generation and screening with client feedback


…

4.2.1

SPANDANA’S

PRODUCTS

PRODUCT

SOCIAL

SECURITY SCHEME

PREMIUM

1% of loan amount

FEATURES

In case of:• Member’s death – entire loan

outstanding amount is adjusted• Husband’s death – Rs5,000• Fire accident – Rs1,000

No documentation required – disbursement immediate and ismade at a special centre meeting

TARGET CLIENTS

All borrowers


• Differentiating product (from competitor’sproduct mix) – boosts promotion efforts

• Allows risk mitigation for the organisation• Pricing is based on using 50% higher mortality

rates (than LIC’s benchmark 2 deaths/1,000) andso far has yielded large margins on this product

TABLE 4.2 – SPANDANA’S INSURANCE PRODUCTS

and staff perceptions forming an important input• Concept development through several staff meetings (credit

officers and head office managers) though this stage is, in prac-tice, not distinct from the product development step

• Business analysis as a priority – cost and profit analysis • Pilot testing and selecting pilot markets with care – based on

the results of the pilot, product design may be modified • Market testing through staff meetings and sales analysis –

though, this is not done systematically but more as somethingthat happens over time

• Refinement and review of the product mix • Product promotion efforts used not only to promote the rele-

vant products but also to tackle competition – apart fromdirect communication through staff, skits and songs used as asupplementary tool to promote new (and existing) products.

4.2.2 VIVEKANANDA SEVAKENDRA-O-SISHU UDDAYAN (VSSU)

VSSU is an NGO working in the South 24-parganas district of WestBengal. The local market is fairly competitive with a number of MFIsand NBFCs vying for a share of the same target market. To competesuccessfully in this environment, VSSU offers a wide array of productscatering to the different financial needs of its clients. The product port-folio has a good mix of offerings, which cater to client needs and organ-isational objectives in a balanced manner. Innovations in productfeatures, pricing, promotion and placement have been adopted todesign the portfolio.

The guiding principles of product design at VSSU are • Give what the market needs• Base features on clients needs and income patterns

• Use past experience in the market • Analyse operational cost incurred in delivery, cost of funds

(including that of idle funds) and market (bank) interest rates invarious savings products

• Provide incentives and disincentives

SAVINGS PRODUCTS

VSSU offers its clients the facility of a daily deposit scheme, a savingsscheme similar to that of a commercial bank, fixed and recurringdeposits as well as a regular income plan. These are described in Table4.3. Its depositors have access to a savings-plus bundle of products calledSeven in One facility under which services such as life, medical and edu-cation insurance, in kind incentives, travel incentives, social develop-ment facilities and a doorstep collection facility are provided to theregular depositor. The doorstep collection facility, an innovative place-ment strategy in microfinance, gives VSSU access to a hithertountapped customer segment that does not or cannot come to the officefor transactions.

Along with these incentives there are also disincentives such as penaltiesfor early withdrawal. Through these means the organisation differenti-ates between client segments and encourages loyalty.

The VSSU brand is promoted as one that offers a product to suit everyneed, on good terms and conditions. Each of its savings products tar-gets a specific market segment and has features that are better than theproducts offered by the formal sector. For example, the Fixed Deposit(FD) product offers a higher interest rate than the banks and shorterterms than post office deposits.



The organisation maintains its competitive edge by providing the clientwith anytime access to its services 365 days a year – an innovative place-ment strategy that gives VSSU a distinct advantage over most other financialintermediaries in its operational area.

Another strategic aspect that gives VSSU an advantage is its well-defined and detailed product cost analysis. This is illustrated in Figure4.3, using the daily deposit product.

LOAN PRODUCTS

The organisation offers its clients a number of loan products. Theseinclude loans for general purposes, education, small group enterprisesand the purchase of rickshaws. The interest rates on the products rangefrom 6–24% on declining balances. The pricing strategy adopted byVSSU is largely based on the cost of funds. For instance, since thesource of funds for the education loan is a loan with extremely softterms (VSSU considers it a grant) the product carries the lowest inter-est rate of 6% on a declining balance.

To secure its loans VSSU offers it clients an array of collateral substi-tutes. These include mutual guarantors, third party guarantors, socialguarantees by reliable persons, asset hypothecation and post-datedcheques. The suitability of the substitute is determined by the organisa-tion. For those members who have a large savings deposit, VSSUextends the facility of a within deposit loan (loan that is less than orequal to the amount of savings) without collateral. The product allowsthe member to obtain a loan of upto 99% of his/her savings balance atan 18% interest rate.

To promote its brand, VSSU gives its clients an interest incentive ifthey agree to put up a VSSU signboard. The features of its savingsproducts are publicised by printing the product terms and conditionsin the client’s passbook. Clients are also informed of these features dur-ing the organisation’s Annual General Meetings.

4.2.3 SEWA BANK

SEWA Bank is a pioneer in the field of microfinance. It was the firstmicrofinance institution to register legally as a bank. As an urban coop-


…

4.2.2

VSSU’S

PRODUCTS

FIGURE 4.3 – OPERATIONAL ASSUMPTIONS FOR PRODUCT COST ANALYSIS

STAFF

• 1 field officer handles 200 clients/day• 1 field officer works for 25 days/month and

earns a monthly salary of Rs 2,000 (Rs80/day)• Staff cost/day/client = Rs 80/day/200 clients = 40p/client/day

STATIONERY

= 20p/client/day TOTAL COST

= 80p/client/day= Rs250/client p.a.

INTEREST

Paid to client= Rs60 p.a.

Earned from bank = Rs99 p.a.

AUDIT AND

MONITORING

= 20p/client/day

NET TRANSACTION COST

= 70p/client/dayNET INCOME EARNED

=Rs39 p.a.



PRODUCT

DAILY DEPOSIT

SAVINGS DEPOSIT

FIXED DEPOSITS (FD)

RECURRING DEPOSIT

MONTHLY INCOME

SCHEME

FEATURES

• Fixed amount to be deposited each day• Lock-in period of 18 months• 7-in-1 facilities after lock-in period• 4% simple interest after lock-in period

• Additional withdrawable product for clients of other savings schemes

• Minimum balance Rs500• Maximum of 4 transactions allowed per month • Doorstep collection for a deposit amount >Rs1,000• 5% simple interest for periods >90 days

• Deposit upto Rs 45,000 for a maximum of 78months

• 7-in-1 facility for depositors• 8–11% quarterly compound interest

• Minimum monthly deposit • Can be used as collateral to access loans• 7-in-1 facility• 10–11% compound interest

• Pension plan• One time deposit for 60 months• Personal accident insurance• 9% simple interest paid out monthly

TARGET CLIENTS

Daily wage earners (earlierrickshaw pullers)

Bank savingsaccount holders

Investors of post officedeposits/banks

Clients who do nothave a daily income

Retired persons andpensioners


• Easier for clients to save daily• Early viability established through transaction

cost analysis

• Withdrawable savings option for existingclients

• Lower collection costs due to add-on transaction • Meets organisation’s short-term fund

requirement

• Clients need investment options for long termand bulk funds

• Source of long term funds for the organisation

• A flexible option for savers augments deposits• Increased member credit-worthiness by use as

loan collateral• Reduced risk for the organisation

• Reduced cost of funds for the organisation.• Costing done on the basis of cost of external

and idle funds• More stable cash flow

TABLE 4.3 – SAVINGS PRODUCTS OFFERED BY VSSU

erative bank it is one of only two banks – the other being a Local AreaBank promoted by BASIX – focusing on providing microfinance ser-vices. As elsewhere, Ahmedabad, where SEWA Bank operates, is char-acterised by the lack of access of low-income people to commercialbank services. At the same time, the city has seen a number of instancesof fraud perpetrated by financial service providers, which makes mar-keting financial services very difficult.

In this situation, SEWA Bank’s brand positioning as a “trustworthy bankfor the self-employed poor” has been quite successful (see Figure 4.4).SEWA Bank offers a full range of products and services based on clientfeedback, staff discussions, research and impact studies. These productsare differentiated as follows according to the life cycle needs of clients

• Savings: to enable planned expenditure• Credit: for productive expenditure including house building

and debt redemption• Insurance: to meet unplanned expenditure needs• Financial counselling: to enhance clients’ understanding of

financial management.

Moreover, the Bank while conducting all withdrawal or disbursementtransactions at its office in Ahmedabad, has increasingly moved tocollecting deposits and loan repayments at the clients’ doorstep. Forthis it uses extension counters, mobile vans, bank field staff(Handholders) and community leaders it has trained for this purpose(Bank Saathis). While this raises issues of financial control for SEWABank, with the development of appropriate systems this potentialproblem can be overcome.

Another aspect is the additional cost – mainly in the form ofcommission paid to the Bank Saathis – of 1% of the deposits collected.This incremental cost is variable and does not create a significantadverse impact on the bank in case the Saathis do not succeed in theirendeavours. Apart from being very convenient for clients, this facilityforms an important part of the institution’s placement/deliverystrategy. Thus, SEWA Bank’s mix of doorstep and office-based services,combine convenience and physical access with the trust traditionallyassociated with banking services – something that is highly valued byits low income clients.

SEWA Bank is also a pioneer in terms of leveraging the relationshipsbuilt by its sister organisations – the Self-Employed Women’sAssociation and its various affiliates – to push market penetration.These institutions have played a major role in promoting the bank’s ser-vices in their areas of operation. A very good example is the housingdivision of SEWA, which has been instrumental in arranging a uniquepartnership between SEWA bank and the Ahmedabad MunicipalCorporation. In this arrangement, the SEWA housing division identi-fies an area and pursues the Municipal Corporation to adopt the areafor basic infrastructure development. Once this is done, SEWA Bankextends housing loans in the area.


…

4.2.3

SEWA BANK’S

PRODUCTS

NBFCs

SEWA Bank

CommercialBanks

LOW

MEDIUM

LOW

MEDIUM HIGH

FIGURE 4.4 – TRUST-RETURN TRADE-OFF IN DEPOSIT SERVICES

HIGH

T R U S T

RET

UR

NO

ND

EPO

SIT

S



PRODUCT

SAVINGS

ACCOUNT

CURRENT ACCOUNT

FIXED DEPOSIT

RECURRING DEPOSITS

(including adaily depositproduct)

INTEREST RATE

4% p.a.

No interest

7–10.5% p.a.

4% pa for dailydeposit;

10.5% compoundp.a. for longterm deposits (>5 years)

FEATURES

• Any amount can be deposited andwithdrawn at any time

• Provides cheque facilities toinstitutional clients

• Products with a tenure between 60days and more than 5 years

• Fixed deposit certificates can be gifted

• Some products have a bundled offer ofa loan, conditional on regular savings

• Daily deposit provides easy savingsfacilities

• Long term deposits have monthlydeposit amounts that range fromRs50–750

• Conversion of recurring deposits intofixed deposit products is allowed

• Each recurring deposit product isdistinctively branded and promotedwith the objective of meeting certainlife cycle needs

TARGET CLIENTS

All members

Institutional clients

All members

Daily deposit – daily wage earners

Long term recurringdeposits – all members


• Basic savings product – cheap source offunds

• Helps tap the significant small businesscommunity

• Large and low cost source of funds

• Positive impact on the asset-liabilitystructure

• Significant source of funds for theinstitution

• Significant source of funds• Promotes regular savings habit in

clients and serves as a long term sourceof funds

• Positive impact on the asset-liabilitystructure

TABLE 4.4 – SEWA BANK’S RANGE OF SAVINGS PRODUCTS

SAVINGS PRODUCTS

SEWA Bank has become a leader in microfinance with regard to sav-ings products owing to its belief that the provision of secure opportuni-ties to save and build assets is critical for low-income women. Savingsalso provide the bank a regular inflow of funds at a relatively low cost.The range of products offered by the bank is described in Table 4.4.

It is evident from the table that SEWA Bank offers a variety of productfeatures in its savings product mix. This mix is coupled with extensivedeposit mobilisation efforts including the use of promotional materialand annual lottery schemes attached to deposit accounts, and the pro-vision of easy access delivery channels (placement). This has enabledthe organisation to increase its deposit base from Rs268 million on 31March 2001 to Rs464 million a year later.

However, with regard to pricing, SEWA Bank has a problem. The inter-est payable on all its long-term deposits is not only in excess of thoseoffered by comparable institutions in the market it is also higher thanthe returns on its investment activities. Moreover, the quantum of sav-ings the bank has raised is also much higher than its fund requirements.

This situation vis-à-vis the bank’s savings products may not be finan-cially sustainable in the medium to long term and is therefore currentlyunder review.

LOAN PRODUCTS

SEWA Bank’s loan products have a number of useful product featuresspecifically designed for the needs of its clients. These products are out-lined in Table 4.5.

Designed with the diverse credit needs of its clients in mind, the mainloan products of SEWA Bank have features that suit the circumstancesof each type of borrower. The income generation and debt redemptionloans have cashflow based flexible repayment. The housing loans havelower interest rates and longer terms and are given only after ensuringthat the Ahmedabad Municipal Corporation plans to undertake devel-opment work in that area. The jewellery based secured loan’s USP isspeed of appraisal and disbursal that makes it convenient for peoplefaced with an emergency.

Despite its effort to design products to meet the credit needs of itsclients the bank has a low credit-deposit ratio. It is this perception thathas led SEWA Bank to undertake further product development – suchas the recently introduced daily instalment loans. The bank also plansto undertake more intensive promotion initiatives for its loan products.

INSURANCE PRODUCTS

SEWA Bank’s insurance products are linked with formal insuranceagencies – the Life Insurance Corporation for life insurance and theGeneral Insurance Corporation for non-life insurance. The link withthese agencies allows the Bank to offer products that enhance borrowerwelfare by enabling risk mitigation for them (and by extension also forthe organisation).

These products form an important addition to the institution’s productmix to complete a comprehensive financial services package, whichaddresses most of the life cycle needs of the Bank’s clients. To promoteits insurance products SEWA Bank plans to use Bima Sevikas (fieldstaff specialised in insurance).


…

4.2.3

SEWA BANK’S

PRODUCTS



PRODUCT

INCOME

GENERATION

LOANS

HOUSING LOAN

SECURED LOAN

INTEREST RATE

17% p.a. declining

14.5% p.a.declining

17% p.a. declining

FEATURES

• For debt redemption and income generationactivities

• First loan is Rs5,000 and maximum loan amountRs25,000

• Repayable over 3–5 years– tenure decided by a special loan appraisal, clientrating system and client cash flows

• Smaller loans (daily loans) of amounts <Rs5,000 aregiven for meeting urgent requirements of clients –requires very little processing time

• Given for house repair, extension, construction • ‘Parivartan’ scheme involves upgrading of slum

dwellings. • Product is part of an institutional partnership

between the Ahmedabad Municipal Corporationand Mahila Housing SEWA Trust

• Uses jewellery as collateral after valuation by experts • Jewellery physically retained by SEWA Bank until

loan is fully repaid

TARGET CLIENTS

All members

Some loans aretargeted at specialcategories of clients– such as the wivesof mill workers

Members withstable savingsbalances and live inselected slum areas

All members whohave jewellery


• Basic loan product targeted at self-employed clients

• Expected to be an important contributor togrowth

• Firm belief that improved housing facilitiesare productive and beneficial for both thelender and borrower

• Provides a competitive edge to theorganisation and boosts promotion effortsfor all products

• Secured loan• Easy and quick access to loans for clients

who have jewellery and need to convertsuch assets into a more liquid form

• Positive impact on organisation’s brand

TABLE 4.5 – OUTLINE OF SEWA BANK’S LOAN PRODUCTS

FINANCIAL COUNSELLING

This service was formally introduced only recently (July 2002) thoughit has been available informally for a long time. This service has thepotential for providing a thrust to SEWA Bank’s position in the highlycompetitive market in urban Ahmedabad. The idea behind the serviceis to enable its clients to understand planning, consumption and invest-ment, fund sourcing and asset distribution in relation to personalfinancial management. Initial perceptions of this recently introducedservice are that it is a useful addition to SEWA Bank’s product mix andthe bank’s clients have an increasing interest in it.

