Can the Marriage of MFIs with Banks be a Sustainable Option out of the Microfina...
Mumbai, India, August, 24 2011 -
There is a feeling among bankers that the acquisition of MFIs could strengthen the functioning of these institutions and enable the much-needed funds infusion. But any such takeover would first require an assessment of the portfolio of these MFIs
The proposed Microfinance Institutions (Development and Regulation) Bill, 2011 states that its aim is, "to provide access to financial services for the rural and urban poor and certain disadvantaged sections of the people by promoting the growth and development of microfinance institutions as extended arms of banks and financial institutions and for the regulation of microfinance institutions and for matters connected therewith and incidental thereto."
If microfinance institutions (MFIs) are to be extended arms of the banking sector, then why not consider the idea of banks acquiring MFIs? This is especially relevant in the present Indian context and many stakeholders appear to be in favour of such a swayamvar.
Some bankers feel that this is the only way out as banks would be able to infuse capital, establish better governance, ensure that systems/processes function on the ground, and most importantly that banks will also be able to satisfy their mandate of financial inclusion. However, they also think that the Reserve Bank of India (RBI) must take the initiative and prepare the stage for the bank-MFI swayamvar
to take place. One of them remarked emphatically that, "this is the only way out of the present mess, as banks will then feel that they are in control of the situation in terms of growth plans, avoiding multiple-lending, over-indebtedness and the like. And, over time, this arrangement will also enable banks to deliver savings and risk management services through well-governed MFIs as business correspondents."
In my opinion, while this is a useful suggestion, there are problems here, including assessment of portfolio, merging of corporate cultures and the like, that need to be addressed. These would need to be addressed properly and banks would certainly like (and have) to be sure that—while there may be some risk in the microfinance portfolio—the portfolio does not have "lemons" (defined as non-performing assets) in significant measure.
The aspect of ghost clients, multiple-lending, greening of loans, use of third party agents and similar aspects are a cause for worry and these suggest that the portfolio of MFIs may not be as sound as portrayed to be. The Andhra Pradesh crisis and its impact have compounded these problems manifold, and what you have is a portfolio under great stress. Therefore, a whole lot of things need to be carefully ascertained before the match-making gets underway and is successful.
As one banker cautioned, "While the idea is indeed attractive and could be a practical way out of the present mess, the issue of corporate cultures is a critical one and should not be underestimated. Hence, acquiring banks must therefore be wary of the fact that managing the acquired MFIs will not be the same as managing banks and that there would be important differences in systems and the way things happen on a day-to-day basis. If the acquiring banks try to foist their corporate culture on MFIs, the acquisitions could fail. So, while acquisition of MFIs is a good idea in today's crisis-ridden environment, the management of MFIs (post acquisition) will have to be done in a hands-off manner by the banks concerned. This needs to be clearly understood prior to an acquisition and also followed in reality, post acquisition."
Commenting on the likely success of such acquisitions, an industry stakeholder remarked, "I am not sure if the acquisition will really work, as wherever such acquisitions have happened, the acquirers tend to force their systems and practices on the acquired institutions. This may not work and also, staff turnover could increase-in fact, it is already high in microfinance and that may prevent the new entity from settling down. I am most worried about how the clients would view such an event and the new entity and from my little experience; I think that they may not be as free with a banking institution as with a local MFI."
As a retired senior management executive of a public sector bank summed up the merit of this idea beautifully, "This is a very useful idea, but it should be operationalised carefully. Banks that have worked closely with specific MFIs should consider acquiring them. The rationale for this is that they would know the strengths and weaknesses of the concerned MFI and hence, would be able to manage the entity better, post the acquisition. The RBI must look at the large (NBFCs and other) MFIs that could be acquired, call for a meeting with them and get their concurrence before giving the go-ahead. If this happens, it would be one of the best things for microfinance as the industry will grow in a healthy manner because of better governance and higher transparency in banks, which I'm certain will rub off on the acquired NBFC MFIs."
The cautionary notes apart, what would be the advantages if banks were to acquire MFIs?
- First, MFIs will be able to gain access to capital and perhaps lower cost bank funds, and thereby offer better-priced products to a larger number of customers. Please note that capital is definitely required to bail out MFIs from the present crisis.
- Second, this would facilitate further scaling up by MFIs, as banks can infuse and attract the necessary capital. The governance, management and systems of MFIs will improve and become more robust. The challenge here, of course, would be to ensure that the flexibility and easy organisation style of MFIs is not lost.
As evident, the initial reactions to the idea of banks acquiring MFIs have been positive. In my opinion, if some of the challenges mentioned in this connection are addressed suitably, the idea is workable in the context of the following outcomes:
- Post acquisition, MFIs should become more stable and mature financial intermediaries; and
- At the same time, the MFIs must retain their local charm and grassroots approach, which affords them considerable flexibility and scope for innovation.
Without question, enabling banks to acquire MFIs is worth exploring and could turn out to be the much-sought-after solution for the current problems of the microfinance industry… I sincerely hope that the Union Ministry of Finance and the RBI will look at this seriously, as a possible way out of the crisis.