Chapter 7 FINDINGS, SUGGESTIONS & CONCLUSIONS

Transcription

1 Chapter 7 FINDINGS, SUGGESTIONS & CONCLUSIONS 7.1 Findings of the Study Findings based on Introductory Questions It was found that, 43% of MFIs are Non Banking Financial Institutions (NBFCs) followed by society (41%), Section 25 Company 12% and Trust 4%. The number of MFI -NBFC are relatively much high in especially in Gujarat state. This implies that despite the challenges faced by them, NBFCs are of the view that the microfinance sector is giving them opportunities. From the graph, it can be seen that 68% of respondents have conducted the impact study to know the extent of improvement in standard of living of people. This helps them to get connected with the poor people. It also helps them to formulate strategies regarding loan management. It also gives them the way to reach to maximum clients so that the client coverage as an objective can be taken care of along with the objective sustainability. All the MFIs, whether trust, society, section 25 company and NBFC send their executives on the regular basis to find the improvement in the stsndard of living of their customers. When the respondents were asked question regarding distance travel to receive a loan or make deposits, it was found that majority of clients (76%) travel less than 10 kms. This means that the majority of clients of these MFIs are from nearby areas. The reason is that there are many Self Help Groups, Joint Liability Groups who are taking care of these clients. These SHGs and JLGs are linked to these MFIs. 154

2 It can be seen that majority of credit agents (77%) are going out of their institution to meet their clients. In fact, sales staff is recruited for this purpose. Their responsibility is to handle the clients of specific region/area. This helps them to get connected to their clients to keep track of the payment schedule so that NPA fully remains under control. Meeting clients outside institution also helps credit agents to develop strategies regarding liability and asset side. This meeting is more rigorously taken care among NBFCs like MAS Financial Services Limited, Disha Microfinance limited, Arman Financial Services Limited, Light Financial Services, Janalakshmi Financial Services Limited, Asmitha Microfin Limited, Ananya Finance for Inclusive Growth Pvt. Limited and Pahal Financial Services Private Limited. To make decision regarding allocation of loans, majority of MFIs (68%) prefer meeting clients more than once in a month. It indicates that MFIs are taking care of meeting both the main objectives i.e. sustainability and outreach. Regular meeting also help MFIs to get connected with their clients. It can be seen that despite regular meeting with client to improve the quality of services for the clients, market survey is not given much importance as a tool to improve overall service. Market survey can help MFIs to improve overall services. MFIs can come with viable solutions from the issues raised by clients. Though it was found that the sales staffs are given training to satisfy the need and requirement of the clients Findings based on the challenges faced by Micro Finance Institutions In case of the first factor, Financial Issues, factor loading is the highest for the sub factor, High transaction cost (0.868) which indicates that it is a major financial issue among all given sub factors, followed by Inadequacy of financial resources as the primary constraint,(cheap fund) As all sub-factor loads are more than 0.5, except rescheduling loans (-0.811); they are significant in influencing Financial Issues. In 155

3 current Microfinance situation, legal entities is facing problems in raising money from the nationalized banks, which is creating a shortage of cash flow. To overcome this shortage organization is accepting high cost debt funds from the private players. For the second factor, operational Issues, factor loading is the highest for the sub factor, management and processing of data which indicates that it is a major operational issue among all given sub factors. As all sub-factor loads are more than 0.5, they are significant in influencing operational Issues. The survey found that MFIs are having operational issues like management and processing of data, provision of a range of products and services, lack of basic infrastructure and availability of inadequate network. The reason for the same is that the Non-profit MFIs like Trust and Section 25 Company usually do not have any incentive to adopt best practices related to managing financial service organizations. Governance and accountability are limited in case of these MFIs. In case of NBFCs and society, the assumption is that member control would ensure good governance. But the member control gets limited as soon as the size and distance of MFIs grows beyond few hundred members and few villages. A difference in income, literacy and exposure further aggravates the problem. In case of the third factor, human resource issues, factor loading is the highest for the sub factor, No. of borrowers per field staff worker (0.888). This indicate that the MFIs in Ahmedabad and Gandhinagar area the number of employees especially field staff worker are less. Moreover sufficient training on time to time basis is required to be given to them so that the productivity increases. It was found that performance linked incentives for staff is not there as many non trust, society and company are averse to idea of incentives and performance linked payments. Moreover there was shortage of good quality staff at all levels, village level barefoot accountants to back office systems administrators. The more senior level staff usually have better alternative opportunities in the mainstream. 156