4.2.4 ASA TRUST

The Activists for Social Alternatives Trust (ASA) is one of the largestMFIs working in the Thiruchirapalli region of the southern Indianstate of Tamil Nadu.

ASA follows the Grameen Bank model and has evolved its products anddelivery systems over time. ASA’s basic products are simple and haveclearly laid out terms and conditions. While this limits the productdesign features it is compensated to some extent by the fact that ASA’sproduct mix is wide and meets a variety of life cycle needs. The mixincludes savings, credit, insurance linkage and non-financial services.

Key features of ASA’s products include

• Simple product design: Products are designed to facilitate easyrecord keeping and tracking. Most loans are repayable on aweekly basis with a repayment period of 50 weeks at an 18%p.a. flat interest rate. Only the loans given for housing are

repayable in equated monthly instalments and carry a 15%p.a. declining interest rate. ASA is also flexible when it comesto agricultural loans. Based on requests from members, it candecide to offer a loan with repayments made on monthly orquarterly terms.

• Different products for different purposes: There are foursuch products. This differentiation enables improved trackingof loan utilisation and contributes to portfolio diversification.Thus, product design enables risk mitigation.

• Placement that facilitates internal control and reduces trans-actions costs: All loans are disbursed from the branches ontwo fixed days every week – this strategy facilitates internalcontrol and also reduces transaction costs relative to the earliersystem where disbursements were made every day of the week.

• Savings as a sustained and growing source of funds: Savingsare of two types – voluntary and compulsory. The compulsorysavings are linked to the number of years of membership, aproduct design feature that enables a sustained and growingsource of low cost funds for the organisation. The voluntarysavings act as an additional mode of savings for the memberseven while enhancing the abilities of members to repay loanson time. ASA was amongst the first Grameen patterned MFIsto introduce a voluntary savings product.

• Insurance linkage to mitigate risk: Insurance linkage prod-ucts complete the product mix at ASA – all members who bor-row for animal husbandry purposes are linked with a large,public sector insurance agency for animal insurance. This has


…

4.2.3

SEWA BANK’S

PRODUCTS

been in practice since the late 1980s. In addition, over the pastcouple of years, life insurance has been encouraged for allmembers – by now an estimated 70% of members have beencovered under this scheme which entails insurance beingissued by the largest life insurance company in India. Thisstrategy of insurance linkage enables ASA to mitigate risk evenwhile limiting its contingent liabilities for insurance claims.Nurturing the relationship with established insurance agencieshas helped to facilitate the insurance service in terms of claimssettlement and has been of benefit to all the parties concerned.

Apart from these financial products, ASA offers business developmentservices to clients. This non-financial product is seen as a useful supple-ment that, apart from benefiting clients, enhances the organisation’sability to cope with competition. A special team has been formed toassess the need, mode of delivery and types of non-financial, businessdevelopment services for members. The exact form that this service willtake 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.Preliminary indications are that there is a significant demand for suchservices though this will only be tested when the service is offered on acommercial basis. Nevertheless, members see even the existing scale ofsuch services as an additional benefit and a supplementary product thatwidens the range offered by ASA.

ASA’s products have been modified over time with changes in the prod-uct design based on both client feedback and inputs from the branchstaff. For this purpose, the organisation follows a systematic process ofproduct development and review. The structured process for enablingclient responses to feed into product design and the multiple stepsrequired for introducing new product features are summarised in

Figure 4.5. These steps involve participation at all levels of the organi-sational hierarchy.

This process has enabled ASA to react to client feedback quickly andhas, thus, enhanced its ability to retain clients by offering appropriateproduct features. Field level communication is also given importancethrough staff disseminating information at client meetings, client repre-sentatives are also used for this purpose.

Other product promotion efforts include the use of padyatras. Such anevent involves an organised walk undertaken by senior branch staff andthe top ASA management to provide an opportunity for direct interac-tion with clients. This mode of interaction has been well received byASA’s clients and provides a unique way to communicate with them ona periodic basis.

4.2.5 SAMRUDDHI

Samruddhi was started as an innovation in microfinance to promotelivelihoods. It has a strong client focus and its products and deliverysystems have been designed, to meet the needs of various clients in dif-ferent rural livelihoods/sectors. Perhaps the most important attribute ofSamruddhi’s operations is its ability to take an unconventionalapproach to controlling its costs and risk. Its product developmentprocess stresses the segmentation of the target market and the develop-ment of specific product structures and delivery channels.

The organisation’s product features are drawn from three main parameters• Repayment ability (duration)• Associated risk (security)• Purpose



Repayment ability (cash flow) determines the duration of loans, whichvary from upto one year (for short term loans) to 1–3 years (formedium term loans). Loans greater than 3 years are presently not issuedas Samruddhi feels that it does not have the capacity to appraise andmanage these loans. To mitigate its default risk, the organisation col-lects a refundable cash security (CS), which is a specified percentage ofthe disbursed amount.

Purpose-wise loans are available for both farm and non-farm activities.Farm loans are for cultivation, purchase of agricultural inputs and live-stock rearing. Non-farm loans include manufacturing, trade and services.Within this, Samruddhi has a product for “growth microenterprises”.These are loans for units that have the potential to generate wage employ-

ment. Through these, Samruddhi facilitates indirect income generationand, thereby, aims to contribute to wider economic development.

Permutations of these parameters with various placement modes, forboth delivery and collection, provide the client with a valued credit ser-vice. Loan pricing is done on a cost plus basis including the cost of risk.Thus, a General Purpose loan extended to an SHG carries an interestrate of 15% with CS and 18% without CS. Crop loans that are inher-ently risky carry higher interest rates of up to 24%.

Unlike most MFIs in India, Samruddhi does not have field workersthat transact directly with the client. Instead it works throughCustomer Service Agents (CSAs) who are self-employed field officersresponsible for business development and the collection of Samruddhiloans. As the commission paid by Samruddhi is directly related to thevolume and quality of business generated by the CSA, this mode ofloan origination is cost-effective. The organisation’s Field Executive(FX) monitors the work of each CSA.

Loans are disbursed through various channels that serve to increase theoutreach of the programme while at the same time reducing risk. Forexample, crop loans that are extremely risky are disbursed to joint liabil-ity groups (JLG). The JLG maintains peer pressure and also reduces thetransaction cost for Samruddhi. Other channels include loans to SHGs,SHG Federations and Mutually-Aided Cooperative Societies (MACS)as well as Revolving Savings and Credit Associations (ROSCAS).

Like disbursement, collection is also designed to minimise cost andrisk. Collections are the job of the CSA and lending to groups reducesthe cost of transactions. Samruddhi also lends to members of milkcooperatives. The manager of the milk chilling plant acts as an informal


…

4.2.5

SAMRUDDHI’S

PRODUCTS

Feed

back

loop

FIGURE 4.5 – STRUCTURED PROCESS FOR PRODUCT DEVELOPMENT & MODIFICATION

Summarised feedback from clients (received through thebranches): discussed at core team (top management) meeting

Discussion with the branch managers

Discussion with the Coordination Committee (ASA staff plus representatives of clients)

Communication with clients through field staff

guarantor for these loans. For these members the repayment instal-ments are deducted directly by the plant from the payments due tomilk producers. This collection method helps to control delinquency

risk. Table 4.6 shows the pros and cons of Samruddhi’s loan products.



PRODUCT

INDIVIDUAL LENDING

JOINT LIABILITY GROUP

(JLG)

SELF HELP GROUP (SHG)

MUTUALLY AIDED

COOPERATIVE SOCIETIES

(MACS)

ROSCAS

PROS

√ Low transaction and opportunitycost for clients

√ “credit focussed” rather than amodel-based approach

√ group peer pressure√ lower transaction cost

√ group peer pressure√ low transaction cost

√ Low transaction cost with highindividual outreach

√ Income generating commonactivity of a group

√ Low risk due to members’ ownfunds invested in the same activity

CONS

x high transaction cost for lenderx higher risk

x group defaultx limits flexibility as group

formation required

x high group mobilisation cost

x Restricted control over the end-use

x Low geographical and sectoraldiversification

x Activity may be seasonal andmarket dependent increasing theportfolio diversification risk

SAMRUDDHI’S STRATEGY

• loan origination and collection by CSAsreduces transaction cost for lender

• cash security acts as collateral

• self appraisal of loan proposals• legal mutual agreement between members

• no end use restriction therefore a higherinterest rate/CS

• Microfinance Agents (MFAs) operating likeCSAs reduce monitoring cost

• Thorough financial and operational appraisalof the MACS

• The responsibility of assuring individualrepayment lies with the MACS

• Cash flow based repayments as the activity iscommon

• Higher interest rates along with cash security

TABLE 4.6 – PROS AND CONS OF SAMRUDDHI’S LOAN PRODUCTS


PRICE

• Pricing based on a detailed costing of the product, consider-ing transaction costs and client costs as well as prevalent mar-ket rates – VSSU has a well defined framework forundertaking this

• Pricing is a strategic decision undertaken in line with sustain-ability considerations and overall organisational goals – facedwith competition Spandana decreased its interest rate onloans but only after an analysis of the financial implications ofthe change

PROMOTION

• A systematic strategy to explain product features or promotethe differentiating features of an organisation’s product mixvis-à-vis competing offerings – Spandana’s use of a pamphletprepared in the local language, is an important tool in tack-ling competition, whereas, ASA uses, amongst other tools, apadyatra to promote products, obtain feedback and buildcustomer loyalty

• Multiple promotional tools that supplement direct commu-nication efforts of an organisation – VSSU provides incen-tives to clients to place its sign-board at the site of theirbusiness while Spandana organises skits in potential marketsand uses songs to advertise its products and services.

• Specific brand positioning of the institution and its products– SEWA Bank positions itself as a “trustworthy bank for theself-employed poor”, while to Spandana’s clients it is “a trust-worthy MFI providing very efficient and responsive financialservices”, similarly VSSU positions itself as “products foreveryone at better terms with anytime access”

4.3 DESIGNING FINANCIAL PRODUCTS FOR THE POOR

Sophisticated product design and development practices illustratedabove do, of course, need to be deployed in accordance with the strate-gic framework of an MFI and the capacity of its MIS to handle itsinformation and monitoring requirements. Specific features of theproduct design and delivery mechanisms of best practice institutionscovered by this research are

PRODUCT FEATURES

• Undertaking continuous client and market research as well asorganisational assessment as key steps that feed into productfeature design – ASA, SEWA Bank, Spandana and VSSUrespond quickly to client feedback and market competitionby designing products that fit within the capacity of their sys-tems and boost their financial performance

• Highly flexible and client-friendly product features thatenhance the competitive strength of the organisation – VSSUoffers a fully withdrawable savings product and bundled loanand savings products while SEWA Bank offers an annual lot-tery scheme for savers, daily savings collection at the doorstepfor daily wage earners and a loan linked to regular depositbehaviour for some recurring deposit products

• A comprehensive product mix catering to a wide range offinancial services: differentiation within product lines and acomplete range of product lines – SEWA Bank’s differenti-ated savings products and comprehensive package of financialservices illustrates this; VSSU’s savings product line reachesthree distinct market segments – daily wage earners, salariedpersons and the retired

4.4 EMERGING TRENDS

It is evident from the above discussion that improvements from thedays of rigid or very loosely defined products have taken place in themicrofinance sector in India. As MFIs in India grow and expand and ascompetition in the sector increases, a greater focus on products anddelivery methods will be needed. Product offerings will require carefulthought in relation to the 4Ps of the marketing mix. Moreover, newproduct development will also need to be undertaken more systemati-cally and scientifically. Considerations of branding, product position-ing and improving organizational MIS to cope with the increasedrequirements brought about by these changes will also be necessary.

MFIs covered under this study show, unconventional and innovativethinking is required to meet the needs of low-income clients. Productsand services are key elemens of expansion and delivery strategies andneed to be designed to balance client and organisational needs. As thesector matures, deployment of innovative product design and deliverystrategies described in this section is likely to become more common.While some of the products and delivery systems discussed here are asyet to be fully tested, a broader panorama of the microfinance sector inIndia indicates that these products form the vanguard for some of theemerging trends in the industry, including

• Fully flexible product offerings: Products that can be innova-tively designed to meet customer needs – this would meanmany more variations in features than are being commonlyoffered at present. Such a development would necessitateaccompanying sophistication in information and monitoringsystems used by MFIs.

• Automation: To facilitate easy transactions, some MFIs in thecountry are thinking of creating an ATM-based infrastructurewhile others are experimenting with the use of smart cards andpersonal digital assistants (PDAs) to facilitate recording,reducing transaction costs and improving delivery.

• Detailed marketing and product development strategies:Formal and systematic steps to decide on design, promotionand positioning of products. Developing coherent anddetailed marketing strategies similar to those employed by theformal financial sector are being considered for markets suchas Guntur district of Andhra Pradesh where competition isbecoming intense.


43products & delivery

PLACEMENT

• Delivery mechanisms that enable convenient access of finan-cial services to clients – SEWA Bank uses mobile vans, BankSaathis and “Handholders” who reach clients at theirdoorstep; VSSU provides its clients any time access to ser-vices, 24 hours-365 days

• Multiple and low cost delivery channels that enhance prod-uct outreach – Samruddhi uses collection agents, collabora-tion with agri-input companies, village level institutions andother institutional service providers

NEW PRODUCT DEVELOPMENT

• A systematic process based on market and client levelresearch and feedback including a conceptual design phase, abusiness analysis and a pilot test – Samruddhi and Spandanafollow this structure to introduce new products

5.1 INTRODUCTION


A system is a group of interrelated components working together towards acommon goal by accepting inputs and producing outputs in an organisedtransformation process. O’Brien15

MIS: A management information system captures data, processes it andprovides relevant information for control, analysis and decision-making atthe operational and strategic level in a cost efficient and timely manner.

From the definition above it is clear that, given their critical link withdecision-making, Management Information Systems (MIS) are requiredin every type of organisation. An MIS has special relevance for MFIsgiven that their operations involve very large numbers of small financialtransactions with clients at frequent intervals. These transactions haveto be constantly monitored to assess the health of the organisation anddecide on future actions. Thus, operational and strategic decision mak-ing in an MFI relies heavily on appropriate and timely informationbeing gathered through effective systems.

