Our adviser, Bindu Ananth’s tweet brought our attention to an excellent article on LiveMint “ A Matter of Incentives” that said:
Retail financial products are push products. How many times have we heard this said to defend products pregnant with costs? There is an inherent flaw in this argument for three reasons. One, it is unfair to the buyers because they are sold products that benefit the seller more. Two, buyers end up paying for the negative sales calls the seller makes. Out of every 10 people approached, maybe one or two finally sign the check, say product manufacturers and distributors in defence of the high cost of distribution, which means that the cost of their negative sales calls are loaded on to the person who buys. Unfair.
This got us thinking. Perhaps the reasons above could explain in part the difficulties being faced by the Indian microfinance industry today.
MFIs had managed to insulate themselves to a large extent by increasing their interest rates to cover their cost of operations with modest profit margins. Since the entire industry interest rate average was high, there was little need to innovate and develop processes that would dramatically reduce their costs. The fact that there was a huge demand for microfinance only made MFIs more comfortable and didn’t help spur innovation and cost cutting either. Now, as the pressure on MFIs to reduce their interest rates increases, they find themselves with little time to change their ways and re-imagine their operations. So many are throwing up their hands in the air and resorting to the more conservative approach, saying “24% interest rate cap is just not possible, we will have to shut down,” when instead they should ask for some time and invest resources in getting their math right.
The MFI business model, by design, requires significant interaction with the end customers (on an average, twice every month) to reduce risks and keep NPAs minimal. Customer acquisition, too, is a slow process and typically requires nearly 4 to 5 days of training as well as verbal testing by at least two senior level members of the MFI’s distribution staff.
But, really, the problem is not so much with what we’ve detailed above but with the following:
- Defaulters do exist (in spite of the group guarantee check) but the periodic resource intensive recovery process reduces the effect on the balance sheets. We have heard that field agents sometimes make trips in vain. What if, at the center meeting, field agents could also capture the “promise to date” (when the customer is likely to pay back by) and the customer’s contact number? Field agents could optimize their time/schedule and meet the customer accordingly. Less travel means lower costs. If MFIs could keep their databases up to date and store the current contact details of customers with telephone numbers, then field agents could even call their customers to confirm meeting before heading out to see them.
- It’s not uncommon to see groups of customers being trained and being disqualified at the final stage (typically GRT) due to violation of simple rules (the fact that they are one another’s family members, that the group is somehow not homogenous enough, etc.). Making the process more stringent and training field agents further had not solved the problem. What if we could come up with a simple, objective process to monitor progress (almost like a personal balance scorecard) and constantly report back these errors to the field agent? Less errors, less misses (“negative sales” as the LiveMint article puts it), lower costs.
- Any outsider will be amazed by the dependency of MFIs’ field operations on paper. Saving paper will not lead to huge savings (though, someone recently pointed out Carbon Credits) but it will definitely reduce information delay. Documents are exchanged between the branch and head office and sent back and forth if and when there are any errors that require rectification. With the error rate being at an average of around 8 to 10% of the total volume of applications (during customer acquisition) this leads to huge drop in productivity not only at the field but also at the back office. Having multiple manual checks has not really reduced the problem for MFIs. What if there was a way for someone to remotely do a quick check and point out errors while the field agent was sitting with the customer and filling out the application? Less errors, less back and forth, lower costs.
- Maybe technology is the solution or maybe it is simply about tweaking processes or maybe it’s both. But now, more than ever before, MFIs must be bold, re-imagine their processes, and invest their resources in rebuilding themselves.