4 For the fourth factor, social issues, factor loading is highest for collection & delivery of money to remote areas (0.614) as all sub-factor loads are more than 0.5, they are significant in influencing sustainability. In case of the fifth factor, external issues, factor loading is the highest for the sub factor, Government regulatory actions for MF industry (0.656). The reason for the same is the scams coming out microfinance area. Due to which fortunately RBI has become active and has passed Microfinance Act. In case of sub-factor, Banks and lending institution s role in MF industry, the factor loading is negative (-0.819) which indicate that the banks and lending institutions are not seen as challenge, but as a supporter to smooth functioning of microfinance activities. Further because competition among MFIs was increasing, clients could borrow from multiple lenders. They get loan in excess of their repayment capacity with multiple borrowing. MFIs fail to manage the rapidly expanding market in terms of financing, monitoring credits and risk management. It can be seen that in the sixth factor, factor loading is highest for the sub factor retention rate (0.915). This indicates that the attrition rate among employees in microfinance business is high. Thus the salary package, incentives, regular training, work environment etc. to be improved to reduce the attrition. For the seventh factor, financial literacy, factor loading is highest for Client financial literacy (0.857). As all sub-factor loads are more than 0.5, they are significant in influencing financial literacy. This means the staff members especially field officers should be having proper training as to how to make the illiterate and uneducated clients financially literate. 157

5 In case of the eighth factor, management information system, factor loading is the highest for the sub factor, MIS system (0.956) followed by governance problem. The reason for the same is the majority of MFIs are relatively small in size, due to which the use of sophisticated MIS tools are not in much use. Due to less number of computers the use of software package is limited. Another reason is that sophisticated tools costs high which these small MFIs could not able to afford. It can be seen that in the ninth factor, institutional goals, factor loading is highest for development of mind set of staff (0.796) followed by education and skill-set of staff member (0.643) indicates that the MFIs are facing problems regarding availability of trained staff with mindset. It was found that the difference in legal entities has influence upon financial issues, Operational Issues, HR issues, External issues and Management Information System. Moreover, MFIs having legal entity NBFCs and Section 25 Company are facing more challenge in factor Financial Return; NBFCs are facing more perceived challenge in factor Operational Issues. MFIs having legal entity Trust and Society are facing more perceived challenge in factor sustainability. MFIs having legal entity NBFC and Section 25 Company are facing more perceived challenge in case of external factors as factor. The reason could be the uncertainty prevailing among MFIs due the scams in Andhra Pradesh. Loan procedures have become even tough. Banks are under scrutiny regarding loan disbursement to MFIs; moreover due to the entry of more MFIs in market, competition is becoming tough. MFIs having legal entity Trust (Saath Charitable Trust, Samerth Trust and Udgam Charitable Trust) and society ( Gujarat State Women s SEWA co-op Federation ltd., Unnati Foundation, Suryoday Micro Finance Pvt. Limited, Nidan Micro Finance Foundation, Indian School of Microfinance for Women, Equitas Foundation and Arohan Cooperative Federation) are facing more perceived challenge in factor Management Information System. Whereas all other factors i.e. social impact, expansion, financial literacy and institutional goals shown insignificant relationship. 158

6 It was found that the MFIs having legal entity, NBFC, are facing more perceived challenges as in factors, Financial Return and Operational Issues, MFIs having legal entity, trust are facing more perceived challenges in factor Sustainability, MFIs having legal entity, society are facing more perceived challenges. There is significant difference in the perceived challenges faced between MFIs having different objectives. Eight factors showed significant relationship, except factor, Institutional Goals. Further it can be stated that MFIs are giving more importance to self sufficiency as an objective in factors Financial Return, Operational Issues, Social Impact, External factors, Expansion, Financial literacy and Management Information System, where as in factor Sustainability, more importance is given to client coverage as an objective (80 percent) Findings based on the objectives of Micro Finance Institutions It was found that the out of 75 respondents, 43(57%) respondents believe the fact that both sustainability and outreach are more or less equally important as an objective. Majorly, Society and Section 25 Company were having this opinion. NBFCs were emphasizing relatively more on sustainability 30 (40%) as an objective. In case of Legal Entity, Trust, emphasize is more on client coverage i.e. outreach as compare to sustainability. Thus the survey found that though the basic ideology of MFIs is to serve the society and reach to the poors but NBFCs and Section 25 Companies are giving due importance to sustainability as an objective of the MFI. This implies that the focus of MFIs had shifted largely from a social mission to an aggressive commercialization approach. Profit becoming first priority in MFIs in parallel with commercialization over time that leads to increase in indebted borrowers. 159