While each MFI strives to develop its own system or perhaps to acquirethe best available MIS, there is no one single formulated informationsystem that can address the needs of all institutions. An MFI’s size,methodology, volume of operations, managerial structure, expansion

strategy and access to resources are the key factors that determine thecomplexity of the required system.

Generically, a good MFI information system should incorporate thefollowing characteristics

• User friendliness for data entry and reporting: MFI systemsare mostly used by semi-skilled personnel at the branches andneed to provide a good user interface to minimise error

• Timely, accurate and reliable information: The microfinancebusiness is fast moving involving numerous transactions anddecision makers who need reliable information on time tofacilitate control and decision making

• Design and output flexibility to suit the organisation’s chang-ing needs: Given the sector’s nascence and rapid growth, mostMFIs are growing at a brisk pace and information needs areconstantly changing. This requires systems that can be modi-fied and upgraded easily at a reasonable cost.

• Links to ensure data flow within an organisation: To improvecost efficiency and human resource productivity, it is impor-tant to link up the MIS with other management systems likeaccounting.

• Secure and stable architecture: The large number of transac-tions and the resulting storage and processing requirementsmake stability and security critical factors for MFIs.

5 Management Information Systems

15 O’Brien, James A, 2000. Management Information Systems. Tata

McGraw Hill, India.

• Cost-effectiveness: Considering the delicate financial healthand low margins earned by most MFIs, it is necessary that thesystem be highly cost-efficient.

5.1.2 SECTOR OVERVIEW

Most Indian MFIs do have some basic information systems to ensuredata flow to the head office, chief functionary or donor agency. Inmany organisations, large and small, these systems are manual, not pro-fessionally designed and prone to errors. Recording at the field levelcomprises of client passbooks and a loan register that are consolidated –generally with a significant time lag – at the head office. Accounting isvery basic in nature and annual financial statements are often preparedseveral months after the end of the accounting period. Reports for useby staff are very few in number and tend to focus more on donorrequirements than on operational utility.

As MFIs grow, gain exposure and experience and obtain greater accessto grant funds the accounting systems are usually the first to be com-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 manualrecords and computerise only during the consolidation and preparationof reports.

Mature institutions introduce professionally designed managementinformation systems to deal with growth in the volumes of credit andclients. Most of these MFIs opt for software that has been customisedfor them, such as the FAMIS software used by Samruddhi or thePortfolio Tracker developed by SKS and CFTS. This is because theavailable MIS software for MFIs, in the Indian market, suffer from

either or all of the following problems• The degree of software customisation possible is limited. The

available software usually caters to a uniform microfinanceprogramme and does not allow for local variations.

• The cost of the available software is usually beyond the MFI’sbudgeted resources.

• Post-purchase service is limited.

Locally developed software is easier to incorporate within the existingsystem if it is planned and designed carefully. While it requires greaterstaff time during the development phase than standard software, theinvestment in development balances out as adoption becomes easier.

This section looks at some of those institutions that have succeeded insetting up systems that overcome these difficulties. While two of theMFIs documented here have computerized systems, one organization –Spandana – has a manual recording process that puts to rest the ideathat manual systems are inherently weak and signify the inefficiency ofan organization.

5.2 ILLUSTRATIONS OF BEST PRACTICE

5.2.1 SPANDANA

Spandana has a manual recording and reporting system that is repre-sented in Table 5.1.

Spandana modifies its systems to minimise data redundancy and cap-ture as many details as possible. While the manual system is very cost-effective and requires low operator skills, it does leave open the


45Management Information Systems…

Management Information Systems

CLIENT

BRANCH

OPERATOR

Field worker (FW)

Accountant

FWBranch Manager (BM)

Accountant

BM

MEMBERSHIP

CENTRE REGISTER

MEMBER

BASELINE DATA •

SAVINGS

SAVINGS PASSBOOK/CARD •

Product-wise savings register

LOANS DISBURSEMENT

• LOAN PASSBOOK •

• Disbursement register

LOANS COLLECTION

• WEEKLY COLLECTION SHEET •

DAILY FINANCIAL STATEMENT •

DAILY DEMAND COLLECTION BALANCE •

CASH BOOK •

GENERAL LEDGER •

•Weekly progress report ••Weekly receipts and payments •

•Monthly progress report •Ratios •

TABLE 5.1 – SPANDANA’S MANUAL MIS

Note: Text in italics represents points of data consolidation

REPORT

FINANCIAL STATEMENT

DEMAND COLLECTION BALANCE

PROGRESS REPORT

RECEIPTS AND PAYMENTS

PERFORMANCE RATIOS

CENTRE MEETING APPRAISAL

GENERATED BY

FWBM & FWBMAccountantBMBM

GENERATED FOR

Cashier – check cash balanceBM – overdue calculationHO – operations for consolidationAccounts department for consolidationHO operations for monitoringHO – Human resource department for performance appraisal

FREQUENCY

DailyDailyWeekly & monthlyWeeklyMonthlyWeekly

HEAD OFFICE (HO)

THE RESULTING REPORTS GENERATED BY THE MIS AT SPANDANA ARE

potential for entry errors. Additionally in view of the organisation’sexpansion plans and considering potential situations of a very high andsudden increase in delinquency levels, the current system could be alimiting factor in terms of the efficiency of operations.

Nevertheless, while these potential downsides exist, given that theorganisation is able to produce branch wise statements of financial andoperational highlights by the end of every week and consolidated state-ments within a day or two of every month end, it is clear that the man-ual MIS is quite efficient and cost effective at the present scale andquality of operations. This efficiency facilitates the remarkably highstaff productivity levels (around 450 active borrowers per field staffmember) at Spandana, and thereby, impacts positively the organisa-tion’s bottomline.

5.2.2 CASHPOR FINANCIAL AND TECHNICAL SERVICES LTD (CFTS)AND SWAYAM KRISHI SANGAM (SKS)

Both CFTS, an MFI based in the Mirzapur district of the easternIndian state of Uttar Pradesh, and SKS (with operations in the south-ern state of Andhra Pradesh) use the Portfolio Tracker (originally devel-oped by Grameen Communications) to record data and generatereports. The software was enhanced by CFTS to include an accountsmodule (Version 2.1). SKS then made further changes in-house and ispresently using Portfolio Tracker 2.5. As both organisations use thesame software, broadly the information flow is depicted in Table 5.2.

Both CFTS and SKS generate a number of reports both at the branchand HO levels. As most of the reports are auto-generated by the system,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

reports that are prepared at the HO level are manual but these are soonto be incorporated into Portfolio Tracker. All the main reports areshown in Table 5.3.

The SKS and CFTS system, comprising Portfolio Tracker & Accountsmodule, is a standardised software for the Grameen model. The com-plexity level is low and its Windows platform allows easy disseminationof operating knowledge to the field staff. This standardisation has alsoenabled proper definition of access rights and security procedures. Theintegration of the Portfolio Tracker with the Accounts module permitserror-free data transfer in quick time. These features make it very user-friendly and architecturally stable. However, the system is relativelyinflexible and is limited in terms of incorporating changes in operatingparameters. It also lacks analytical and planning capability and thesefunctions must be performed separately. SKS is now in the process ofincorporating these modules into the Portfolio Tracker software.

The MIS is based on a “part distributed processing” model where thebranch offices have limited processing capacity. They manage opera-tions, reporting weekly to the head office where the information is col-lated and analysed.

The collection sheet is the basic recording document. It automaticallygenerates amount due and amount repaid. In case of a deviation fromthe default amount, the collection/ disbursement is recorded manually.At the end of the day’s operations, the information is confirmed by thebranch manager/cashier, following which the relevant voucher entriesare made in the accounts module. The confirmation process preventsthe possibility of erroneous entries being passed.

SKS is also experimenting with innovative recording mechanisms using




CLIENT

BRANCH

HO

OPERATOR

FW

BM

FW

FW

Auto generated

Auto generated

Accounts DistrictManager

• COLLECTION

• COLLECTION SHEET

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

• MEMBER PASSBOOKS •

• STAFF CASH POSITION REPORT • • Branch Cash position report

• Budget report• Cash flow report• BACK UP DATA

• Financial statements• Portfolio reports• Ratio calculation

DISBURSEMENT

• CLIENT PROPOSAL

• WEEKLY LOAN APPROVAL

• DISBURSEMENT VOUCHER •

• Due disbursement report •

LOANS

TABLE 5.2 – PORTFOLIO TRACKER

EASE CHECKRROWS OF THISABLE

palm pilots and smart cards. These are presently being piloted toanalyse their cost-effectiveness. The organisation envisages thatthese devices will save staff time during meetings and, thereby,enhance productivity.

5.2.3 SAMRUDDHI (BHARTIYA SAMRUDDHI FINANCE)

Samruddhi has fully computerised and decentralised informa-tion and accounting systems, integrated with the help of a cus-tomized, FoxPro-based application software FinancialAccounting and Management Information System (FAMIS).Data generated by FAMIS is further analysed at the head officeusing an Oracle Discoverer tool. The flow of information fromthe field to the branches and further on to the HO is sum-marised in Table 5.4.

FAMIS enables the staff at the branches and the HO to generatea variety of reports as and when required. Table 5.5 lists some ofthe key reports that are used in the organisation to monitoroperations. Besides these there are also reports that are regularlyprepared for different donors agencies.

The term “generated by” refers to the person who generallyviews/prints and uses these reports.

FAMIS is a FoxPro application on a DOS platform that hasbeen designed exclusively for Samruddhi, keeping the organisa-tion’s unique information needs in mind. While, it is not veryuser-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.



REPORT

CASH POSITION REPORT

BRANCH CASH POSITION +

BANK DEPOSIT SLIP

CASH FLOW REPORT

DUE DISBURSEMENT

(DISBURSEMENT LIST)

BUDGET REPORT

(FOR THE NEXT 2 WEEKS)

LOAN DISBURSEMENT

BRANCH FINANCIAL

STATEMENTS

BRANCH PERFORMANCE REPORT

AREA REPORT

FINANCIAL STATEMENTS

SEGMENTED FINANCIAL STATE-

MENTS FOR CREDIT

PORTFOLIO REPORTS

LOAN LOSS PROVISION

STAFF PERFORMANCE REPORT

RATIOS

BY

FW

BM

BM

BM

BM

BM

BM

BM

Area

manager

HO –

Accounts

HO –

Accounts

HO

HO

HO/BO

HO

GENERATED FOR

Assistant BM – to verify physical cash

BM – to confirm the transaction

HO – Accounts to tally cash and bank

balances

HO – Accounts to record expenses

and other receipts and payments

HO – Operations manager

HO – Planning and monitoring

manager

HO – Accounts to tally cash

HO – to consolidate

HO – to monitor portfolio quality

and outreach

HO – to consolidate

For internal reporting

For business planning

For monitoring

For consolidation

For consolidation

For planning and monitoring

FREQUENCY

Daily

Daily

Weekly

Weekly

Weekly

Weekly

Monthly

Monthly

Weekly &

Monthly

Monthly

Monthly

Monthly

Monthly

Weekly

Monthly

CFTS

•

•

•

•

-

-•

•

•

-

-

--•-

SKS

•

•

•

•

•

••

•

-

•

•

••••

TABLE 5.3 – MAIN REPORTS GENERATED BY CFTS AND SKS


CLIENT

BRANCH

HO

OPERATOR

Customer service agent (CSA)

Field Executive (FX) &UH Transaction assistant (TA)TA

CSATATA

Auto generated

Auto generated

TA

Executive (ManagementInformation)

LOANS COLLECTION

• REPAYMENT SCHEDULE

• REPAYMENT RECEIPT COUNTERFOIL •

• Day wise demand chart• REPAYMENT RECEIPT •

• COMPUTERISE REPAYMENT FOR CLIENT

Daily cash book and bank book

Outstanding reportOverdue report

Employee performanceVillage performance

Branch monthly statementDATA BACK-UP

Consolidated monthly statementPAR/NPA analysis

Quarterly pogrammatic indicatorsNPA tail analysis – trend analysis

Overdue turnover – biannualVillage concentration – biannual

LOANS DISBURSEMENT

• APPLICATION AND REGISTRATION

• LOAN APPROVAL

• APPROVED LOANS COMPUTERISED

• DISBURSED AMOUNT ENTERED •

• FEES RECORDED •

•INDEXING & BRIDGE TO ACCOUNTS MODULE •

•DAILY CLOSING OF ACCOUNTS •

TABLE 5.4 – SAMRUDDHI – FAMIS

FAMIS also provides the option to generate a number of reports on var-ious operating parameters. The system backup is sent to the head officewhere information is compiled and a wide range of reports is generatedthrough a Decision Support System (DSS) from the OracleCorporation. Another limitation of the FAMIS software is its limitedprocessing capacity.

On account of these limitations, Samruddhi is now working on anOracle Relational Database Management Syatem (RDBMS)-based

MIS software. This combines the functional robustness of FAMIS withthe user friendliness of a Graphical User Interface (GUI) and the highcapacity and security of relational databases. In developing this system,Samruddhi has adopted a systematic development process includingneeds identification, a system audit, establishing a task force and a for-malised contracting system.



REPORT

DAY-WISE DEMAND CHART

OVERDUE REPORT (AGEING OF PORTFOLIO)

EMPLOYEE PERFORMANCE

VILLAGE PERFORMANCE

(DEPTH OF COVERAGE IN EACH VILLAGE)

MONTHLY STATEMENT

CONSOLIDATED MONTHLY STATEMENT

PAR/NPA ANALYSIS

NPA TRAIL ANALYSIS (TRACKING LOAN NPA OVER

THE YEARS)

OVERDUE TURNOVER (MOVEMENT OF OVERDUES)

CURRENT YEAR PERFORMANCE

VILLAGE CONCENTRATION

PROGRAMMATIC INDICATORS (OUTREACH, PORTFOLIO

QUALITY INDICATORS)

GENERATED BY

TAFXTATA

TAManager Information

GENERATED FOR

CSA – to keep track of collections that are due from clientsFX&UH – to follow up on overdue loans by the 15th of each

monthHO – to compute biannual staff incentivesUH – to develop diversification strategyHO – for consolidation and further analysis on Oracle DiscovererCOO, Manager Operations – to monitor the performance of the

unitsCOO, Manager Finance – to make provisionsCOO, Manager Finance, Manager Operations – to monitor the

portfolio qualityCOO, Manager Ops. – to monitor recovery of bad loansCOO, Manager Ops. – to monitor current performanceCOO, Manager Operations – to plan for further growth and

expansionBoard, Funding agencies and other external persons

FREQUENCY

WeeklyMonthly

MonthlyAs requiredMonthly Monthly

Monthly Monthly

BiannualAnnual Biannual

Quarterly

TABLE 5.5 – KEY REPORTS USED BY SAMRUDDHI TO MONITOR OPERATIONS

5.3 LESSONS IN SYSTEMS OPTIMISATION

The type of information systems – manual or computerised – couldvary depending on the organisation’s needs and available resources,however, a well worked out information system is essential in

microfinance. The illustrations demonstrate that information systemsprovide the foundation for building control and incentive systems aswell as for facilitating daily decision-making. The key features ofinformation systems identified by this research are


MANUAL

• Easy to use forms not requiringhigh data entry skills

• Care in avoiding duplication inthe formats reduces manualerrors

• Large number of checks by thebranch managers and the headoffice staff

CHARACTERISTIC

USER

FRIENDLINESS

ACCURACY AND

RELIABILITY

FLEXIBILITY AND

EXPANDABILITY

COMPUTERISED

• GUI enabled software with user-friendly data entry screens and menus for generating outputs suchas is in the Portfolio Tracker.

