Banks in Microfinance: Do They Have Any Strategy?

Microfinance in India has been a big thing for the past decade. In fact, for sometime it was felt that it was a solution for poverty in India before everyone realized that the expectations from it were over hyped. However, with so many players joining the bandwagon, banks have also joined in the fray, sometimes as an ally of MFIs and sometimes as competitors, and mostly as agencies fuelling the intense competition between agencies.

Although almost every bank has entered microfinance, from nationalized banks to private banks to foreign banks, there does not seem to be any focused strategy for the same. Apart from ICICI bank which is very aggressive in the field, all others have a policy of wait and watch, and have been very conservative. While a lot of the banks are there in this sector to fulfill their target of priority sector lending, a few banks believe in the bottom of the pyramid theory, and feel that this sector can actually be a rewarding source of revenue. Yet, no one seems to have a strategy in place, and currently each bank is doing a lot of trials and errors to find out what can be the best strategy, while in the process leaving the MFIs to make hay.

There are three ways that banks reach out to the Microfinance clients. One is by direct lending to such clients, which is usually and mostly through government schemes that come out from time to time. Also, they reach out to people individually. This is not much popular among the bankers as this method has seen large defaults and NPAs for banks. The second method is the SHG Bank Linkage model, where the groups formed by either the bank or some other NGO is given loans by the bank. Most nationalized banks, through NABARD have been following this method, but again, the results are not very positive. The third and the most popular way is to not give loans to the ultimate clients directly, but to lend to an intermediary, the MFI, which in turn onlends to clients. The MFI pays the money back to the bank. Again here there are different methods in which this is done. Term Loans, Cash Credit Loans or Agency model, where the MFI works as an agent of the bank and charges a commission for its services, while the loan portfolio and the clients belong to the bank.

As discussed earlier, the first two ways have not been very successful. The third is the most popular way but there are many problems with that too. One of the major problems there is that an intermediary in between increases the final cost of borrowing to the client by a huge margin. Another problem is that there are very few strong and well established MFIs which can be given loans to, and identifying and separating potential and good MFIs from the poor ones is really difficult, and certainly not an area which the banks are very capable at. Of course there are compatibility issues and the Partnership Model of the ICICI has gone through rough weather recently due to its over aggressive nature and RBIs guidelines. But all this has happened mostly because there has not been a very well thought out strategy on the part of the banks based on their own strengths and weaknesses and available resources. Even if there has been one, it has not been very well thought out or either has been too aggressive or too conservative.

Yes, there is a huge market for Microfinance out there, and yes there is fortune at the bottom of the pyramid, and banks, if they operate properly, can be the most efficient players in the sector, giving the poor clients very good deal on financial services, as banks can provide a full range of financial services at very reasonable rates. But for this to happen, they first need to have a concentrated, focused and well targeted strategy.