7 It can be seen that the difference in objectives of Microfinance Institutions has influence upon all factors i.e. Financial Issues, Operational Issues, Social Impact, Sustainability, External Factors, Expansion, Financial Literacy, Management Information System and Institutional Goals as a factor faced by MFIs. Based on literature review, the percentage distribution between outreach and sustainability can be, 0%-100% indicate focus is only on sustainability, 20%-80% is 20% outreach and 80 % sustainability, 40%-60% is 20% outreach and 80 % sustainability, 60% - 40% is 60% outreach and 40 % sustainability, 80% - 20% is 80% outreach and 20 % sustainability. For the factor, Financial Issues, it is observed that the highest mean value (3.396) is for 40%-60% objective type which indicated that the MFIs should focus more on the 40%- 60% combination of objective, followed by 60%-40% combination of objective. All the factors show significant relationship, except factor, Institutional Goals, as there p value is less than 0.05, the significance level of 5 per cent. Further it can be stated that MFIs are giving more importance to self sufficiency as an objective in factors Financial Return, Operational Issues, Social Impact, External factors, Expansion, Financial literacy and Management Information System, where as in factor Sustainability, more importance is given to client coverage as an objective (80 percent) Findings based on the opportunity available for Micro Finance Institutions It was found that, three types of Legal Entity i.e. Society (3.16), Section 25 Company (3.67) and NBFC (3.94) are agreeing that MFIs promote all kinds of business i.e all kinds of microfinancing activities like micro saving, microcredit, micro insurance, remittance and other products like pension, provident fund, etc. and further diversification, whereas Trust (2.00) disagrees with the same which indicates that the people involved in running the trust do not have similar perception regarding entry into different types of business. Statement regarding microfinance institutions are effective tool against poverty response, it was found that all four types of legal entity strongly believes that microfinance institutions promote economic growth i.e. Trust (4.00) 160

8 Society (3.45), Section 25 Company (4.67) and NBFC (4.47). Response was mixed for the statement, Microfinance Institution s aim is not only poverty purge as Section 25 Company (4.44) and NBFC (4.41) strongly believes the same. The reason is that they have to balance between sustainability and outreach. Whereas trust (2.00) emphasizes more on outreach and the response of Society (3.00) is neutral in this regard. Finally all four legal entities strongly believe that partnership between commercial banks & MFIs definitely helps in meeting the institution s objectives. Response to the question regarding MFI as an effective tool against poverty, reveals that almost all types of legal entity whether trust, Society, Section 25 Company Act or NBFC (96%), believes that microfinance is surely an effective tool against poverty. This implies that all the type legal entities perceive that microfinance is effective tool in reducing poverty. The reason of stating the same with confidence is that they have conducted the impact assessment study. Respondents claim boldly that the emergence of these institutions has improved the standard of living of people in nearby areas. Taking all legal entities as a whole, indicating the significant difference in the perception of MFIs for promoting economic growth. They strongly believe that provision of credit to the poor has proved to be powerful tool in development. By leveraging the entrepreneurial spirit and allowing poor to better manage their financial lives, microfinance facilitates from the bottom up. They feel that the growth of microfinance sector would be an increasingly powerful force in bringing about sustainable and balanced increase in quality of life of the needy people. It is definitely an important tool for development. Taking all legal entities as a whole the observed significance level is less than 0.05 indicating significant difference in the perception of MFIs for not only focusing on outreach but also focusing on sustainability (MF s aim is not only poverty purge). The unweighted mean, indicates that even if different types of legal entities have equal 161