• The interface reduces the task of entering the loan number repeatedly

• Integration of accounts and portfolio modules, such as in Portfolio Tracker and FAMIS, reducesmanual transfer errors.

• Semi-automated transfer of data from the portfolio to the accounts module allows corrections• Fixed input cells with validation conditions prevent erroneous entries; for example, FAMIS does not

allow the field staff to enter fees that are less than defined for the product

• Purchasing of source code enables further modifications, as in the case of the Portfolio Tracker • 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 ismoving to software that will allow computerisation of its entire information systems includinghuman resources and payroll. SKS is planning to include a monitoring component in the PortfolioTracker

• Flexibility to generate a wide variety of key reports on various critical parameters easily and in atime and cost-efficient manner, such as in the Samruddhi Decision Support System



• Decentralised recording, con-solidation and cross-checkingof data at appropriate opera-tional levels, in a timely andefficient manner as inSpandana.

• Logically linked and sequencedrecording formats: Spandanaensures that data from one for-mat is consolidated or used atthe next level, instead of simplyrecording it once again

• Access to books of accountsrestricted to enhance security,such as in Spandana

DATA FLOW

ARCHITECTURE

(MAINTENANCE,

SECURITY & TECHNICAL

DESIGN)

• Decentralised recording and consolidation at the branch level. Daily transaction entriesare done at the branch level and updated at the head office on a weekly basis as in CFTS,SKS and Samruddhi.

• Overall consolidation at head office through back-up storage devices reducing the physicaltransfer of reports.

• Reduced redundancy in input screens

• Use of tested software with a stable architecture and easy to maintain with the organisa-tion’s in-house IT capability. The Portfolio Tracker has been developed by Grameen Trustwhile the FAMIS software has undergone constant modifications to maintain its perfor-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 atSamruddhi and is now being replaced by Oracle software that can process larger volumesof data.

• Back-up data of the branches stored at the head office. All the computerised institutionssend 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


…

5.3

LESSONS IN

SYSTEMS

OPTIMISATION

• Standardised report formatfrom each branch allowingquick consolidation at the HO

• Frequency of reporting concur-rent with operational decisionmaking

• Reports capture all the relevantinformation at the field level

• Ongoing analysis of informa-tion needs and objectives asdone by Spandana

• Continuous upgrades in therecording formats and reportsto meet the changing needs

REPORTING

PROCESS

• Standardised set of comprehensive reports which are disseminated to various levels accord-ing to predefined dates and frequency

• Critical analysis of existing information system, involving all stakeholders, to identifyshortcomings and assess needs

• Establishment of an exclusive team to interface between the vendor and the operationsteam

• Formalised contract with vendor for software development and post-purchase mainte-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 debuggingsuch as in CFTS and SKS

• Adequate (over a few operating cycles) piloting and testing of software before implementa-tion

5.4 EMERGING TRENDS

As organisations in the microfinance sector in India grow, they feel theneed to manage their information better as the volume of data handledby each MFI expands. This has led to a number of innovations in theinformation management sub-systems of collection, transfer, process-ing, storage and reporting. Amongst all of these sub-systems, the mostcritical and expensive in microfinance is collection and this is wheremost innovations are being attempted. This is being targeted at two lev-els

• Streamlining of business processes: A number of organisa-tions that had earlier restricted themselves to established mod-els such as Grameen or SHG are now adopting a mix ofstrategies, including individual lending, that reduce the cost oftransaction management. Since gathering informationimposes a significant cost, considerable attention is beingfocussed on it by using methods such as Business ProcessReengineering.

• Automation: New methods of managing collection are beingexperimented with. These range from low end hand-heldsmart card readers with data entry screens to more sophisti-cated small computing systems that perform basic consolida-tion and processing functions.

• Architecture: In the area of processing and storage, the movehas been towards (RDBMS) that are more secure, have higherprocessing capacity and provide further integration of infor-mation.

Overall, as the sector matures and systems are tested more rigorously, amore universal architecture of appropriate information systems formicrofinance is likely to emerge.


55Management Information Systems

6.1 INTRODUCTION


Internal Controls are all resources and procedures used by managers toexercise control over the activities of an organisation. It is a process thatallows the management and its personnel to be reasonably sure that theobjectives they have fixed are achieved. Appropriate controls help tocorrect contradictions and detect anomalies between different decisioncentres as well as to ensure that designated policies and procedures arefollowed at all levels of the organization.

The Basel Committee on Banking Supervision defines internal con-trol16 as “a process, effected by an entity’s board of directors/trustees, man-agement and other personnel, designed to provide reasonable assuranceregarding the achievement of objectives in the following categories

• Verify the efficiency and effectiveness of operations;• Assure the reliability and completeness of financial and manage-

ment information; and• Comply with applicable laws and regulations”

This definition reflects certain fundamental concepts • Internal control is a process. It is a means to an end, not an end

in itself.• Internal control is effected by people. It is not policy manuals

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 anentity’s management and board.

Internal control is comprised of the following five interrelated compo-nents (Figure 6.1)

• Control Environment: The core of any organization is its peo-ple – their individual attributes, including integrity, ethicalvalues and competence largely determine the environment inwhich they operate.

• Risk Assessment: Establishment of mechanisms to identify,analyze and manage related business and operating risks.

• Control Activities: Establishment and implementation of con-trol policies and procedures to help ensure that the actionsidentified by management as necessary to address risks andobtain the specified goals are effectively carried out.

• Information and Communication: Surrounding these activi-ties are information and communication systems. Theseenable the organization to capture and exchange the informa-tion needed to conduct, manage and control the MFI’s opera-tions.

• Monitoring: The entire process must be monitored, and mod-ifications made as necessary. In this way, the system can reactdynamically, changing as conditions warrant.

6 Internal control for risk management

16 1998. Framework for Internal Control Systems in Banking Organisations. Basel

Committee Publications, No.40.

To understand this better in the context of microfinance, the entireprocess of internal control can be broadly classified as

• Prevention: Involves building checks into the methodology,operational and reporting processes and ensures in-built riskassessment and maintains the control environment. Includesclient appraisal, loan utilization, peer pressure, collateral, port-folio tracking, cash control, documented policies

• Detection: Undertakes the identification of risks and lapses inadhering to policy and setting up suitable control activities. Itincludes mechanisms such as portfolio tracking, loan utiliza-tion checks, internal audit, cash control, external audit

• Correction: Includes developing and implementing solutionsto close the gaps identified during detection. Effective com-munication and monitoring is a part of this. The result is achange in policies and procedures

These are clearly not mutually exclusive stages – a preventive measure,such as a portfolio report, could also be a way to detect risks. Similarly,a detective measure could result in the development of better ways toprevent risk. While MFIs employ a number of ways to maintain con-trol over their operations, the critical ones covered by this study are

• Portfolio control• Internal audit

PORTFOLIO CONTROL

MFIs provide small loans to a large number of clients and are therebyhandling a large number of transactions. The sheer volume of transac-tions requires that risk be reduced both before disbursement – throughclient appraisals – as well post-disbursement through a regular andcomprehensive portfolio tracking system.

Portfolio control thus performs the preventive and feedback functionin the larger internal control system and this is what makes it such acritical aspect in microfinance operations. Tracking enables regularmonitoring of both financial (credit and liquidity) as well as opera-tional (transaction and fraud) risks while also giving a picture of opera-tional performance.

INTERNAL AUDIT

“Internal auditing is an independent, objective assurance and consultingactivity designed to add value and improve an organization’s operations. Ithelps an organization accomplish its objectives by bringing a systematic,disciplined approach to evaluate and improve the effectiveness of risk man-agement, control, and governance processes” – The Institute of InternalAuditors, USA


57Internal control for risk management…

CONTROLENVIRONMENT

RISKASSESSMENT

CONTROLACTIVITIES

INFORMATION& COMMUNICATION MONITORING

FIGURE 6.1 – COMPONENTS OF INTERNAL CONTROL

This component of internal control focuses on evaluating the opera-tions ex-post for risk management and compliance. The board uses theinternal audit report to make policy decisions, which lead to furtherimprovement and implementation of control measures. The results areusually confidential and, to avoid any bias, the internal auditor reportsdirectly to the board.

In the business of managing money, good internal control systems arecrucial to ensure process and financial compliance and to maintain reg-ulator and investor confidence.


Most MFIs have procedures built into their operations that act as con-trol measures. However, these are usually informal and their relevanceas risk-mitigating elements is not recognized. Such procedures aredesigned to facilitate proper targeting, credit appraisal, smooth flow offunds, mitigate credit risk and provide critical points for monitoring.

Most institutions recognize the need for a formal control mechanismonly after a significant event of misappropriation of funds or if there isa serious malfunction in the MFI’s operations. The latter is more likelyto occur as the portfolio and client base expands.

As the portfolio is an MFI’s largest asset, tracking it is the most basicpreventive measure that MFIs have. However, a large proportion ofMFIs in India do not have comprehensive portfolio control and track-ing systems. While the average tracking system at present does providethe MFI information on the volume of its portfolio and repayments, itis usually unable to provide accurate information on critical aspectssuch as overdues and delinquency. Due to the malfunctions mentioned

earlier, or due to visionary governance, most large MFIs have recog-nized and installed portfolio-monitoring checks into their basic collec-tion reports and managerial processes.

Only a small number of MFIs have developed the detective measure of internal audit. Most are either deterred by the associated increase in costor rely more on “faith” in staff. Where they exist, MFIs use this functionto ensure policy compliance and proper recording to prevent frauds. Inmost cases, since there is no concept of audit charter, functional objec-tives and procedures are poorly defined.

Internal audit teams could be comprised of the staff of other branches, orthe operations manager alone. The periodicity of audits ranges from anoccasional visit to regular planned visits. The scope of the audit rarelyincludes head office auditing and is usually limited to field and portfoliooperations. Financial audits are regarded as the domain of the externalauditor.

Reporting, once again ranges from informal telephone discussions tostandardized detailed reports. The degree of sophistication of the inter-nal audit is usually a function of the professionalism and skill of the topmanagement or the vision of those responsible for the MFI’s governance.

6.2 ILLUSTRATIONS OF BEST PRACTICE: PORTFOLIO CONTROLS

This section illustrates some of the best practices through which insti-tutions ensure that their control systems cover both pre-disbursementas well as post-disbursement aspects of operations.

Internal control for risk management

…

6.1

INTRODUCTION

TO INTERNAL

CONTROL

CLIENT APPRAISAL

Prevention begins with the client appraisal process. SKS uses a low costand quick method of appraisal that does not require substantial staffskills. Its Sangam (branch) managers appraise individual loan applica-tions as well as corroborate data with other members of the group, whoare the guarantors. The application is further discussed in the weeklystaff meeting. These multiple levels of subjective evaluation ensurethat potentially risky applicants are not sanctioned loans. However, theprocess is not very accurate in terms of assessing the cash flows of theborrower in relation to her ability to repay loans.

Samruddhi’s client appraisal technique is more detailed though itrequires specialized skills and is undertaken by the FX. The FX reviewseach application in terms of the credibility of the applicant in the mar-ket and his/her experience in the activity. A cash flow is prepared forthe applicant, taking into account household income, income from theactivity, expenses and other debts of the applicant. Similar to SKS,Samruddhi also examines the intent and liquidity of the co-obligant(guarantor). For Samruddhi, this process is especially critical as it basesits repayment schedule directly on the borrower’s cash flow.

Samruddhi also appraises the applicant’s project in terms of the targetmarket, infrastructure, technical feasibility and skill required for theproject. Other external risks such as operating environment, govern-ment policies and competition are also considered.

LOAN UTILIZATION

Besides loan and client appraisal SKS also follows up on the utilizationof loans within a week of disbursement. SKS believes the loan should

be used immediately as a delay would mean a loss of income and theborrower would be unable to pay the first installment. If the money isnot used the member has the option of coming to the Sangam meetingwith the money and stating the reasons for not using it. If she feels thatit is possible for her to use the loan, the Sangam Manager may, athis/her discretion allow her to retain it for one more week. However,this is not allowed beyond the second week. If the unused money is notpresented before the meeting but remains unused then the member isliable to pay the installment and interest due on it. Enforcing utiliza-tion is the responsibility of the group leader and the Sangam Manager.At every meeting, members are reminded of the purpose for which theyhave taken a loan and that there should not be any cross-usage.

While SKS relies on peer pressure, Samruddhi relies on the FX and theCSA to ensure that the loan is used immediately and properly. Often itmay involve approaching the supplier, from where the borrower isexpected to acquire machinery, inputs or any other commodity forwhich the loan is extended. If a borrower has failed to use the loanamount as expected and the CSA/FX suspect that there is no intentionof doing so, the borrower is made to repay the entire loan amountimmediately. The CSA and FX can take the help of the Unit Head forthis purpose. Documentation and reporting of loan utilization is a sys-tematic and well laid out process at Samruddhi.

DETECTION OF OVERDUES

At CFTS, overdues are detected immediately in the field as this is thefirst line of defence against risk. The pre-printed collection sheets gen-erated by the Portfolio Tracker require the Field Worker simply to can-cel out any payments that he/she has not received. These stand out asanomalies and are immediately discussed during meetings. To discour-



age delinquency, members of the overdue client’s group have to pay Rs2per week and other members in the same Centre have to pay Re1 perweek. Thus the collection of overdues is largely by peer pressure.

Samruddhi too, instructs its CSAs to carry the borrower due reportupdated every month. This consists of a list of two types of borrower:one, whose loans are due during the period and second, whose loans areoverdue. This gives the exact amount to be collected from each borroweron the due date. It also includes a column on Interest Due Per Day(IDPD) which shows the additional interest amount to be collected ordeducted for any delay or advance payment from the specified date.

PORTFOLIO TRACKING

Portfolio tracking information is provided to the CFTS and SKS man-agement in the monthly branch performance report while the UnitHeads at Samruddhi see this information online or through a numberof reports including the overdue report. Both these reports include age-ing statements. Besides operational tracking of the portfolio,Samruddhi also uses tools to generate further information on the per-formance of the organisation’s productive assets as a whole. Theseinclude tracking the loan NPA over the years and monitoring themovement of overdues.

Dealing with overdues is a control activity that is closely integratedwith the environment established in the organization. SKS has a zero-tolerance policy that is clearly communicated to its clients: In case amember does not attend a meeting or attends and does not pay herinstallment, the group is asked to pay the installment. If the group isunable to pay, the whole Centre becomes responsible for paying theloan. If the Centre does not pay the loan, the Centre Manager stays

until nightfall, if necessary, to collect the loan. Prior to leaving in themorning, Centre Managers record their departure and destination inthe branch’s Movement Register. Upon their return in the evening,when the other Centre Managers see that one Centre Manager has notreturned within the expected time, they go to the delinquent Centreand join the other Centre Manager. This is followed up by a visit fromthe Branch Manager.

