Learning from the Indian Microfinance Crisis

Three weeks ago, just at the height of the microfinance unrest in India’s Andhra Pradesh state, panelists at the Microfinance India Summit 2010 said that an increased focus on financial literacy, creation of more credit bureaus, and greater pricing and interest rate transparency were all essential to the success of the sector. Perhaps Jennifer Isern of the International Finance Corporation said it best: the sector “must get back to client-centered, client-focused” microfinance.

The issues that led to the crisis are certainly complex as noted by Beth Rhyne, managing director of The Center for Financial Inclusion, who wrote an excellent blog calling for policy makers “to think more deeply about the role of MFIs in the financial sector” and to “craft a set of ground rules that promote balanced product offerings, solid institutional development and good governance.”

One area that is often overlooked, however, is the human capital management practices that may also have played a contributing role.

As the Indian microfinance sector responds to the Andhra Pradesh crisis, an opportunity has been created in India, as well as in the global sector, to reevaluate their “people practices” and make them a core part of a system that has provided a safety net for millions.

Based on work Grameen Foundation’s Human Capital Center has done with microfinance institutions (MFIs) around the world, we have found that the following common practices can negatively affect an organization’s financial and social impact:

A focus on short-term performance targets (often reinforced by incentive plans) that stress portfolio size, quality/repayment rates, and number of clients. Pick any one of these dimensions and you can see the potential to stray from client-protection principles:

1. Portfolio size – This indicator depends on attracting more clients and/or larger loans, which may encourage relaxed credit underwriting/approval decisions and ultimately increase the potential for client over-indebtedness.
2. Portfolio quality – In an effort to minimize late repayments or defaults, loan officers may resort to collection tactics not approved by the MFI to “encourage” repayment.
3. Number of clients – Similar to portfolio size, this indicator may also encourage relaxed credit underwriting/approval processes.

The organization must be very clear about frontline staff roles and their primary responsibilities. For example, providing effective financial services and helping to protect client interests are not mutually exclusive objectives, but the organization’s recruitment and selection, learning and development, and rewards practices must all be aligned to help staff meet them. There must also be quantitative and qualitative performance objectives that clearly define the behaviors expected, such as honesty, respect, transparency, etc.

Now is a good time to rethink the use of incentives altogether. Some MFIs have either never used incentives or have eliminated them with no negative consequences. And more and more private sector companies are realizing that employee motivation and commitment depend on many dimensions; money often plays just a small part.

• Organizations with decision-making centered at the top may treat field employees (loan officers, branch managers, etc.) simply as vehicles to deliver profits, with little ability to add value. People tend to work toward what is expected — whether these expectations are high or low. In addition, keeping decisions at the top means that they are made far away from the people who have the most current information on clients and local conditions. Providing targeted learning and development opportunities to frontline staff that focus on what is needed to drive both financial and social results will increase capability and ensure that decisions can be made at the levels closest to where the challenges lie.
• Organizational culture that stresses financial over social return. Creating and maintaining a culture that focuses on social as well as financial returns and embraces client protection principles requires intention and appropriate decisions/actions. Large, rapidly growing organizations may be tempted to cut corners on the selection and orientation and training of new hires, with the result that the organization’s social mission, core values and long-term vision are not effectively communicated to the new hire. Ensuring the organization’s core values and social mission are understood and embraced by everyone in the organization should be one of the primary roles of the chief executive. Every internal and external presentation or communication piece is an opportunity to reinforce this message, and all senior staff should be held accountable for modeling these behaviors. In fact, adherence to these core values should be part of each employee’s individual performance expectations.
• No focus on creating an internal “brand.” What is the organization’s external brand? Is this mirrored internally? Are employees valued and treated as important assets? Valuing employees in the same way that clients and other stakeholders are valued helps them understand the brand promise and how best to deliver it. For example, focusing on transparent credit practices should be mirrored by transparent promotion and rewards practices. And if client education is an important part of service delivery, the organization should make sure that all staff have an equal opportunity to access the learning and development they need.

These practices play a key role in determining the financial and strategic success of an institution.

The private sector has shown time and time again that the organizations that “get” the people side of things are more successful and sustainable than those that don’t.

Reevaluating and revising these practices in the Indian microfinance sector and elsewhere will help support the fundamental social mission of microfinance by focusing front-line employees on client protection, as well as sound credit practices, and by creating and empowering loan officers who are driven by a mission to serve the poor.