Consolidation inevitable for AP crisis-hit MFI sector

Written by BV Mahalakshmi | Updated: Oct 21 2011, 08:20am hrs
Its indisputable that microfinancial institutions (MFIs) are still trying to emerge from a deep financial crisis. However, they have been working towards having a sound and trustworthy credit bureau for the benefit of the industry and borrowers. Allaying fears about the credit bureau, Alok Prasad, CEO, Microfinance Institutions Network (MFIN), tells FEs BV Mahalakshmi that the bureau would help in fresh borrowings and sieve out defaulters. Excerpts:

It is believed that the credit bureau has not yet taken off in its full form. Your views.

MFIN supported the development of a specialised credit bureau for the microfinance industry, as early as March 2010. This credit bureau, namely, High Mark, got fully operational from Jan-Feb 2011. As on date, 42 MFIN members have signed the bureau agreement and are submitting customer data. The challenges of data quality have, for the most part, been successfully overcome even though it did call for a large effort by the MFIs with MFIN steering the process. About 60 million customer records have already been uploaded. And, 30 MFIs have started using the bureau reports for credit decisioning and ensuring adherence to RBIs regulations. The progress made by the microfinance industry towards building a credit support system directed towards low-income households in just about 12 months' time is unparalleled in the history of banking in India.

With the Andhra Pradesh government delaying the acceptance of the composite package submitted by MFIN, borrowers in the state continue to be listed as defaulters in the credit bureau, which may hit their access to credit in future. If the package is accepted, then the credit record will get normalised and they will no longer be treated as defaulters.

It is reported that the MIS (management information system) at many MFIs is weak and unless robust standards are created and enforced, the bureau is as good as non-functional. How do you plan to tackle errors in data entry, data conversion/manipulation, and frauds, which are some of the common problems for MFIs

High Mark and other mainstream bureaus, such as Equifax and Experian, have made considerable investments in developing appropriate technology solutions for addressing the special requirements arising out of the unique characteristics of microfinance clients. Matching logic and algorithms to support analysis of MFI data have been specifically developed and are working quite well. This, of course, is an ongoing exercise and a steady improvement in the match rates is expected.

Industry observers say that there are issues in effective implementation of MIS, such as lack

of a standardised core system at the MFI level, weak IT infrastructure within MFIs, and so on. Your comments.

It is true that for many of the small MFIs with manual systems or rudimentary MIS, which is not fully integrated, there are the twin challenges of timely data submission and data quality. However, this is not a matter of choice. The RBI regulations require all MFIs to become member of at least one bureau. Equally, compliance with the RBI's single borrower cap is well nigh impossible without use of bureau reports. MFIN is working quite intensively with its members for ensuring that a full credit support eco-system anchored by the bureaus is in place. It is also partnering with IFC (W) for technical assistance and training support as the members may need.

Given the current scenario, what is the expected growth of revenue in the MFI sector vis-a-vis the annual growth under normal circumstances

During 200510, the microfinance industry witnessed dramatic growth with an average CAGR of about 70%. M-Crils Microfinance India Index (composite index of growth of MFIs in India) moved from 444 in March 2005 to 7,474 in March 2010. It is estimated that by September 2010, the index had risen to 9,000 and, then, fell to 8,022 by March 2011.

By the end of the current fiscal, trend-lines suggest that the index will be at around 6,000. This 35% drop from the September 2010 peak makes for a telling story of what the AP crisis has done to the industry.

What is your outlook for the

industry for the current financial year

The fundamental reality which needs to be recognised is that the core market that MFIs are serving is very large. Mainstream banks have had little success in reaching out to the MFI customer segment, despite all the policy interventions by the RBI and the central government. And, this is not likely to change in a hurry, whatever may be the expectations policy makers have from banks. As the recent NCAER Report Assessing the Effectiveness of Small Borrowings in India has clearly concluded, most formal financial institutions are reluctant to serve the poor due to perceived risks, high transaction costs (in percentage terms) and low profitability. Hence, MFIs have

little real competition and are

important actors in the financial inclusion space.

The microfinance industry is going through a process of adjustment. A new normal is emerging. But, given the overhang of the AP crisis, the industry remains in a crisis mode. While, overall, it is going to shrink this fiscal, institutions with good governance structures, stronger capital base and low or nil AP exposure, should end the year with reasonable growth.

Bank credit continues to pose problems for the sector What is your next move on this front Also, do you think M&As in this sector is a workable solution as there are apprehensions of bad chemistry on a long-term basis

I think the stance of banks is gradually shifting from negative or neutral to neutral-positive. Bankers are inherently conservative, but as risk perceptions diminish, the funding position should improve. This is a process and we have to be patient. The dialogue with the banks and the RBI is continuing. The regulatory signals are positive and we have enough reasons to be hopeful. M&As are always a bit tricky, but some consolidation is inevitable.