While reports provide the basis for the tracking of delinquency, theorganizations also have a systematic and standardized follow-up proce-dure that is communicated and followed meticulously. At Samruddhi,the overdue report is generated by the FX on the 10th day of eachmonth and followed up along with the CSA. On the 15th the UnitHead analyses and follows up with the FX on the status of overdues. Asecond follow-up is then scheduled on the 25th of the each month. Theexact process to be followed differs from one age category to another.As the loan gets older, the senior management gradually takes over.Thus, for a 1–30 day-old loan, overdue collection is done mainly by theCSA, for 31–60 day overdue loans the FX is responsible for collectionwhile for loans in 61–90 day category, collection is primarily theresponsibility of the Unit Head. These responsibilities are well laid outand documented to ensure that overdues are dealt with regularly.

6.3 INTERNAL AUDIT

6.3.1 CFTS

The Internal Audit Department (IAD) at CFTS has the general pur-pose of determining whether or not the organisation’s business is beingconducted according to the operations manual, particularly with


…

6.2

ILLUSTRATIONS OF

BEST PRACTICE

respect to financial management and internal controls. Besides being adetective process, CFTS’ audit also functions as a corrective means. It istermed as a constructive and learning experience for all those con-cerned.

In consultation with the Executive Chairman, the IAD decides uponthe visit schedule. This is confidential and knowledge of it is restrictedto the two decision making parties. A branch audit takes about twoweeks during which the team stays at the branch and collects informa-tion through both formal and informal channels.

The internal audit process is clearly laid out in the operations manualand incorporates checks for both process and financial compliance.Some of the aspects included are

• Cash verification and cash handling process compliance • Verification of transfers from the Branch Office to the District

Office including disbursement records, collections against dis-bursements, salary payouts, branch reconciliation and trial bal-ance verification. This also includes sample Centre audits withat least one Centre per field worker. The visits are usually dur-ing Centre meetings and take the form of surprise checks

• Process and financial compliance of fund management• Verification of branch assets and supplies

The output of the audit exercise is an Audit Report. The Report hasthree main sections

1 An Executive Summary giving an overview of the findings2 Critical findings of the audit team that need to be addressed

immediately3 Other findings and observations

The report is sent directly to the Executive Chairman with copies givento senior management. The report along with an Audit ComplianceRequest is also sent to the supervisor of the audited branch. It detailsthe findings in the report and asks for specific changes to be made byspecific dates and for an Audit Compliance Report to be submitted tothe management within three months of receiving the request.

On receiving the Audit Compliance Report, the senior managementwould request a short follow-up audit.

CFTS’ internal audit is a secondary level of control. It builds on the pri-mary control activities that are part of the organisation’s procedures.Therefore, the purpose of the audit is simply to check whether the con-trol procedures embedded in the operations are actually functioning ornot. As an additional indicator for management, the standardizedreport format prioritises risk and allows for horizontal as well as longi-tudinal comparisons between branches.

6.3.2 SAMRUDDHI

Samruddhi’s operational spread poses a significant problem in terms ofinternal control. An internal audit department such as that of CFTS, isnot feasible for Samruddhi’s widespread operations. It has, therefore,developed the concept of Independent Local Auditors (ILAs).

As soon as a unit is established, local chartered accountants are identi-fied and the senior management appoints an ILA. Microfinance orien-tation is provided to the ILA along with Samruddhi’s operationsmanual and a booklet that lists the areas that they need to audit alongwith the scope of the audit. There is also a system of holding annualmeetings of all ILAs in which the progress and potential areas of



improvement are discussed. This meeting is also used by the organiza-tion to introduce new policies pertaining to internal audit.

The process entails the internal audit being undertaken each month.The main areas audited are – cash, loans, disbursements, business planand capital expenditure. Both the old and the new portfolio are exam-ined on a sample basis. A field visit is mandatory, checking at least 30borrowers. Focus is placed more on credit policy compliance and thechecking of reports generated by the MIS.

The ILA submits a quarterly report to the Audit Committee with acopy to the Unit Office. The committee, comprised of two directors,discusses the report and along with the Group Associate Vice President.The issues highlighted in the report are referred to the OperationsManager for follow-up. He then issues a letter to the Unit Head alongwith a copy to the ILA. While the Unit Head is given 15 days torespond to the variances reported by the ILA, if the matter is urgent itis sorted out through a conference call between the Unit Head, seniormanagement at the Head Office and the ILA.

This process of using ILAs is a low-cost approach as travel is signifi-cantly reduced. Besides this, the local resident status of the ILAs oftenhelps facilitate Samruddhi’s relationship with local banks. The accessi-bility of the ILA often means that the Unit Head frequently interactswith him/her regarding statutory financial or legal requirements associ-ated with managing the portfolio. However, the latter also increases thechances of collusion between the unit and the ILA and the decentral-ized process limits Samruddhi’s control. To deal with this, Samruddhi’sexternal audit includes an independent verification of the units to sup-plement the regular visits of Head Office managers.

Samruddhi’s ILA concept is useful for organizations that are geographi-cally dispersed and have decentralized operations. However, for the ILAmethodology to function effectively the organization should have a pro-fessional control environment, established control policies and proce-dures, well developed information systems and clear mechanisms to checkthe performance of the ILA.


…

6.3

INTERNAL

AUDIT

6.4 ENSURING RISK MITIGATION

Since microfinance is an activity with large volumes of small transac-tions, practitioners must put in place internal control mechanisms toprevent and detect fraud and to avoid deviation from organizationalnorms. The sample institutions described above have employed thefollowing practices to make their internal control mechanisms efficientand effective.

CONTROL ENVIRONMENT

• The Board has an Audit Committee or a member responsiblefor internal audit to keep a check on the Internal Audit teamand lend it greater credibility. For instance, the chairman ofCFTS is responsible for internal audit.

• The internal audit department reports directly to the boardand reports cannot be influenced by senior management. Thiscreates an environment of autonomy and fair play amongstthe junior staff and management. At Samruddhi the ILAsreport directly to the Audit Committee

• An environment of zero-tolerance for misappropriation offunds. For example, CFTS has dismissed staff members whocommit fraud.



RISK ASSESSMENT

• Multiple levels of evaluation including corroboration of clientdata with guarantors and drawing from the experience ofother staff – SKS Sangam managers appraise applicationsindividually, with group members and discuss them withother staff in meetings

• Cash flow based appraisal to determine absorption capacityand repayment potential – Samruddhi uses this to establishrepayments schedules for its clients

• Assess the ability of the co-obligant to repay. For instanceSamruddhi examines the intent and liquidity of the co-obligant

• Monitoring geographical diversification of portfolio to reducethe risk associated with excessive concentration in a single area

• Tracking the movement of overdues through an ageing analy-sis to assess delinquency risk – Samruddhi also tracks the non-performing assets over the years

CONTROL ACTIVITIES

• Stipulated maximum period for loan utilisation – throughexperience SKS requires members to use loans in one week asfurther delay leads to utilisation for other activities

• Thorough loan utilisation checks – Samruddhi may checkwith the supplier from where the borrower is expected toacquire the machine, inputs or other commodities that servethe purpose for which the loan is extended

• Standard process for dealing with non-utilisation. Forinstance, if a member of SKS has not used the fund withintwo weeks she is liable to pay the instalment anyway. AtSamruddhi, if a borrower has failed to use the loan amount asexpected and has no intention of doing so, the borrower is

made to repay the total loan amount immediately• Quick field level detection of overdues. For example the pre-

printed collection sheets and recording process at CFTSimmediately highlight the overdues in the meeting

• Zero tolerance policy to ensure ontime payment – SKS has apolicy of not closing centre meetings in the village until therepayment is collected

• Standardised follow-up process – at Samruddhi, the opera-tions manual gives clear responsibility for follow-up accordingto the age of the overdue

INFORMATION AND COMMUNICATION

• Documented process for an organisation with an internalaudit department – CFTS has a section on internal audit aspart of its operations manual. Samruddhi provides its ILAswith brochures on the main areas that they need to cover

• Orientation to operations for internal auditors. For example,Samruddhi’s ILAs are provided with a copy of the operationsmanual and also conducts an annual Auditors Meet to shareexperiences

• Result of audit shared with branch. Both CFTS andSamruddhi send a copy of the audit report to their branchesfor follow up action

MONITORING

• Audit compliance follow-up – Samruddhi has a conferencecall with the ILA and Unit Manager to discuss the actiontaken, while CFTS requires branch managers to submit anAudit Compliance Report

6.5 EMERGING TRENDS

Due to the growing size of Indian MFIs, increasing attention is beingpaid to internal control as a critical management function. This has ledto a number of new developments that, though nascent at this stage,point towards the emerging scenario.

Some of the developments that deserve mention are

• Involvement of the Board of Directors and senior manage-ment in control activities: As a result of the growing impor-tance of internal control, board members and seniormanagement are being made directly responsible for oversee-ing/managing control systems. The concept of an AuditCommittee of the Board is becoming accepted and enables aclear delineation of internal control from other operations.

• Separation and professionalisation of the audit team: Untilnow, most MFIs have treated internal audit as ad-hoc checkswhich were conducted by the senior management and someother 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.

• Operations/internal audit manual: To communicate issuesrelated to operational policy and to ensure proper compliance,MFIs are developing detailed operations and audit manuals.This is resulting in better understanding of policy at the oper-ational level and is making it easier to spot non-compliance.Recording and transaction management procedures areincreasingly being clearly laid out to regulate compliance.

• Business planning: To monitor target achievement andprogress, MFIs are introducing comprehensive business plan-ning procedures with participation from all levels of the orga-nization. This results in realistic plans that have the support ofoperating staff. Such plans help in spotting variances for initi-ating detailed checks and corrective measures.

Overall, microfinance in India is currently moving towards better risk assessment and mitigation tools that prevent, detect or facilitatecorrection.



65Internal control for risk management

7 Financial management & accounting policies

7.1 INTRODUCTION


“Financial management is concerned with the acquisition, financing andmanagement of assets with some overall goal in mind.”17

It is evident that financial management, with its three sub-functions, isa critical management issue for all MFIs. Financial management relatedto acquisition includes investment decisions on the asset compositionas also disinvestment decisions related to reduction or disposal orreplacement of assets that are no longer required.

Financing decisions relate to the liability and equity side of the balancesheet. Issues such as the leverage of the MFI (debt to equity ratio), div-idend payout and raising capital are all part of financing decisions. Thedetermination of sources, maturity and cost profile of debt are otherimportant financing decisions that need to be taken after consideringclaims to assets and other conditions that may be imposed by lenders.

Asset management decisions particularly involve the management ofcurrent assets. For MFIs, issues related to portfolio quality are the mostimportant asset management decisions. Further, consideration of the liq-uidity of assets is also important. Apart from studying the maturity pro-file of assets, financial managers must also study the costs of maintainingassets and the potential returns to them in order to make informed deci-sions that affect the profitability and sustainability of an MFI.

For the purpose of this study, financial management practices under-taken by MFIs are analysed in terms of

• depth and quality of investment, • financing • asset management

Apart from financial management, this section also considers account-ing practices. Accounting refers to the recording, classification andsummarising of economic events resulting in the consolidation of infor-mation and presentation of financial statements that can then be usedfor decision-making purposes. It is guided by certain universal princi-ples though accounting practices are open to interpretation even whileseemingly adhering to the principles. This has become apparent fromrecent accounting scandals that have affected the world economy. Thesound use of policies and disclosure of financial information is key to allfinancial management decisions. Poor accounting practices lead toinaccurate financial statements and, in turn, sub-optimal decisions.

The emphasis here is on accounting policies and reporting while therecording and consolidation of financial information was covered inSection 5. In this section, accounting practices are analysed based onthe accuracy of disclosure and the principle of conservatism in thereporting of financial information. Thus, the guiding principle used inanalysing accounting policies is that information should be disclosed indetail and prepared in such a manner that assets and income are notoverstated even while expenses and liabilities are not understated.

17 Horne, VHC. and Wachowicz, JM, 2000. Fundamentals of Financial

Management. Prentice-Hall of India


Most Indian MFIs merge financial management with other functionalareas that are the responsibility of the senior management. Thus, thefinancial management function is not separated from the operationalmanagement. Mechanisms that enable good financial analysis are also,often, not in place. Instances of MFIs undertaking common size analy-sis or examining financial statements for the purpose of decision-mak-ing are rare.

Even when financial analysis is undertaken, the focus is on generatingreports for donors. While some reports are also for internal purposes,these often have little significance from a financial management per-spective. In these cases, the information is generally not used for analy-sis or any decision making but only on presenting financialinformation as a formality. This results in financial decisions that, whilepossibly being acceptable, may not be the most efficient in the particu-lar circumstances of the MFI.

This lack of appreciation of the need for financial management skills inMFIs is a matter of concern. With increasing scales of operation andmore complex financial products, MFIs need to place greater emphasison enhancing technical capabilities to undertake financial management.Further, the ever-increasing scale of transition since the late 1990s fromlargely grant-based operations to more debt-financed operationsrequires a parallel improvement in financial management techniques.

With the growth, gradual mainstreaming, a larger scale of conversion tolegal structures that entail greater regulation and skill improvement in thesector, a small but growing band of MFIs is taking the lead in changingthe outlook towards financial management. Separating this function

(along with accounts) from operations is one step that some MFIs havetaken. A few have gone further and introduced formal mechanisms forfacilitating financial analysis of consolidated as well as branch operations.

Proper investment management of idle funds for optimal returns, a sys-tematic approach to fund raising and planned portfolio diversificationare some other initiatives being taken. While not every one of thisselect group of MFIs may be following what could be termed ‘bestpractices’, the trend is positive and leads to a slow but growing recogni-tion of the need to improve standards and practices with regard tofinancial management.

In terms of accounting policies, the situation is similar. Most externalauditors used by MFIs in India generally do not add value to the auditexercise and the establishment of appropriate accounting policies suf-fers. Most MFIs have emerged from multi-service, grant-driven NGOsand even after the establishment of a sizeable microfinance programme,the accounting practices of such institutions are not adapted to thechanged requirements. Thus, for multi-service organisations, separatefinancial reporting of microfinance operations is not very common.From the M-CRIL database only 25% of the 67 multi-service organisa-tions rated, prepared separate financial statements for microfinance.Even in these institutions, cost allocation is, usually, not fully accurate.

As a result, provisioning (for loan losses in particular) and asset qualitymonitoring that are important for any financial intermediation activity areoften not undertaken. Financial disclosures other than asset quality aregenerally not provided; it is common to find financial statements whereaccount heads are insufficiently detailed, making it difficult to analyseaspects such as the level of dependence on subsidised versus non-sub-sidised loans.


67Financial management & accounting policies…

The treatment of grants received, as operational income is also very com-mon. This inflates operational profit figures and creates a false sense of com-fort about the sustainability of microfinance operations. Here also, a gradualshift in approach is taking place and a few MFIs are moving towards theadoption of sound accounting practices and financial reporting.

