Challenges to Microfinance

1. Challenges to Microfinance Sa-Dhan Conference: 18 March 2010 Micro-Credit Ratings International Ltd 602 Pacific Square, 32nd Milestone NH8, Gurgaon 122001 INDIA sanjaysinha@m-cril.com Tel: +91 124 230 9497, 230 9707 Fax: +91 124 230 9520

2. Exponential growth projected CRILEX – Index of Microfinance

3. While margins have increased considerably

4. Portfolio quality improved to March 2009

5. …and returns on assets was high

6. But at what cost? The Southern Karnataka problem is not on account of religious objections but rather due to complex socio-economic considerations The root cause lies in the environment of “easy money” created by intense competition and multiple lending leading to “tinderbox” conditions Overindebtedness of a few triggered intervention by muslim organisations posing as guardians of the community But their allegations have some justification… There is a real reputation risk to compound the delinquency crisis

7. The immediate issues… • Clients in Kolar and elsewhere are highly appreciative of the loan facility • but there are concerns about collection practices • fostered by the single-minded zero delinquency culture • at the prevailing levels of indebtedness (Rs30-40,000) the • group liability norm becomes a serious burden if a few are • over-indebted • adherence to the “no-refinancing” rule is a problem when • MFIs are trying to recover existing bad loans • The need for relationship lending is apparent

8. …and the wider context • A few MFIs have grown extremely fast obtaining fantastic valuations for their equity • Others have felt the pressure to expand and transform to NBFCs • Ownership dilemmas – and who benefits from high valuations • Low hanging fruit vs high operating expenses in far flung areas • Ensuring client relations/protection – multiple lending • Challenges of human resources – trainees training trainees • Implementing control systems, client tracking, MIS issues • Matching growth ambitions with financial resources • Minimising political risks

9. …and let’s remember the glass house The risk management industry is rife with short-cuts and conflicts of interest Auditors rarely assess the quality of underlying loans and Raters with little knowledge or commitment to microfinance are so busy cutting costs and each other’s throats That both portfolio testing and branch level systems analysis are forgone Essentially there continues to be a conflict of interest in MFIs (or any rated organisation) paying for the service – a solution is required

10. Establish an environment of responsible finance • Adoption of a Code of Conduct is important • But it should be activated through • Social assessments/social ratings to under- • standwhat is happening in the institution • Follow up action based on the findings • Penal action by networks against MFIs • violating the code • The matter is urgent and needs to be addressed

11. An important opportunity With coverage of around 20 million clients, MFIs can make an important contribution to financial and social inclusion but This needs controlled growth with adherence to social mission Not the pursuit of quick profits and short term share valuations We need to act,now.