Ranu Kalita, 38, lives in Changsari, Assam, with her husband and two children. a few years ago, the couple realised that their financial position was precarious. They could not approach banks or other formal financial institutions for help due to lack of financial literacy and credit history.
Last year, Ranu reached out a branch of a microfinance company in her village to seek a loan of ₹30,000. She invested the money to set up a small unit for weaving clothes. The collateral-free and low-cost loan offered by the MFI allowed her to purchase yarn in bulk at affordable prices and improve her marketing efforts. As a result, Ranu now makes about ₹200-300 per day. She is a proud entrepreneur and is an inspiration to several women in her neighbourhood.
There are many such untold stories in every nook and corner of India where microfinance institutions have changed the lives of individuals or families. As reported by Microfinance Institutions Network (MFIN), there were about 2.65 crore borrowers associated with these NBFC-MFI with the outstanding gross lending portfolio of ₹51,878 crore as of June 30, 2018; majority of these are women. With such profound social impact, balancing profitability with social good is an imperative for MFIs to ensure sustainability that helps the organisation grow and take its credit services to the last mile. Here are the three things that MFIs can do to balance profitability and social good:
Expand business horizons
MFIs face competition not only from their peers but also from small finance banks, payment banks, and universal banks working through business correspondents or directly. To optimise the risk and develop a sustainable business model, it is important to explore other business avenues like business correspondent tie-up with banks, small housing finance, MSME (micro, small and medium enterprises) finance, solar finance, water, and sanitation loans, etc. This also means MFIs have more opportunity to connect with people at the grass root level and enrich their lives in newer ways.
Apart from exploring different business verticals, building presence across the country is the key. The need for formal credit varies not just from one state to the other but also across districts. Fine understanding of client needs, local culture, regulations, challenges, and opportunities enables MFIs to strengthen presence in new geographies and add value to the bottom line.
Leverage technology to optimise operational cost
The major operational cost for MFIs is to set up branches in remote areas, recruit staff, documentation and KYC, loan disbursal, and collection. With digitisation of client on boarding process using mobility devices, documentation and disbursal time can be reduced significantly. Jan-Dhan accounts allow a majority of borrowers to receive loan amount directly in their accounts, minimising the risks associated with cash. On a macro level, real time data analytics helps MFIs keep a check on portfolio performance, customer concentration, potential risks, and new areas of growth.
Invest in financial literacy
The lack of financial literacy keeps a large rural population in the country away from formal credit. With their dominant presence in rural and semi-urban areas, MFIs are well placed to bridge this gap. At the same time, the social connect established during financial literacy campaigns also helps in developing the client base within the area or community. Financial literacy also inculcates the habit of savings and timely repayment of loan. This is a win-win situation for all the stakeholders, the business, the clients, all financial institutions, and the society at large.
The role of microfinance in financial inclusion and poverty alleviation has been proved all over the world. As the industry aims to find the balance between profitability and social good, right policy measures from government and regulators, and strategic tie-ups with banks will hold the key to serve the people at the bottom at affordable cost.
Views are personal
The author is chairman and managing director, Satin Creditcare Network Limited.