The following are some illustrations of institutions that are setting pro-gressive trends in financial management and accounting practices.

7.2 ILLUSTRATIONS OF BEST PRACTICE: FINANCIAL MANAGEMENT

7.2.1 SPANDANA

Spandana is a fast growing and progressive MFI that has developedmost of its operational and financial systems through experience andtesting. The organisation had around 23,500 clients as on 30September 2002 up from 16,400 clients as on 31 March 2002. Evenwith this scale of operations it handles its MIS (refer to Section 5) andfinancial management needs through manual systems and procedures.

Spandana’s financial management systems stand out when viewed inthe context of the relatively low degree of computerisation that theywork with. Despite this, the organisation has evolved relatively efficientways of generating information and has evolved basic, but effectivefinancial management and analysis techniques.

Considering investment activities, Spandana’s high growth rate hasmeant that its asset distribution is inevitably concentrated (90%) on itsmost productive asset, loans to clients. Given the high and growing

demand for loans in its operational area, Spandana has chosen to deferany increase in its fixed assets. The focus on meeting client creditdemand has resulted in a low investment in computerisation – the lackof both hardware and software customised to meet the organisation’sneeds. Even in the foreseeable future, Spandana intends to maintain anasset composition that does not have non-portfolio assets (includingfixed and short term assets) at levels greater than 15–20% of totalassets. This strategy – partly driven by high levels of credit demand –ensures that assets are productively utilised and yield maximum returnseven while serving large numbers of loan clients.

With regard to the financing of its fast growing portfolio, Spandana’sstrategy incorporates the following elements

• Reliance on commercial sources of funds since the organisa-tion believes that, in the long-term, this is the only way to findthe resources necessary to fuel its growth

• Diversification of sources of funds to lower the funding risk;by 30 September 2002, Spandana had seven major institu-tional creditors. Spandana is also considering raising preferredequity from institutional lenders as it transits into a non-bank-ing legal form; discussions have also taken place with a pro-posed microfinance investment company for raising equity

• Simple spread sheet-based cash planning for debt servicing –this sheet consolidates information on loans from all lendersand provides a quarter-by-quarter disaggregation of expectedoutflows; use of pivot tables is planned to enable a summarisedand flexible presentation of information

• Focus on long-term financing relative to the current nature ofmost of its loans – as a result the working capital managementand liquidity concerns related to debt servicing are minimised

• Loan linked savings products (Siri savings) – to provide stabil-

Financial management & accounting policies

…

7.1.2

SECTOR

PROFILE

ity to the liability structure and reduce the liquidity pressurecreated by the recently introduced voluntary savings product(see Section 4)

• Careful monitoring of financial risk through basic ratio analy-sis to track its leverage, capital adequacy and debt servicingposition – this monthly analysis is undertaken branch wise andthen consolidated.

Maintaining portfolio quality is accorded the highest priority in theorganisation and is reflected in the high levels of discipline evident inall aspects of Spandana’s operations. In terms of asset protection, theorganisation uses risk mitigation measures for its portfolio. These mea-sures include having a mix of urban and rural loans in its portfolio sup-plemented by social security (insurance) products (refer Section 4) thatprovide some protection to both the borrower and the organisation.

Within the urban portfolio, there is considerable diversity with over ahundred sub-categories of enterprises financed. Portfolio monitoring byactivity is also undertaken regularly to maintain a check on and reducecovariant risk. The MFI’s internal control measures (including internalaudit by a specialised team) constitute another means of asset protection.

For short-term cash management, expected inflows from loans are esti-mated and monitored weekly and decisions taken after considering theexpected outflows towards loan disbursements and expenses. Simple,easy to produce, weekly report formats facilitate this decision makingprocess. For long-term planning, Spandana uses detailed financial pro-jections that are revised periodically.

Tracking and analysis of income statements, balance sheets, past fund-flow statements, financial ratios and trend analysis are undertaken on a

quarterly basis. In order to track the sustainability of the institution,Spandana, undertakes monthly analysis of its income statement(branch wise and consolidated) using adjusted costs for inflation(impact on the real value of equity), subsidised funds (affecting finan-cial costs) and in-kind donations (affecting operating costs or cashflows mainly for fixed assets received in-kind).

Regarding the cost of managing assets (primarily the loan portfolio),Spandana keeps a close track of staff productivity. Profitability and pro-ductivity ratios are tracked very closely, resulting in healthy competi-tion between branches in reaching the highest levels of growth whilemaintaining portfolio quality. Branch level economics are also workedout in detail as part of its expansion and cost control strategy (referSection 3). For the organisation as whole, a breakeven analysis has beenundertaken to understand the implications of growth on the financialmargin it earns from its operations.

7.2.2 SAMRUDDHI

In terms of financing strategy, Samruddhi is a model MFI on accountof its fund raising capability. It has the largest equity base of all MFIs inIndia and its management believes that a sound capital base is essentialfor undertaking any financial services activity. To achieve this,Samruddhi has mobilised equity funds of Rs20 crores from variousIndian and international financial institutions. This has been madepossible by ensuring that the systems employed by the MFI meet thestrict norms of any due diligence conducted by these institutions.

The organisation takes a long-term view of fund-raising and believesthat there is a lag time of at least a year between mobilisation efforts andthe actual fund coming in. Therefore, it starts fund-raising a year in



advance of the projected requirement. In making an assessment of thequantum of its funding needs, it relies on its comprehensive budgetingand planning system.

Portfolio and investment management functions in Samruddhi are in-built to the two tiers of its fund management system: unit fund man-agement and central fund management.

FUND MANAGEMENT AT THE UNITS

The fund needs of Samruddhi’s unit offices are met from three mainsources

1. Client repayments: Repayments have to be reported onthe same day and any laxity on this is penalised2. An overdraft facility against the security of fixed deposits(FDs) is used when repayment funds are inadequate. Earliercash was transferred from the Head Office (HO) to branch asand when required. This resulted in huge bank draft charges.Then it was suggested that branches make FDs and retain cashbut the amounts held were smaller with low returns and hightransaction costs. Also, the units resorted to retaining largecash balances anticipating disbursement. The system waschanged and FDs worth Rs10 lakhs ($20,000) were put in afew select accounts against which the units are given an over-draft facility. To ensure appropriate utilization of the overdraftfacility, the Unit Head has to provide detailed explanations tothe senior management at the HO.3. Head office: The last resort for funds is the HO since theoverdraft is limited. For the transfer of funds from the HO, arequest has to be made in advance and a week is required forcompleting the transaction.

On an average each of Samruddhi’s branches have 4–5 bank accounts.Cash limits for these are set at approximately Rs1 lakh ($2,000) perbank account. If there is an excess amount in the bank, it is convertedto an FD. The Independent Local Auditors (ILA – see Section 6 formore details) have to report all exceptions and the number of days thebranch bank balances are in excess of specified limits. An excess amountin the bank with respect to limits affects the performance assessment ofthe Unit Manager.

To hedge against any deterioration in asset quality, Samruddhi has asystem of diversifying its portfolio across sectors and geographicalregions. There are limits to exposure under various loan categories andthese are maintained strictly. The Unit Heads at Samruddhi also moni-tor the geographical diversification of the portfolio to ensure that nottoo much is concentrated in a village or area. The report generated bythe system provides village-wise information on the number of loanaccounts, the outstanding amounts in those accounts and the repay-ment rate. For Samruddhi, it is important to track these aspects of theportfolio as a CSA could try and build a large portfolio in a single vil-lage to reduce travel costs. Such a situation would multiply the organi-sation’s risks.

CENTRAL FUND MANAGEMENT SYSTEM

The HO’s comprehensive cash and investment management systemintegrates the unit fund requirements and the organisation’s repaymentobligations with investment planning to optimise the use of funds.

Repayments and disbursements are tracked on a daily basis from allbranches to determine detailed fund requirements. A daily cash balancereport and weekly bank statement from all units is submitted to the


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7.2

ILLUSTRATIONS OF

BEST PRACTICE

HO. The details of investments with maturity dates are compared tothe debt servicing obligations for the next two months. Investments aremade keeping the safety, liquidity and returns in mind, in that order ofpriority. Most funds are placed in FDs with banks and exposure to anyone bank cannot exceed 20% of Samruddhi’s equity base. All cashshortfalls for emergencies and repayments are covered from a credit linetaken from ICICI bank. Since Samruddhi pays interest at the rate of13.5% per annum on this credit line, it makes repayments on the over-draft a priority.

Loans are not prepaid even if there is adequate cash for this purposeand despite the fact that Samruddhi’s investments yield lower returnsthan the cost of funds. This is done because the transaction cost forobtaining loans is much higher than the difference between the invest-ment yield and cost of funds.

7.3 ACCOUNTING POLICIES

In terms of accounting practices, examples for different aspects can betaken from several institutions. For recording and accountingtreatment, most MFIs follow the accounting policies laid down by thelaw. Revenue recognition is based on cash (except in the case of Non-Bank Finance Companies some of which follow accrual based incomerecognition, as permitted by law) while cost is recognised on theprinciple of accrual.

For multi-service organisations, there is a problem of allocating com-mon costs. In this aspect, SKS has an elaborate system of tracking thetime allocation of staff to various services or programmes and appor-tioning the cost of the resources accordingly. This leads to an appropri-

ate allocation of common resources over the different programmes ofthe organisation.

External audit is also an area where MFIs are moving towards a moreformalised process. Samruddhi has a formal external audit contractingsystem which sets out the audit process as well as the non-critical areasthat the external auditor has to cover in the audit.

Samruddhi’s disclosure practices are amongst the most comprehensivein the MFI sector. The annual statement of accounts contains a histor-ical performance analysis on key parameters like growth in loanaccounts. Also presented is a disaggregation of the portfolio by unit andproduct. Trends in financial performance are analysed by key prof-itability ratios like the return on assets, return on equity, operationalself-sufficiency and financial self-sufficiency. Some other key disclo-sures that Samruddhi makes are as follows:

• The basis for the preparation of statements• Revenue recognition• Fixed asset costing• Depreciation method• Aging statement for the portfolio • Policy for making provisions and reserves• Policy for writing off loans• Method of calculating employee benefits• Foreign exchange transactions• Share capital

These disclosures provide a range of information that a regulator, ananalyst or a lay reader would need in order to understand Samruddhi’soperations.




7.4 EFFECTIVE FINANCIAL MANAGEMENT

Good practice in financial management and accounting providesfinancial benefits, long-term direction and stability to the operationsof microfinance institutions. Clear accounting policies contribute todisclosure and transparency in terms of reporting financial perfor-mance and providing an accurate reflection of the financial position ofthe MFI. Emerging lessons from the sample institutions include

INVESTMENT

• Careful investment planning based on a realistic assessment ofsafety, liquidity needs and returns in that order

• Limits on exposure to a particular instrument or institution• Limits on non-portfolio assets to less than 15–20% of total assets

FINANCING

• Comprehensive planning with scientific forecasting• A long term planned approach to fund-raising; proper contingency

measures like cash credit facilities• A financing strategy that entails use of multiple and stable sources of

funds leading to funding risk mitigation – Samruddhi has structureditself in a legal form (NBFC) that permits the greatest access to capi-tal markets and under certain regulatory conditions, to depositsfrom the public; its strategy has involved developing relationshipswith multiple lenders, mobilising equity capital from internationaland domestic investors even while retaining management controlthrough the use of a holding company. Spandana’s strategy entailsthe use of multiple sources of funds – relationships are nurtured witheach of the lenders and new strategic relationships explored with

other sources including potential equity investors • Analysing working capital needs and maximising efforts to attain a

stable liability structure – even while generating sufficient fundswith an optimal cost and conditions; for both Samruddi andSpandana, use of a mix of development and commercial investorshas meant a stable liability structure

ASSET MANAGEMENT

• Clear strategy to protect and manage assets through measures such asinternal audit, portfolio tracking, portfolio diversification and clientlevel insurance – Spandana has developed a coherent strategy forprotecting its asset quality and also for controlling the costs relatedto managing its portfolio through operational procedures, branchlevel and organisational economic analysis and monitoring of pro-ductivity, cost and profitability ratios.

• Use of current accounts for collection as is done by IASC• Limits for branch office bank accounts

ACCOUNTING

• Cash basis for recognition of interest income on loans except incases where loans are repayable in quarterly, half-yearly or yearlyinstalment basis – cash based recognition of income is a commonlyused practice and represents a conservative way of reportingincome

• Treating grant inflows as non-operational income and reportingthese inflows after determining operational profitability –Spandana uses this basis clearly separating non-operating incomefrom operating income

• Providing a detailed disclosure statement with regard to theaccounting policies adopted and also providing details of each

7.5 EMERGING TRENDS

Financial management and accounting are inter-related key functionalareas for all institutions engaged in financial intermediation. With agreater scale of operations, increased reliance on commercial funds andon for-profit institutions that provide a platform for attaining high levelsof outreach, financial management is now attracting the requisite degreeof attention. The trend to commercialisation – along with the recent cri-sis of confidence in corporate accounting in the US – is also leading togreater recognition of the need for sound accounting practices.

With the scaling up of operations and conversion to more mainstreamlegal structures (such as NBFCs) the following trends can be observedin financial management practices

• Separately dedicated professional staff and department forfinancial management: A few institutions have started creat-ing a separate, dedicated department to deal with financialmanagement. Typically, such departments are headed by ChiefFinancial Officers (or equivalent positions).

• Cash management is fast becoming an important aspect offinancial management in microfinance. Clear cash transferprocedures, specific cash holding limits and emphasis on theoptimal utilisation of excess cash are becoming the norm inmost progressive MFIs

• Cheque based disbursement and repayment: Some MFIs arenow moving towards a cheque-based system of loan disburse-ment and repayment. IASC has also introduced the concept ofusing current collection accounts for receiving repaymentsfrom remote areas. Apart from enhancing cash control, thisreduces the delays in encashing cheques and allows for thespeedy transfer of cash.

• Accounting: Documented accounting practices with increas-ing emphasis on disclosure. In multi-service organisations,there is also a trend towards making separate statements fortheir microfinance divisions.

However, a more widespread application and appreciation of the needfor financial management techniques and of sound accounting prac-tices, is still required. MFIs need to allocate specialised humanresources for financial management and to develop their skills. Suchteams should deal with investment, financing and asset managementdecisions on a day-to-day basis. Accounting policies need to ensure thatthe preparation of financial statements, the basis for all financial man-agement decisions, is transparent and reflective of the true financialposition of the organisation. Such a focus will enable MFIs analysetheir balance sheets in a more appropriate and efficient manner andmanage the organisation’s risk accordingly.


73Financial management & accounting policies

account head through schedules to the financial statements –Samruddhi has a very detailed annual report that clearly outlinesits accounting policies on income recognition, provisioning, write-offs, depreciation and also shows the disaggregated account headsthrough schedules to the financial statements

• Standardising and clearly defining the scope of an external auditthrough the use of a formal contracting system – this is being doneby Samruddhi in a professional manner

8.1 INTRODUCTION


Human resource management is “a process consisting of the acquisition,development, motivation and maintenance of human resources.” 18

People enable an organization to operate. In microfinance, due to theabsence of the mechanization that is associated with production organ-isations, people take on an especially significant role since they under-

take all activities that generate revenue. This makes managing humanresources, an important part of an organisation’s operations.

