Subject: Strategic Management
Topic: Strategic Plans of Microfinance Firm
Ten years into the second millennium and sixty five years after our India gained independence, more than 37% of our country’s population lives below the poverty line. More than 22% of the entire rural population and 15% of the urban population of India exists in this terrible financial predicament. It is important to note that 30% of the country’s poor take loans from MICROFINANCE INSTITUTIONS. This project gives a comprehensive view of the status and contribution of this sector to our economic growth and development. After much research, we have identified the strategic plans followed by these path-breaking institutions and analyzed their success with respect to generic management strategies. The Indian microfinance industry is the world’s largest microfinance industry. The objectives of these firms range from poverty alleviation, women empowerment, promoting gender equality and developing an entrepreneurial spirit within the population. With such multi-faceted goals, STRATEGIC PLANNING becomes the foundation on which all the business activities can be connected and aligned. A strategic plan for such a unique business model must challenge assumptions, gather input from the internal as well as external environment and effective implementation. To get further insight into these plans, we interviewed several experts, collected information from reliable sources and ultimately focused our study on the working of Hindusthan Microfinance Private Limited.
Our group did a lot of research on the importance of strategic planning, the types of strategic plans and the entire structural framework on microfinance and its penetration in our country. For this purpose, we studied numerous research papers, journals, business magazines and data from the Microfinance Information Exchange.
Upon identifying the various types of microfinance firms, we interviewed senior managers and employees in firms dealing with microfinance. For this, we prepared a detailed questionnaire that included questions on growth, marketing and organizational strategies as well as the challenges and opportunities in microfinance today. We visited a Post Office to inquire about the Small Savings Schemes, spoke at length with a Senior Analyst from ICICI Microfinance and interviewed the Managing Director as well as Vice President-Operations of Hindusthan Microfinance Private Limited.
We decided to focus our research project to the workings of the latter firm. After collecting all the relevant data, we conducted a comprehensive analysis of the firm’s strategies. A SWOT analysis as well as a PESTEL analysis has been thoroughly done to identify the gaps and strengths of the firm. Upon brainstorming, we have also given a few recommendations to the firm for superior performance.
Theories and Past Studies
Microfinance theoreticians have advanced two theories regarding their aims-an economic and a psychological. The economic theory treats microfinance institutions (MFIs) as infant industries, while the psychological theory differentiates microfinance entrepreneurs from traditional money lenders by portraying them as “social consciousness driven people.”
- Past Studies:
Global Partnerships Theory and Credit Lending Model
Global Partnerships expands opportunity for people living in poverty by investing affordable capital and management expertise in select MFI institutions (MFIs) in Latin America.
Consulting services in credit risk and delinquency management for leading rural MFI, including crisis management and loan portfolio restructuring – Eastern Europe, 2009-2010
Analysis of root causes of high delinquency; reengineering of credit risk management and loan collection (including the design of delinquency policies and an arrears committee); development of risk procedure and risk management reports; recommendations regarding development of MIS reports to allow for appropriate risk management and loan portfolio tracking; and training of credit staff and branch managers.
Private International Investment Group
Development of Business Plan for the establishment of a greenfield commercial bank providing MSE and (home-collected) retail loans – Russian Federation, 2009
Market review and competitive analysis; design of business strategy and roll-out plan; development of operating model; financial modelling and development of financial projections; and preparation of business plan document.
Establishment and development of a greenfield MFI – Argentina, 2004 to date
Design and establishment of greenfield microfinance institution, including the establishment of lending operations (credit methodology, operating model, incentive systems, policies and procedures, credit process, loan collection, information systems, and so on); recruitment and training of staff; implementation of proprietary credit information system of GMG; senior management roles.
Consulting services in support of the transformation of a leading MFI into a regulated commercial bank – Eastern Europe, 2009
Gap analysis for transformation with special emphasis on organisational, legal and financial aspects; feasibility check including development of strategy and action plan for transformation; assistance in the elaboration of business plan.