9 presence across the economy, there is significant difference in the perception of MFIs for not only focusing on outreach but also focusing on sustainability. The reason for the same is because NBFCs and Section 25 Company are focusing more on sustainability whereas society focuses on both, sustainability and outreach. The weighted means indicate that if different types of legal entities are proportionately present across the economy, there is significant difference in the perception of MFIs for not only focusing on outreach but also focusing on sustainability. Taking all legal entities as a whole indicate significant difference in the perception of MFIs regarding working in partnership with commercial banks for smooth functioning of MFIs. The unweighted mean, indicate that if different types of legal entities have equal presence across the economy, there is not much significant difference in the perception of MFIs regarding working in partnership with commercial banks for smooth functioning of MFIs. The weighted mean, indicate that if different types of legal entities are proportionately present across the economy, there is not much significant difference in the perception of MFIs regarding working in partnership with commercial banks for smooth functioning of MFIs. This implies that all the type legal entities are strongly having the same opinion that partnership with banks would support in better functioning of their microfinance activity. Based on overall findings the problems faced by the MFIs are (a) High cost of funds and financing, (b) Marketing i.e. disbursement and collection of credit services by the MFIs leads to high cost of information (c) High cost of operations leads to operational issues, (d) Inefficiency in information sharing as MFIs fails to communicate with one another leading to high risk and susceptibility of the indebted, (e) Lack of physical infrastructure which can promote more and innovative profitable ventures, (f) Lack of proper regulatory mechanism, (g) Low levels of technical expertise and entrepreneurial knowledge and (h) Credit for non-productive and consumption purposes. 162

10 7.2 Suggestions In current Microfinance situation organization is facing problems in raising money from the commercial banks, which is creating a shortage of cash flow. To overcome this shortage they are accepting high cost debt funds from the private players. The MFIs should seek out for funds from alternative sources i.e., equity markets, foreign investors, private equity investors rather than depending on banks. They should follow such fund sources which offer the lowest cost. And to get funds from such sources they must standardize and improve their practices. In this connection, relatively large MFIs should practice full transparency, professional management, disclosures of information on all accounts, implementation of international standardization practices (ISO) and following of Generally Accepted Accounting Principles (GAAP). This will enable them access to institutional funding across the world, as these international organizations strictly follow such practices before funding. MFIs have to focus on effective cash flow management which would reduce unnecessary blockage of cash. Every branch has to be linked directly with banks to reduce cash transfer timings. To strengthen the operation procedures for field level activity and to increase repayment rate, it can be suggested that the MFIs can change collection period from weekly to monthly basis to overcome high transaction cost. Regarding financial challenges it can be suggested that there should be centralized structure of organization so that maximum authority of loan disbursement can retain with top management. Proper analysis of client s risk assessment to be done with the help of income analysis of client and outstanding analysis of clients. Moreover, customer satisfaction audits by independent agencies must be conducted from time to time. To overcome HR issues organization can start offering salary packages prevailing in sector. Moreover policy and regulation related to documentation to be formed & executed seriously. Performance linked incentives for staff should be encouraged. This would develop corporate culture and thereby sustainability as an objective along with outreach can be met. 163

11 To overcome staffing concerns, standard training module for different levels of employees in organization to be prepared. Products understanding of staff members also need to be emphasized. On job and off job training to be given to newly hired staff members. This would lead to shift in attitude and behaviour of employees. They may come up with the need based and affordable products for the clients. This would also help in maintaining client relationship, training to clients, client awareness is necessary. The shortage of good quality staff at all levels can be taken care of by converting the pioneer MFIs into training institutions. Use of computers and telecom equipments must be encouraged by MFIs. Data and Information Management is one of the operational difficulty that organization faces from a long time. MFIs have to work on customized software which can generate good number of required reports. Information technology would be of great help not just to increase efficiency and reduce costs (internal to the organization) but also increase the access and presence of MFI in the global environment (external to the organization). It will add to the acceptance of MFIs across the globe providing better terms in any deal. Mechanism to share the information generated by MFIs must be created so that they not only benefit from the learning s of different players but can also crosscheck such critical information which could be beneficial to all of them. In this direction, a system to share information about credit allowed by different MFIs to a particular client is of particular relevance. This way, they can obtain information as to how much credit a client has already availed from different MFIs and compare it with his overall credit servicing capability. This will reduce the chances of loan trap for MFIs and also minimize the problem of multiple borrowing. MFIs have to force their sales because they are not entering any new area or are not coming up with any new products which could serve the other needs of the credit seekers. This compels them to enter new districts, states, regions on geographical lines or to come up with new 164