The components of a human resource management system are illustratedin Figure 8.1. The acquisition, development, motivation and mainte-nance of human resources are all important elements of the system andmust be undertaken in the context of prevailing external influences.

• Acquisition: The management ensures that it has the rightnumber of the right kind of people at the right places and atthe right time. Acquisition therefore includes, human resourceplanning, recruitment and employee orientation.

• Development: The skills of the people in an organization needto keep up with the needs of the organisation in relation toimproving the techniques and technology available for opera-tions. The development component takes into account train-ing for skill improvement and career development.

• Motivation: High performance depends on both ability andmotivation. Motivation is affected by the job design, perfor-mance evaluation, compensation and discipline within theorganization. An effectively motivated employee who has con-temporary skills and knowledge can be expected to be a com-petent employee.

8 Human resource management

FIGURE 8.1 – COMPONENTS OF HUMAN RESOURCE MANAGEMENT18

DEVELOPMENT

ACQUISITION

MOTIVATION

MAINTENANCE

18 DeCenzo DA & Robbins SP, 1997. Personnel/Human Resource Management.

Prentice-Hall of India

EXTERNAL

INFLUENCES

• Maintenance: The objective of this last major component is toretain people who are performing well. This requires that theorganization provide a stimulating work environment and safeand healthy working conditions. Maintenance is a theme thatis reinforced by the development and motivation components.

• External influences: These include government and labourregulations as well as commonly accepted modes of employeeand organisational behaviour. Such influences underlie theentire human resource management function.

This study, documents specific best practices for the following compo-nents

• AcquisitionRecruitment and selectionEmployee orientation

• DevelopmentTraining

• MotivationPerformance evaluation and compensation

The maintenance and employee retention component is closely linkedto these three and the documentation of best practice for it weavesthrough the illustrations on the three components. Also, as many pro-gressive MFIs adhere to basic government and labour requirements onissues such as pension, gratuity, work hours and work conditions, thecomponent on external influences has not been discussed in detail dur-ing the course of this study. However, this in no way undermines thesignificance of this component that plays an important part in terms offair recruitment and compensation.


Given that many MFIs in India have evolved from multi-service NGOswith a welfare orientation, they tend to focus on staff that have a devel-opment background and are willing to work in the ‘tough’, ‘grass-roots’conditions that they operate in. While this is certainly an importantaspect, unfortunately, there is excessive emphasis on it. As a result,other issues of acquisition, maintenance, development and motivationare relatively neglected.

Most NGO-sponsored MFIs do not rely on recruitment as a tool forgetting qualified senior staff. Instead, they often redeploy senior stafffrom their other development activities to microfinance. Though this isoccasionally successful, the redeployment often leads to microfinancebeing conducted as merely another development assistance programmerather than a potentially sustainable activity.

Given the insufficiently differentiated treatment of microfinance withrespect to other development activities, many multi-service NGO-MFIs do not understand that special skill sets are required in the staffmembers who deal with microfinance. Result of the inappropriaterecruitment practices, management systems tend to be underdevelopedand inefficiencies creep in. This is particularly relevant at middle andsenior management levels. Staff members who may have beenextremely good at managing other development programmes may notbe suitable to manage microfinance activities.

Due to their emergence from idealistic development organisations,MFIs have traditionally refrained from using monetary incentives as atool of employee motivation, relying instead on the staff ’s orientationand intrinsic inclination to undertake development activities. However,


75Human resource management…

this is now changing and many MFIs do provide cash incentives forgood performance.

Training is presently in-service, though there is an increasing trendtowards sending staff for training – whether domestic or international –sponsored by development assistance organisations.

The better-managed MFIs in the country are now becoming quite pro-gressive with regard to human resource management. Clearer acquisi-tion, maintenance, development and motivation practices are beingdeveloped. The role of the HR function is becoming better defined andskilled personnel are being assigned to it. MFIs now place greaterimportance on these issues and are developing specific policies forhuman resource management. Some of these changing practices arediscussed below.

8.2 ILLUSTRATIONS OF BEST PRACTICE: RECRUITMENT AND SELECTION

Recruitment is the identification of appropriate personnel for actual oranticipated organizational vacancies.

8.2.1 SKS

SKS relies on both advertisements and posters to attract potentialemployees. The process is systematic. Applicants are asked to come fora walk-in interview and a written test. The test is designed to assesstheir mathematical and local language skills. SKS perceives these to bethe two most important skills that a person working in field operationsin microfinance should possess. In addition, for its managerial staff,

SKS usually hires persons with rural management qualifications, goodaccounting skills and preferably relevant work experience. As staffmembers have to act as promoters of the programme, they are alsotested in public speaking. The process is designed to assess a candidatein relation to the key attributes required for a potential job.

To assess field skills, the short-listed candidates are then sent on a fieldvisit with a branch manager. The field visit is mandatory for recruit-ment at all levels, as SKS perceives such skills to be critical. During thefield visit, a member of staff who is likely to work with the applicantdoes the evaluation. In the case of field staff, it is the branch managerwho evaluates the applicant. Final selections are made on the basis ofthe branch manager’s feedback.

All these policies are laid out clearly in a manual – this facilitates sys-tematic adherence to the designated process of recruitment. In order toreduce acquisition cost and facilitate training, SKS undertakes most ofits recruitment in batches.

8.2.2 SAMRUDDHI

Samruddhi has a detailed and well-structured selection and recruit-ment process. It specifies the qualifications, skill sets and experiencerequired for potential staff members. The CSAs should have passed the(10+2) secondary school examination and should have knowledge ofrural dynamics, activities and culture. The applicant must be a local res-ident, have knowledge of the local language and be willing to travel bya motor scooter or motor bicycle in the field. This profile is designed toensure that the applicant is aware of the socio-economic environmentin the operating area. Supervisory staff such as Field Executives (FX),should preferably hold master’s degrees in a relevant subject and be

Human resource management

willing to work for a unit located in a small town. A careful assessmentof the attributes required in a candidate increases the chances of achiev-ing a fit between job requirements and candidates’ capabilities.

The channels used for publicising vacancies vary across levels. ForCSAs, vacancies are advertised by word of mouth or through printedadvertisements in the local newspaper. For the recruitment of FXs, theorganization relies on management school campuses and advertise-ments in local papers. Senior managers are recruited either throughnewspaper advertisements or through professional recruitment agen-cies. For all levels, the organisation also uses its archive of unsolicitedapplications received during non-recruitment periods, which are storedin a database. A mix of these channels gives the organisation a substan-tial pool of applications to choose from. Of this, the word of mouthrecommendations from its staff gives the organisation higher comfortlevels while assessing a candidate.

The recruitment process is systematically laid out to assess candidateson all the critical parameters and avoid subjective biases. The applica-tions and resumes are scrutinised and suitable applications are identi-fied based on predetermined criteria. In case there are a number ofapplicants there is a common test to shortlist the best candidates.Short-listed candidates are then called for an interview to assess theirsuitability and discuss their job description and remuneration package.In the case of the CSAs this is followed by a credibility check con-ducted locally and a final interview with a HO representative at least ofthe Manager level.

In the case of FXs who are Samruddhi’s employees, as against the CSAswho are agents and where the organizational stake is higher, all short-listed candidates have to undergo a performance simulation test during

an exposure visit at a specified unit. At the end of the visit the applicantsubmits a report on the specific points asked for and the unit managersubmits a feed back report. Selected candidates then take psychometrictests and have a final meeting with the COO and a Manager level staffmember. This is a discrete selection process in which an unsuccessfulperformance at any stage results in rejection of the applicant. The com-prehensiveness of the process enables assessment of the candidate on arange of parameters critical for Samruddhi’s operations.

All the employees who join the company are under probation for sixmonths after which they need to take a test to exhibit a minimum levelof understanding of the job. The test is followed by a brief interviewwith the COO and Managers. The reporting officer also submits awritten report. Based on these the employee is confirmed or the proba-tion period is extended further.

8.3 EMPLOYEE ORIENTATION

Employee orientation, or induction training as it is often called, isimportant to draw new employees into the organisational environ-ment. Classroom sessions aim to direct their skills towards microfi-nance while field based training enables them to acquire relevantexperience before they take on individual job responsibility. The induc-tion process, for some best practice institutions is described below.

8.3.1 CFTS

CFTS has a three-month training period for all staff. The process is sys-tematic and the curriculum is well laid out across the three months, asfollows:



• Month 1 – targeting: This starts with a day-long in-housebriefing and is followed by a one month field visit duringwhich she or he is an apprentice to a senior Customer ServiceRepresentative (CSR). The idea, as evident is to test theapprentice’s performance in the key function of targeting. Atthe end of the visit the Branch Manager evaluates the traineeon specific parameters that include initiation, interest andskills to motivate. The trainee also undertakes a written testthat includes case studies and the use of the Cashpor HousingIndex (CHI).

• Month 2 – credit management: This focuses on how to createand maintain discipline in the groups. Once again it involvesboth classroom and field training. Aspects covered are thepreparation of a loan proposal, the disbursement process andcollection. At the end of the second month, the probationershave to be well versed in various aspects of credit managementin the field.

• Month 3 – MIS and accounting package: During this periodthe trainee understands the basic concepts of accounting, theformats in use and the organisation’s MIS. These are mostlydone on the job under the supervision of senior staff.

This process has evolved with experience. It has been reduced from sixto three months with a focus on practical aspects so that the existingstaff members do not need to spend too much time with trainees.

8.3.2 SKS

The training period for SKS field staff is also three months. While twokey people in the organization are designated trainers, other staff mem-bers are also invited to provide their inputs in specific areas. The train-

ing is both classroom based and on-the-job. It commences with a 4–5day long workshop that uses techniques such as discussions, role plays,demonstrations and lectures to cover aspects related to the organisa-tion’s mission, vision, the operations manual, PRA techniques, loanappraisal methods and MIS. There is also a briefing on questions fre-quently asked by clients. This gives the new staff a feel for the job andgradually draws them into the work environment.

The trainee is then attached to a senior Sangam Manager in the field.Care is taken to match the trainee profile with the manager’s profile.Trainee skills are also considered – better performing trainees are sentto the tougher branches, as the more difficult tasks require betterhuman resources. During one and a half to two months of field train-ing, the trainee must form at least one group to be confirmed in thejob. The orientation module is constantly modified based on traineefeedback and actual situations encountered in the field.

8.3.3 SAMRUDDHI

The period of induction for the CSAs is four weeks. Induction can beeither 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-cepts of the job as well as field exposure. For the latter, the trainee isaccompanied by a designated CSA-trainer for a full week to observe thework pattern in the field. He is expected to interact with customers andother employees, understand the methodology, documentation processand organisation’s accounting system.

Before they go to the field, the FXs are provided an orientation throughclassroom discussions on the organisation’s mission, philosophy, poli-cies and other administrative matters by the senior management. The


…

8.3

EMPLOYEE

ORIENTATION

issues to be included in the briefing vary each year based on feedbackfrom the existing employees. This is followed by a six-month exposureto other units and hands on experience in the unit assigned to them.They are then brought together to share their experiences and under-stand further details of the credit appraisal process. Samruddhi feelsthat training delivered by people who are involved in operations tendsto have a greater impact as trainee and trainer have a better communi-cation and the informal environment also helps.

8.4 STAFF TRAINING

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 managementdevelopment initiatives to improve the skills of their staff.

At CFTS training acts as a refresher. Training needs are identified bythe training officer who visits the branches regularly and are also basedon requests from Branch Managers. Through this method the organisa-tion provides inputs when required rather than committing resourcesfor a longer period.

Samruddhi on the other hand regards training as an ongoing process.The annual Personal/Professional Learning and Review (PLR) processhelps assess the personal and professional learning needs of an individ-ual for improving performance. The organisation uses the informationgenerated through the PLR to identify training needs and prepare atraining calendar. This helps in organising the training programme andwork allocation accordingly.

Samruddhi also encourages its employees to identify suitable trainingsources and programmes for themselves. Training programmes utilisedare of two kinds – internal and external. Internal programmes are onthe job as well as classroom based. As part of external training,Samruddhi offers its employees the option of Continuing EducationProgrammes (CEP). This entails the organisation and the individualsharing the cost of any training programme relevant to the work of theorganisation. Samruddhi also provides a loan for this purpose.

All the three organisations covered also use training as a staff retentionmechanism. In this way, training addresses the human resource mainte-nance function as well.

8.5 PERFORMANCE EVALUATION AND COMPENSATION

8.5.1 CFTS

CFTS’ performance appraisal was developed to maintain both produc-tivity and quality. For the field staff it is linked with individual andbranch performance and strikes a balance between competition and co-operation. The incentive is provided in addition to the staff member’sbasic salary and can be up to 50% of the basic amount. The incentivesystem incorporates all staff members including the Assistant GeneralManagers (AGMs). The operations staff members have an individualtarget based system while the head office staff ’s incentive is linked tothe achievement of overall organizational targets. The support staff ’sincentive is based on an aggregate of other incentives.

Monthly incentive• Linked to individual performance



• Number of groups formed; Rs500 per group of very poorclients and Rs300 per group of moderately poor clients.

Quarterly incentive • Linked to branch and individual performance • Based on achievement of branch target on the following para-

meters;Number of borrowers – 10% of salary Number of savers – 10% of salary

• Interest income earned by individual – for 90% of interest col-lected, 0.1% of the income amount is given as an incentiveand for 100% interest collected the incentive is 5.5% of theinterest income.

The appraisal system is entirely objective and has evolved over theyears. For instance, the portfolio at risk was removed as a parameterbecause the organisation noticed that staff were adjusting repaymentsagainst savings to maintain portfolio quality.

The above system makes it possible for staff performing well to attainquite a large amount (up to 50% of the fixed amount) in variable per-formance pay. This, coupled with a policy of fast track promotion forhigh performance in the field helps the organisation retain good people.

8.5.2 SKS

The SKS performance evaluation system too, has different incentivesfor the Sangam Manager and the Branch Manager. The SangamManager’s incentive is based on

• Formation of a minimum of two groups per month• Less than 25% dormancy (eligible borrowers without a loan)

• Loan utilisation checks • Quality of office work • Quality of field work

The above parameters include both objective and subjective indicators. Forthose indicators that are based on judgement, it is the Branch Managers withwhom the discretion lies. For Branch Managers, the incentive system is basedon overall operational performance of their branch.

8.5.3 SAMRUDDHI

Similar to CFTS, Samruddhi calculates its gross pay as fixed pay plusincentive. The incentive can be up to 50% of the fixed pay. This paystructure is applicable to all the staff including the Managing Director.At the field level, the target performance is assessed on disbursement,repayment rate and the improvement in repayment rate. Besides these,the mentor assesses an employee’s performance on functional responsi-bilities and ability to meet challenges. Each employee is also evaluatedon a human resource and teamwork index.

