Target-setting bad for microfinance

There can be little doubt that Muhammad Yunus and his Nobel-winning work in Bangladesh and beyond have brought glory to all microfinance practitioners and recognition of their work.

Recently, I met the wife of a CEO of a microfinance company and she remarked how easy it has now become to explain what her husband does. Her husband's colleagues, who were part of the discussion, talked about how their parents spoke with new-found pride about their sons' choice of profession.

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I recall how three years ago, when I approached Business Standard wanting to share with its readers all the pioneering work that I witnessed in the microfinance sector, I was told that the industry was too small to merit dedicated column space. True enough.

Total disbursements to the MFIs then amounted to no more than a mere Rs 1,000 crore (Rs 10 billion). My argument that while on the strength of disbursements the sector was indeed tiny, the fact that potential customers numbered 600 million won the day for me and I have been writing since.

Things have really changed since then. Today, only one bank, ICICI Bank, which has been the most aggressive in the sector, may soon touch an annual disbursement figure to MFIs of Rs 1,000 crore.

Other banks and insurance companies too are wooing MFIs for their reach. With only a dozen MFIs with disbursements over Rs 100 crore (Rs 1 billion), venture funds are busy training ex-bankers and MF practitioners to become entrepreneurs and float MFIs which they can fund.

And last but not least, the Press too is now looking at the microfinance sector as an industry beyond one responsible for farmer deaths. Going by the number of calls I receive from journalist friends wanting to know more about this sector, there is clearly now more than just cursory interest.

In all this enthusiasm there is, to my mind, one disturbing trend. While the growth of "inclusive" financial instruments in credit and insurance is most encouraging, suddenly there seems to be a huge focus on numbers and targets.

There is a difference between the older MFIs, which were started by entrepreneurs with NGO and developmental genes, and some of those being started by ex-bankers with funding from venture funds.

Having seen the nationalised sector through its rural branch expansion and target disbursement phase, I worry about the microfinance companies. Being aggressively pushed by the banks, which refinance MFIs, the latter can quite easily fall into the trap of thinking that branch expansion and disbursement totals are ends in themselves.

Similar with insurance. Insurance companies chasing MFIs are dependent on the latter for ideas on products suitable for the poor, both urban and rural. Products, which are low on premium are obviously easy to sell and ramp up numbers on.

MFIs, with their eye on the present, often do not consider that once the claims start and the insurance company realises that it is not making money, the future of the products themselves may be in jeopardy.

While private sector banks, foreign banks and now venture funds push MFIs to show better numbers, it may be worthwhile for the latter to remember that while sustainability and profitability are sacrosanct there is in essence a difference between working for a bank and working for an MFI, essentially because banking services have become established amongst the target audience and therefore require limited product development work, while MFIs work for an audience long excluded from financial services and are very tough to be slotted into homogeneous market researchable baskets.

The provocation for this column was a quarterly review meeting of the Hyderabad-headquartered Basix group that I attended. Started over ten years ago, Basix is a company, which has been slow in disbursement (compared to younger MFIs) and fast on product innovation.

A gentleman who earlier worked for Basix and now works with a multilateral agency asked the Basix management why it was far from the target of a million customers that it had set for itself when it started.

Vijay Mahajan, founder and now chairman of the group, did not sound defensive about reaching a mere 25 per cent of the target. "One cannot start a company without having a target and a million seemed like a good figure," said Mahajan.

"But as we grew we realised that the quality of our loans and how they have changed the lives of those that have taken them are also important parameters to track."

Also, as the sector matures, all players have to work with and learn from each other. "So how do we apportion figures that others have achieved with our help or vice versa," asked Mahajan. "For those working in this sector, efforts are like ahuti in a yagna. When you pour the ghee you cannot tell how much of the fire is because of your effort".