Microfinance: An Overview
Microfinance refers to a movement that envisions a world in which low-income households have permanent access to a range of high quality financial services to finance their income-producing activities, build assets, stabilize consumption, and protect against risks. These services are not limited to credit, but include savings, insurance, and money transfers. Microfinance has widely helped the poor and provided them the opportunities for starting their own business or enterprise by lending a loan at minimal collateral. Microfinance clients are usually self-employed, household-based entrepreneurs. Their diverse “microenterprises” include small retail shops, street vending, artisanal manufacture, and service provision. In rural areas, micro-entrepreneurs often have small income-generating activities such as food processing and trade; some but far from all are farmers. They take financial intermediation, like this, seriously and devote considerable effort to finding workable solutions.
Microfinance is a development strategy that provides credit and savings services to the poor, particularly rural women, for income-generating projects. In addition to providing economic benefits, microfinance is also an effective vehicle for women’s empowerment.
Micro-financing Institutions are of the following types:
Government based Profit making Institute, Government based non-Profit making Institute, A Profit making NGO, A Non-profit NGO. Be it any of these institutions, the basic strategies are similar.
The Case For Microfinance Firms in India
According to the World Bank, India is categorized as a “low-income” country. 70% of the population resides in rural areas, of which 60% of people depend on agriculture. Consequently, there is chronic under-employment and per capita income is only $ 3262. The country is a victim of abject poverty,low rate of education, low sex ratio, and exploitation. The major factor for such high incidence of rural poverty is the low asset base. Rural people have very limited access to institutionalized credit. Microfinance, when strategically planned and implemented, can be an important tool for economic growth. A recent survey conducted showed that there are approximately 147 microfinance firms functioning well in India that are able to satisfy the needs of people.
To focus our study on the strategic plans followed by microfinance firms, we approached a new microfinance institution, Hindustan Microfinance Private Limited that operates in Mumbai and provides various small loans to people unable to attain credit at larger banks. This bank gives loans to those who want to expand their business, start a business or use money for emergent matters and helps clients improve their financial management skills.
Hindusthan Microfinance Private Limited: A Company Profile
Mission: To offer credit and other financial products to the urban poor of India.
Vision: To provide financial services to 200,000 clients by 2013 and 500,00 clients by 2015
Type of MFI: Non Banking Financial Corporation
Founded In: March 2008
Founder: Mr. Anil Jadhav
Clientele: 100% women
Strategic Plans of Microfinance Firms
There are various kinds of strategies that are implemented by organizations for efficient running and effective achievement of goals. They can be for overall growth, marketing, finance, personnel, product mix, organizational or price. Here, we take a look at the strategies followed by MFIs and more specifically, whether Hindusthan Microfinance Private Limited executes these plans.
In growing and competitive markets MFIs are likely to take more risks to acquire new customers and expand their product offerings. Hindusthan Microfinance Private Limited(HMPL) has adopted ingredients from the Grameen Bank model. Earlier, microfinance concentrated on rural areas, but off late, there has been a significant increase in the microfinance activities provided to the urban areas. Even the involvement of females in microfinance has risen from 20% to 97% over a period of 33 years. HMPL currently does not engage in non-financial services but seeing a demand for the same, plans to introduce them in the near future. While HMPL concentrates on providing financial resources only to the urban poor as of now, it plans to diversify into the rural sector in Maharashtra by the month of January, 2011.
For the year 2009, microfinance in India has registered a growth rate of a whopping 30% and world wide 13%.One of the risks of high-powered growth is that MFIs may neglect customer services and relationships, even losing the face-to-face relationships with their clients that are critical to credit quality.