12 innovative products which could address specific needs of the credit seekers. In this connection, venturing to provide loans for vocational training, technical education, wedding purposes, etc., could be considered, that could be developed into viable businesses having huge markets. They could also venture into new product areas by offering microinsurance services. There are illegal and unethical practices adopted by the MFIs, especially in loan recovery, causing hardships to credit seekers. Such practices would adversely affect the long-term survival of the MFIs. To achieve this objective, adequate training should be given to the staff of MFIs so that they follow the lawful and ethical ways to carry out their jobs. Further, they must be trained in project appraisal and counseling so that they can guide the credit seekers on their projects, on the implications of loan terms, and can suggest any improvement in their plans. It is suggested that the government realize the need to provide funds from market to the MFIs directly without involving any other intermediary institutions. This reduce the multiple costs which leads to higher cost of lending by the MFIs and facilitate investors to think about investing in a commercially viable projects. This in turn would lead to better returns. Deposit acceptance, access to capital market, foreign investment, FIIs and other institutional investments could be various ways to go for. This would have two way effect, firstly it permit MFIs to get funds on better terms reducing the rate at which they finance their clients, secondly, provide better returns to investors. This will result in increasing the viability of MFI model. The MFIs and government must aim at providing marketing networks to those producers who depend on microcredit system to fund their ventures. For this, marketing network and system have to be created which will not only do the specialized job of providing marketing services to tiny industry produces but will also help them get a brand recognition. The branding will then provide the microenterprises better access to newer markets and different segments of higher value, fetching more value for their products. In this regard, an organization on the lines of Amul (brand of Gujrat Cooperative Milk Marketing Federation GCMMF) or SEWA (Gujarat State Mahila SEWA Cooperative Federation), which are entirely dedicated to 165

13 marketing of microenterprises produce under branded labels on professional lines, would be an idea worth looking into. This would not only help to create strong brand for microenterprise products, but also provide proper feedback and technical support to enterprises to deliver quality products as per the requirements. This will eventually ensure a better return on microcredit investments. 166

14 7.3 Conclusion Microfinance has emerged as an instrument which aimed at providing financial services to low income populations neglected by traditional financial institutions. No doubt the provision of credit to the poor has proved to be powerful tool in development, but there are number of challenges faced by microfinance institution. Based on overall findings the challenges faced by the MFIs are High cost of funds and financing; Marketing i.e. disbursement and collection of credit services by the MFIs leads to high cost of information; High cost of operations leads to operational issues; Inefficiency in information sharing as MFIs fails to communicate with one another leading to high risk and susceptibility of the indebted; Lack of physical infrastructure which can promote more and innovative profitable ventures; Lack of proper regulatory mechanism; Low levels of technical expertise and entrepreneurial knowledge and Credit for non-productive and consumption purposes. Despite the problems faced by the MFIs, there is no doubt that the model has enough potential to resolve some of the burning problems the country on the whole is facing i.e. imbalanced growth between privileged and underprivileged. The challenge, therefore, is to look beyond the present limitations and opportunities and execute plan which could make MFIs a vehicle to drive and deliver for all section of the society. 167

15 7.4 Directions for the Future Study The present study utilizes several important factors for exploring the challenges faced by microfinance institutions to meet their customary poverty alleviation mission. The present study was an attempt to identify various factors determining challenges and thereby to come up with workable strategies to counter these delivery challenges faced by micro finance institutions in Gujarat in general and Ahmedabad and Gandhinagar city in particular. It may be possible to carry out similar investigations at different parts country as well. This research do not study explicitly the extent to which MFIs contribute to the ultimate goals of poverty reduction, business development or alleviation of market failures, and it does not either perform a cost-benefit analysis of funds invested by donors or governments. Thus the remaining dimensions are recommended to be used as the framework for measuring MFIs level of adherence to their poverty alleviation mission in future studies. The ideas and empirical findings reported in this research suggests a large number of hypotheses that might be tested as part of this research stream. The hypotheses can be grouped according to the following categories: senior management, organizational focus, institutional performance, staff and customer attitudes, reward systems, funding sources, organizational systems and inter-departmental dynamics, and markets offerings and terms etc. 168