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.


06 September 2012 Submitted by Dr V.Rengarajan (not verified)

Dear Peg Ross
It is very much refreshing to read the ‘ The people practice’ in MF sector as highlighted in your posting looking from demand side perspectives instead of harping over too much on supply side front. Regarding the client focused MF for to poverty reduction, based on some lessons learnt in the past ( 25 years in banking sector and 5 years in NGO/MFI sector) I would like to share some of thought for strengthening the effectiveness of participation of the poor in MF sector in Indian context
a. Having been nurtured by NGO or SHPI over a period of time, SHG federation should emerge as self reliant mini MFI for managing multipurpose development activities (socioeconomic cultural and political) delinking all external sources with their least intervention. This will ensure grass root level democracy with active people practice.for managing their self resources. The emphasis here is that this mini MFI has to manage their own internal savings and other fees for their financial management If necessary according to the potential of the area and genuine needs for IG activities alone this mini MFI can approach to formal banking system not necessarily on routine basis as an .annual ritual being practiced presently. They need not go to capital market..
b. Apex institutions and NGO/SHPIs need to confine their promotional activities with advocacy and financial literacy programmes including insurance literacy under capacity development
c. Consultants /experts in MF are to confine guiding micro financial planning ( not micro credit planning) for each SHG/SHG federation indicating the level of growth of internal micro savings, micro credit demands for potential IG schems, needs for micro insurance , and capacity development requirements
Further, towards bringing an integrated credit planning from below , these SHG federation level micro credit planning need to be formulated based on the Potential linked Credit Plan(PLCP ) of NABARD being prepared at district level and also integrated with the district/block level credit planning and development planning mechanism as well in coordination with the respective Lead Bank and DDM of NABARD office and government (district collectorate ) at district level. This integrated micro level planning and coordinated participation of the development institutions concerned with poverty reduction ( a common goal and mission) will go a long way in the adoption of micro financial discipline yielding desired result without any complexities as being experienced in the present AP crisis The respective DCCs/BLBCS need to monitor the progress of these micrp plans and solve the problems such as multiple financing, creation of physical supporting facilities needed for IG activities .service area related
d. The above exercise, discussed in C assumes importance in view of the successful implementation of ‘Financial Inclusion’ being the national agenda . Here attention is drawn on the Financial inclusion report Para 12.03 page 106(Dr C.Rengarajan) “ There has to be adequate access to physical capital in terms of roads, bridges, canals, warehouses and market yards, in addition to electric power and telecommunication, for financial capital to be useful. In he absence of all this , merely insisting on financial inclusion will not work” .NABARD’s Bank-SHG linkage programme helps in flow of money from the formal sector to the poor but mere pumping money quantitatively will not deliver the good unless adequate absorbing capacity of the given area in terms of physical capital, is improved.. Here the micro level planning exercise at SHG as discussed earlier is to be integrated with PLCP and Rural Infrastructure Development Fund (RIDF ) utilization plan would facilitate smooth functioning of financial inclusion mission more productively at micro level
e. Last but not least, poor people need to practice evaluation exercise on the progress of mini MFI at SHG federation and its holistic impact on their livelihood by themselves under the concept ‘social audit or participatory evaluation’.. External credit rating agency is not necessary
f. When we preach people’s participation and practice in MF-SHG sector , we should seriously concern with the ‘ drop out / push out menace in SHG system which remain neglected . Mere quantitative out reach and glittering recovery rate under any program/scheme in this sector conceals the above fact. It is reported that incidence of members’ dropout rate was reported by 43% of the SHGs and the drop out rate was 8.2 % of the members.( MF India- State of the sector report( N.Srinivasan page 23) Group mortality was also reported. There is also cost involved in formation of SHG and nurturing the SHG members. Here the moot point is that poor are financially included through SHG-MF system ceremoniously initially and later dropped or pushed (excluded) out unceremoniously This issue should receive immediate attention of all the concerned so that all the poor people can participate continuously and prosper under MF platfrom

06 September 2012 Submitted by Ramesh S Arunachalam (not verified)

Dear All

This is a wonderful post and I hope it translates into action…Much of this was promised everytime we had a crisis and you may be interested in seeing these posts…as it looks at the role of various stakeholders (MFIs, Equity Investors, Banks, Policy Makers and others) with available published data…especially with regard to the promises made towards client led micro-finance…

The 2010 Andhra Pradesh Micro-Finance Crisis Revisited…For A Factual Account of The Happenings……

Down The Memory Lane: Why Did The Krishna District Micro-Finance Crisis Occur in 2005/6?…

Have a great Christmas and New Year!

Warm Regards


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