Market Penetration of HMPL from 2009-2010; Estimated Market Penetration by March 2011
Microcredit refers to very small loans given to those who lack financial collateral and steady employment to spur entrepreneurship. It is a very important part of every microfinance firm’s financial strategy and aims bringing it into mainstream financial systems. HMPL provides credit loans to a group of 5-6 women at a time. The interest rates on the loans are very high (29%- 35%) mainly due to the high operational costs, low primary lending rates and low return on equity. As per company policy, if the borrower dies, the firm collects Rs. 100 from everyone who is utilizing the services and the dead person’s account is written off. The company does not take any deposits from its customers.
Over the past few years, with evolvement of Microfinance in our country, there are various changes, which have taken place organizationally. While earlier microfinance operated only with a social objective, now more equity and funding is coming in that influences their overall strategies. HMPL, primarily a microfinance institution has sought “Non Banking Financial Company” status from RBI to get wide access to funding, including bank finance. Partners include HDFC Bank, Yes Bank, ABN Amro etc. However they still rely heavily on donations from charities and trusts for adequate funding. The clientele is 100% women who are known to be more responsible with money in rural areas. The most sustainable strategy is to train the community in leadership and managerial functions for them to become effective participants. The organization is well-placed in terms of its reputation in the industry as an organization with best practices.
HMPL sells products ranging from a price of Rs. 5,000 to 50,000. The ticket size is considerably low, considering there is limited financial collateral provided by the clients. This also eases loan repayment. HMPL follows a Joint Liability Group model like Grameen Bank, under
which, an average of 5 women form a group, and each of them take liability for each other . Social collateral, is thus high and members persuade the defaulter to repay the loan or the liability of the loan falls on the group.
Human Resource has largely been a neglected area in the microfinance institutions world-wide yet, the proper placement of right people in right jobs is essential. HMPL selects field officers who have in-depth knowledge of their neighboring areas and are trustworthy enough to handle money and take up the responsibility of a few villages at a time. Even individuals who have only passed their 10th Board Examination are given specialized training to effectively carry out the work and cut costs. High salaries are given to the top management for strategizing and designing plans.
Microfinance firms adopt different market strategies depending on their scale of business. While large scale operating MFI’s would use newspapers, magazines and television, small-based firms cannot afford such activities. HMPL, a relatively small firm, resorts to mass meetings and personal marketing on a regular basis with its clients. They use social media platforms such as Facebook to advertise, and also have a regular newsletter Hindusthan Monthly coming out soon.
Comprehensive Analysis:Strategic Plans of Microfinance Firm
S.W.O.T Analysis of Hindusthan Microfinance Private Ltd.
Good relationship with other local banks for credit dependency
No collateral security
Variety of financial products
Being a NBFC, easy access to funds.
Greater accountability, transparency, corporate governance
High operational and human resource costs
Heavy dependence on loans from donors and charitable organizations-no financial stability
Loan recovery from the destitute
Lack of legal regulations
Non-financial services unavailable
Suburban Areas provide a good potential for future growth of company(most population below BPL)
Introduction of new savings and credit programs
Increased foreign aid
Raising money by listing shares in stock market
Expansion in the north east section of India
Linking bank with self-help groups
Shortage of Liquidity
Fluctuations in foreign currency, if dependent on foreign aid
The Macroenvironmental factors Hindusthan Microfinance Private Limited must take into account while strategic planning
1) Even after 6 decades of independence, the government and the RBI have not been efficient enough to make laws for MFIs so transparency is still missing. On charges of coercion due to non-payment, Andhra Pradesh Microfinance Ordinance was passed on October 15, 2010. The Ordinance requires MFIs to register with the state government and gives the state government the power to shut down MFI activity. A number of NBFCs have been affected by the ordinance.
2) There is political stress from the parties in the neighborhood on MFIs to loan individuals who are not qualified for the loans (financially well off).
3) Government often intervenes with MFIs because of heavy interest rates charged by MFIs.
A Micro finance Institution has more expenses compared to a normal commercial bank. The same amount of money is being distributed among a number of clients as compared to in a commercial bank. Thus more space, stationery, efforts are required to store the data which in turn increases the expense. To cover these expenses, the interest rates charged are exorbitant.