At the head office, the figures by company are taken for assessing theperformance of employees. Each staff member can earn more if they,their unit and the company perform better. This helps align organisa-tional interests with employee interests. Promotions are also based onperformance and there is an emphasis on filling vacancies through pro-motions from within, at least at the operational level. This is not only atool for ensuring optimum employee contribution to organisationalgoals but also motivates employees to stay with Samruddhi, as they seepotential for higher growth in responsibility and earnings. This facili-tates employee retention.


…

8.5

PERFORMANCE

EVALUATION AND

COMPENSATION



8.6 MAKING THE MOST OF PEOPLE

Like most organisations, the sample organisations described abovedepend on their staff to translate their strategies, policies and manage-ment systems into day-to-day operations. Human resources are thecrux of an organisation’s functioning.

The best practices identified during this study that can help in makingthe most of the people employed by an MFI are

ACQUISITION

• Recruitment methods matched to job level and skill. Forexample, SKS advertises in the local newspapers for CSA leveljobs and Samruddhi visits campuses to recruit FXs.

• Rigorous selection to minimise costs of replacement. AtSamruddhi the candidate passes through multiple levels ofselection, each of which acts as an elimination process.Therefore, the candidates left at the end are the most likely tosucceed in the job.

• Use of tests that assess job related skills - SKS measures mathe-matical and local language skills, both of which it regards ascritical to the working of a Sangam manager.

• Performance simulation tests through field visits. For exampleat SKS, the final shortlisted candidates go to the field duringwhich their performance and ability to work is evaluated bytheir probable co-worker. At Samruddhi the FX’s perspectiveof the job is also examined through the candidate’s visit report.

• Background investigations - Samruddhi undertakes a credibil-ity check for its CSAs who handle a large amount of cash.

• Documented and systematic process of recruitment maintainsobjectivity as well as allows for instinct decisions - Samruddhihas a well-documented, discrete selection procedure.

• Formal orientation period allows the new employee to moveinto the job gradually, for example, Samruddhi has a six-month probation period.

DEVELOPMENT

• Formal training needs assessment process - Samruddhi uses thePLR process to determine training needs

• On the job training - at CFTS the three-month training periodhas classroom sessions alternating with actual field experience

• Refresher courses to reinforce learned skills - branch managersat CFTS often ask for short courses to reinforce skills learntduring induction

• Individual career development through self-assessment. Forinstance at Samruddhi, the PLR process encourages employeesto identify their learning needs and suitable external trainingcourses.

• Support for continuing education ensures that needed talent isavailable within the organisation.

MOTIVATION

• Established performance standards for all staff - thus, the fieldstaff are appraised based on the number of groups they formand financial targets achieved, while the branch managers areappraised on the achievement of the branch target.

• The actual performance is measured through regular reportsthat are part of the MIS, ensuring objectivity.

• Appraisal linked to a number of objective and subjective para-

8.7 EMERGING TRENDS

High quality human resources are critical for any organizational activ-ity, an importance that is magnified in the case of the Indian MFI sec-tor with its traditional paucity of quality personnel. To acquire,motivate, develop and retain these resources is, therefore, of utmostimportance. This importance is being realized increasingly and, as isthe case with other aspects of microfinance operations, human resourcemanagement too is becoming more professional. Organizations are rec-ognizing the significance of a skilled and committed resource and are,therefore, trying to develop systems that attract and support employees.Some trends that are emerging are

• Separation of Human Resource Management as a key func-tion: With the increasing importance of this function, someMFIs are separating this function from general administrationand deputing qualified personnel and adequate resources toensure that human resource issues are properly addressed.

• Recruiting professionals: Moving away from a pure socialdevelopment perspective, MFIs have started recruiting suitablyskilled professionals as managers whose skills are required forany well-run financial intermediation activity. Sourcing of staffis 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-managedoperations help earn more income. Additionally, since a num-ber of financial lending institutions have started looking at thequality of an organisation’s staff base before investing in them,this also helps in raising resources for the organisation’s activi-ties.


meters ensures all round staff productivity - SKS appraises theperformance of the Sangam Manager on the number of groupsformed as well as the quality of office and field work

• Performance based incentives for staff - a number of MFIshave a part fixed and part variable incentive system, the vari-able part of which is linked to the key performance standards(refer first point) which provides staff an incentive for per-forming well

MAINTENANCE

• Sponsored training programmes - investment in sponsoredskill enhancement is viewed as an incentive and is beingincreasingly used as a retention tool

• Fast track promotions for high performers - a number of MFIspromote staff who perform well quite fast. This applies espe-cially to field staff and acts as a motivation for them to stay

• Earn more as you perform better - performance-linked incen-tives without strict limits makes it possible for good perform-ers to earn significant additions to their remuneration, whichacts as an incentive to stay on.

• Focus on induction and orientation: The selection and induc-tion of a new employee is becoming a well laid out systematicprocess that aims to develop basic knowledge of microfinanceand the skills needed for operations.

• Training: MFIs are now including training in their businessplans as an investment in building skills. This includes externaltraining. Earlier training was only undertaken at the donor’sinitiative.

• Incentive based salaries: More and more MFIs are adoptingcomposite salary structures with fixed and variable compo-nents. The variable component is based on the performance ofstaff on factors that are critical for the organisation’s opera-tional success and the achievement of its objectives.


83Human resource management

Conclusion – what next?

The primary task of this study was to document “best practices”employed in the microfinance sector in India. To achieve this, the studyteam 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-tions to be included in the document. The MFIs finally covered arelisted in the Annex to this document. The list includes an array oforganisations ranging from relatively small MFIs to large ones; multi-service organisations to exclusive financial service providers; societies toNBFCs and member-based cooperatives to for-profit organisations.The common thread that binds this diversity is that each of the sampleMFIs has achieved a high level of excellence in some area of its func-tioning.

The purpose of this study was to illustrate best practice in differentaspects of microfinance. As stated in the introduction, the nine MFIsselected do not necessarily represent the universe of best practice MFIsin India. Instead, they serve to illustrate the salient features of best prac-tice for the benefit of the larger body of MFIs in the country.

The discussions presented as the sector profile in each section, demon-strate that Indian microfinance is a growing sector. Even though, inaggregate terms, the sector is still in a nascent stage of development, nev-ertheless, there are many MFIs that have a strong interest in improvingtheir operations and adopting best practices. The illustrations of bestpractice in this report – in different areas of operation from governanceto product design, MIS to financial management techniques, internalcontrol to operational strategy – should provide such organisations withthe ideas to enable them to improve existing practices appropriatelyadapted to suit the local conditions and capabilities of each MFI. The

critical areas of improvement and the tools necessary to assess andimprove performance in each area have been documented here.

Overall, the study team hopes and expects that this document willenable MFIs in India to move away from the mould of traditionallygoverned and managed organisations to more professionally run finan-cial institutions. While this study shows that it is possible to adopt bestpractices and achieve excellence in microfinance management, it is alsoapparent that documentation alone is not enough. A larger effort –capacity building, formal training, on site technical assistance andinvestor and donor support – would be required to disseminate andinculcate a best practice culture among all the stakeholders. For this rea-son, the Microfinance Best Practices Programme – of which this docu-mentation effort is a part – has proposed a follow up programme (referFigure on page vii).

As part of the programme

1 This report will be published, discussed at a regional workshop forSouth Asia to be organised in India in early 2003 and distributed tosome 500 MFIs in the Asian region. The message for donors will bereinforced through an investor awareness workshop (includingdonors) to be organised during 2003.

2 In the second phase, the scope of this research will be widened tocover MFIs in other Asian countries – particularly Bangladesh,Indonesia, the Philippines, Nepal and Cambodia. This will broadenthe range of practices covered by the programme and will help toattune it to specific country level considerations that may arise.

This phase will include

• Capacity building with select MFIs that have the potential toexpand outreach in the region to enable them to adopt betterpractices in their operations, accelerate their movementtowards sustainability and enhance their ability to raise finan-cial and other resources for increasing outreach. This is likelyto include formal training modules in combination with selec-tive on-site support in the adoption of practices most suited tothe needs of the particular MFIs’ local conditions.

• Engagement of present investors – both development andcommercial – and the inclusion or drawing in of potentialcommercial investors to increase the flow of financial resourcesfor microfinance.

• An effort to address policy issues that limit the ability of MFIsto raise resources either locally through member deposits orthrough institutional borrowing or from internationalinvestors 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.

Such an effort at disseminating the best practices to a wider audience iscritical given that most of the practices presented have the potential toenhance the abilities of MFIs not just in India, but throughout theAsian region – with suitable adaptations – to scale up and operate in asustainable manner. Given that the outreach of microfinance in India,in particular, but also in many other Asian countries is extremely lim-ited relative to the size of the market, such initiatives are likely to act asa positive reinforcement to other efforts – policy changes and dialoguewith regulatory agencies, formalisation of assessment proceduresthrough tools such as ratings and standard setting for MFIs - that arebeing made in the microfinance industry at present.


85

Annexures…

ORGANISATION

ASA

CFTS

IASC

SAMRUDDHI

SEWA BANK

SIFFS

SKS

SPANDANA

VSSU

LEGAL FORM

Trust

Company

Company

NBFC

Co-operativeBankSociety

Society

Society

Society

EXPERIENCE

(YEARS)

10

5

4

6

28

6

4

4

8

MODEL

Grameen

Grameen

SHG

Mixed

Individual lendingFederated lendingSHG

Grameen

Individual banking

SERVICE STRUCTURE

Multi-service

MFI

MFI

MFI

MFI

MFI

Multi-service

Multi-service

Multi-service

MEMBERS

30,900

18,000

9,700

40,0002

172,0003

8,500

5,600

16,400

7,000

STAFF1

201

117

11

99

105

9

65

38

23

BRANCHES

25

10

2

13

1 +5 collection centres

5

4

8

–

ANNEX 1 – ORGANISATIONAL PROFILE (AS ON 31 MARCH 2002)

1 For multi-service organisations, staff includes allocated microfinance staff in terms of time spent in handling savings and credit activities2 With a –10% to 5% error margin3 The figure provided is for savings accounts – the number of members or unique savers is not available


87

ANNEX 2 – OPERATIONAL STATISTICS (AS ON 31 MARCH 2002)4

ORGANISATION

ASA

CFTS

IASC

SAMRUDDHI

SEWA BANK

SIFFS

SKS

SPANDANA

VSSU

PORTFOLIO

58,026,700

54,580,700

42,385,400

223,327,000

106,748,700

21,293,000

13,616,600

46,688,900

23,791,200

SAVINGS

18,780,226 5

5,360,000

2,556,933

-

464,390,851

163,281

1,751,010

6,023,698

25,272,777

BORROWINGS

83,416,100

86,880,000

63,999,700

169,788,000

13,035,700

24,253,800

621,500

35,101,100

2,464,300

DONATED

EQUITY/GRANTS

Not available

-

430,310

-

-

732,663

15,763,868

5,061,729

PAID UP EQUITY

-

1,530,000

6,000,000

206,001,000

11,777,000

1,351,000

-

-

NET-WORTH

4,371,095

211,516,000

81,887,711

19,63,000

10,060,364

41,46,144

ACTIVE

BORROWERS

8,340

15,050

3,120

11,270

9,250

2,460

3,850

13,210

AVERAGE

LOAN SIZE

~5,000

5,230

17,940

26,630

11,429

10,164

3,535

5,575

10,000

RETURN ON

ASSETS (%)

Not available

-2.45

13.53

0.5

0.7

-1.8

-

11.5

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.

Abbreviations & glossary

AGM BANK SAATHIS

BIMA SEVIKAS

BMBOBQRCENTRE

CEPCHI

COOCSCSACSR

DOSDSSFDFWFXGUIHANDHOLDERS

HOIADIDPD

ILAIRDP

Assistant General Manager

SEWA Bank’s commission agents

SEWA Bank field staff specialised in insurance

Branch Manager

Branch Office

BASIX Quarterly Review

As defined by the Grameen methodology, an operating unit

of 7–10 groups (35–50 members)

Continuing Education Programmes

Cashpor Housing Index: a wealth ranking system based on an asset

classification developed by Cashpor Inc., Malaysia

Chief Operations Officer

Cash Security: guarantee mechanism used by Samruddhi

Customer Service Agents: commission agents for Samruddhi

Customer Service Representative: Cashpor and SKS employees

working as credit officers

Disk Operating System

Decision Support System: an "informational” computer application

Fixed Deposit: bank term deposits

Field Worker: credit officer

Field Executive: designation for Samruddhi’s junior level managers

Graphical User Interface

SEWA Bank field staff who guide the clients through the process of

applying for loans

Head Office

Internal Audit Department

Interest Due Per Day: the interest amount due each day as

calculated by the Samruddhi MIS

Independent Local Auditor

Integrated Rural Development Programme

JLG

MACSMFIMISNABARDNBFC

NGONPAPADYATRA

PCS

PDAPLRRBIRDBMSRMKROSCARRB

SANGAM

SDCSHGSIDBITAUHUSP

Joint liability groups: five-member group sharing the legal

responsibility for the credit extended to every group member

Mutually Aided Cooperative Society

Micro Finance Institution

Management Information System

National Bank of Agriculture and Rural Development

Non Banking Finance Company: specialised public/private entity

whose principal business is lending and accepting deposits.

Categorised subject to conditions specified by the central bank

Non Governmental Organisation

Non-performing Assets

A campaign on foot

Primary Cooperative Society: a cooperative society of primary

producers united voluntarily to meet common economic needs.

Personal Digital Assistant

Personal/Professional Learning Review

Reserve Bank of India

Relational Database Management System

Rashtriya Mahila Kosh

Revolving Savings and Credit Association

Regional Rural Bank: specialised banks for rural clientele sponsored

by scheduled public sector commercial banks and the government

Group of MFI members formed for the purpose of accessing credit

Swiss Agency for Development and Cooperation

Self Help Group: a 10-20 member savings and credit group

Small Industries Development Bank of India

Transaction Assistant: Samruddhi’s data entry operator

Unit Head: Samruddhi’s senior manager at a field/unit office.

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MICRO-CREDIT RATINGS INTERNATIONAL LIMITED

Micro-Credit Ratings International Limited (M-CRIL) is a specializedmicrofinance credit rating and research institution. Within four yearsof operations, since 1998, M-CRIL has undertaken more than 135credit ratings and other assignments in various Asian countries. Theseinclude Bangladesh, Cambodia, East Timor, India, Indonesia,Myanmar, Nepal, the Philippines, Kazakhstan and Sri Lanka.

M-CRIL’s activities are based on the perception that with a greater flow ofreliable information between the microfinance and the formal financialsectors, MFIs would be better placed to access wholesale finance for on-lending to the poor. In line with this mission, M-CRIL also undertakesproprietary sectoral research and contributes to the setting of professionalbenchmarks and operating standards for MFIs.

M-CRIL’s microfinance rating service is aimed at providing a professionaland rigorous opinion on the relative ability of an MFI to make timely andcomplete payments on obligations to investors.

M-CRIL’s rating provides a risk outlook of the rated MFIs and its assess-ment of strength and weaknesses serves as a tool for MFIs and their fund-ing partners/ investors to work together to build capacity.

104 Qutab Plaza, DLF City -1, Gurgaon 122002, India.Fax +91 124 6352439 • Tel +91 124 6563172e-mail: [email protected]: www.m-cril.com

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