India: Putting the Focus on Borrowers – The Microfinance Story
This Case Study shares the lessons learned during the implementation of components of the Responsible Finance program of IFC’s advisory Services—and how that program is having a clear and defined impact on India’s microfinance industry.
In Andhra Pradesh, high growth in the microfinance industry led to an overemphasis on the supply side, ignoring the impact on clients, and brought the sector under scrutiny with the onset of a microfinance crisis in August 2010. The state government’s restrictions on new lending and recovery led to huge nonperforming loans in microfinance portfolios, and consequently bank lending to microfinance institutions plummeted across India, falling to almost zero for those with exposure in Andhra Pradesh. Microfinance operations reached a standstill, and only $835 million is estimated to have been lent to the sector in fiscal year 2012, compared to $2.38 billion during fiscal year 2011.
Given the changed circumstances, with microfinance portfolios having deteriorated across Andhra Pradesh, IFC expanded the scope of its Responsible Finance program by promoting initiatives that incorporate greater customer-centricity into operations and raising decision makers’ and stakeholders’ awareness of the need to effectively address the reputational issues facing the sector. The program focused on multidimensional yet interlinked interventions, pitched at different stakeholder levels, that would address the multiple challenges the industry faced. The following key project components of the program span sector, institutional, and client levels:
- The Microfinance Credit Reporting project promotes use of credit bureaus for decision making and links credit bureaus to microfinance institutions, the key to reducing multiple borrowing and over-indebtedness. The project design incorporates increasing awareness of end borrowers as well as a study of the impact of credit bureaus on microfinance institution borrowers’ behavior and dissemination of results. The project has a database of more than 100 million client records and has received 45 million incremental inquiries to credit bureaus.
- The Responsible Finance Sectoral project works with the stakeholders at the sectoral level and aims at building the capacity of industry associations, facilitating adoption of a common code of conduct, supporting policy advocacy measures, carrying out benchmarking studies, and creating forums for stakeholders to arrive at consensus on key issues facing the sector and potential solutions. The project, with its work with the industry associations, covers more than 90 percent of the microfinance sector. IFC also worked with SMART Campaign India—at the institutional level—for the adoption of global client protection principles (CPPs) by Indian microfinance institutions. The project supports training on CPPs for microfinance institution staff and onsite assessment of the institutions, as well as guidance on appropriate product design and delivery, enhancing transparency, responsible pricing, fair and respectful treatment of clients, privacy of client data, and mechanisms for complaint resolution.
- The Financial Awareness program works on the demand side and aims to roll out an effective and sustainable financial awareness program for lowincome households so that clients make informed choices about financial services—and microfinance institutions and financial institutions experience better business outcomes.
- The Risk Management project contributes to strengthening risk management systems and practices in the microfinance sector in India. It aims to promote global risk management practices in Indian microfinance institutions and integrate them with responsible finance practices. On completion, it is expected to cover 28 microfinance institutions.
- The microfinance crisis demanded a rapid and multi-pronged response.
- In project design, propose holistic solutions.
- Engage with key stakeholders for maximum sectoral outreach.
- Master the balancing act: customize content and standardize quality.
- Ensure client buy-in early on.
Through its Responsible Finance program, IFC with its partners has helped microfinance institutions institutionalize client protection principles and codes of conduct. Across South Asia, the Access to Finance team is managing 16 microfinance institution projects with a built-in Responsible Finance component. The Indian microfinance institutions are nearly 60 percent of the banking sector’s outreach to small lenders; therefore, the impact of these IFC initiatives may be felt by as many as 26 million clients.
Commitment to responsible finance requires participation from all stakeholders, and this program serves to bring them together on the same platform. It requires innovative and proactive approaches at the sectoral, institutional, and client levels. These collaborative efforts aim to build sustainable partnerships in Indian microfinance—partnerships that clearly demonstrate the social impact of the work being done and that do a better job of communicating the microfinance success story. The systematic approach this program follows has had a profound impact on the sector.
We hope these successes—and how the program addressed the challenges—can provide insights that will help those developing similar approaches in other regions. IFC’s Responsible Finance advisory program can continue to be a key factor in building capacity and revamping the sector in fledgling and mature microfinance markets throughout the world. IFC is geared to play a critical role by replicating lessons learned from successful interventions globally.