1) The clients that most of the NGOs focus on are women. Women empowerment through Microfinance is the main mission of such firms. They not only provide capital but also basic knowledge of starting any business/ enterprise on their own. Later on these women can go and consult other commercial banks for bigger loans.
2) Many times, the better halves of such deprived women use them as a source of retrieving money from MFIs and use it for their own personal whims and fancies.
3) Certain sectors of the Indian society are still not broad minded enough to let women come forward and start their own business/enterprise. Thus MFIs lose most of their clientele due to such social backwardness.
4) MFIs provide loans to people with very low collateral. There are individuals who take loans from MFIs but do not utilize it for the stated purpose or repay it on time with the proper interest rates turning into bad debts and thus a loss for the Institution.
Technology can reduce transaction costs and improve transparency in delivering financial services, both of which can translate into increased access and lower costs for many lower-income clients. Challenges include the high cost and limited availability of existing technological solutions, lack of widely available local technical support to support MIS software, consumer adoption rates of technology, lack of basic communications infrastructure in many remote places etc. Despite the appeal of advanced delivery technologies, relatively few financial institutions have successfully deployed them to reach poor and low-income clients. Developing a solid management information system still remains one of the most important tasks facing microfinance institutions, particularly those scaling up.
India has a history of highly innovative watershed projects in which downstream landholders share benefits by compensating landless people upstream for providing an environmental service. Most current projects, however, take alternative measures that ignore the issue of environmental services. Evidence from 70 villages in Maharashtra suggests the presence of poverty alleviation trade-offs, highlighting the potential value of more explicitly addressing compensation for environmental services.
As of now no laws have been passed regarding MFIs. But two-three months down the line, laws and amendments are prone to take place. The Indian government proposes to introduce a bill to regulate microfinance institutions. India’s central bank currently does not regulate interest rates charged by micro lenders, but issues a fair practice code on interest rates to non-banking financial companies.The Department of Financial Services proposes to introduce the Micro Finance (Development & Regulation) Bill, 2010, after taking into account the views of RBI (Reserve Bank of India) and the Malegam Committee recommendations.
|A commercial bank is a type of financial intermediary and a type of bank. Commercial banking is also known as business banking. It is a bank that provides checking accounts, savings accounts, and money market accounts and that accepts time deposits.|
They give loans only on collateral basis.
Commercial banks are readily available in all parts of country
They provide loans at a high rate of interest
Ex-icicibank,hdfc bank etc.
|Microfinance is the provision of financial services to low-income clients or solidarity lending groups including consumers and the self-employed, who traditionally lack access to banking and related services.|
They give loans to self help groups without taking a collateral.
Microfinance companies are scarce and not readily available
They provide loans at nominal rate of interest
Ex-hindusthan microfinance pvtltd,grameen bank etc.
Recommendations for Hindusthan Microfinance Private Limited
- The firm must expand to rural and semi-rural areas in the state of Maharashtra as soon as possible as over 20% of the population in these areas lives below the poverty line.
- The firm must conduct market surveys on a regular basis to assess the growing needs of clients. They must make an effort to deliver non-financial services such as business training, management of family budget, literacy training, health services, access to social workers, gender sensitization to facilitate financial sustainability.
- With the number of mobile handsets increasing in India, they should explore Credit Sms-the future of microfinance as a viable option. By helping MFIs integrate mobile payments into their business strategies, it will eliminate geographic barriers to financial inclusion while simultaneously allowing users to generate robust auditing trails and client credit histories.
We firmly believe that an integrated approach to servicing clients can enhance microfinance’s effectiveness as a poverty alleviation tool. The fight to alleviate poverty is too great a task for anyone or any one discipline to combat it alone. As an entrenched and recognized leader in this mission, microfinance can serve as a bridge beyond banking and development. It can be the link that brings together the services and products available today to the people who need them most. Only through a collective effort will we have the best chance of succeeding.