Risk Management Practices in Indian Microfinance Sector: A Study of Some Selected Institutions in West Bengal

Risk Management Practices in Indian Microfinance Sector: A Study of Some Selected Institutions in West Bengal

Ashish Kumar Sana (University of Calcutta, India) and Bappaditya Biswas (University of Calcutta, India)
DOI: 10.4018/978-1-5225-5213-0.ch001

Abstract

Microfinance institutions (MFIs) are exposed to a great number of risks such as institutional risks, operational risks, financial management risks, and external risks that threaten effective services to clients, financial stability, and future sustainability. In this background, the objectives of the chapter are (1) to understand the concept risk and risk management of MFIs and (2) to examine the risk management practices of select MFIs in West Bengal. Based on the objectives, a structured questionnaire has been prepared to examine risk management practices of MFIs and problems associated with implementing risk management tools and techniques. The study found that most of the MFIs have not adopted risk management tools and techniques so far in their institutions to minimize risks. The study also found that the small MFIs are lacking qualified and professional persons in management and hence facing more strategic and governance risks.
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Introduction

The Indian Microfinance Sector has witnessed a phenomenal growth over the past two decades. Self Help Group Bank Linkage Programme (SBLP) is a step to bring the “unbanked” poor into the formal banking system and to inculcate thrift and credit habits. SBPL has now become the largest community based microfinance initiative with 85.77 lakh SHGs as on 31 March 2017 covering more than a hundred million rural households (Status of Microfinance in India 2016-17, NABARD).

The quantum of credit made available to the poor and financially excluded clients has gone past Rs. 60,000 crore and number of clients benefitted is close to 40 million as of March 2017 (According to Bharat Microfinance Report, 2016-17). The role of Microfinance Institutions (MFIs) in providing financial services to those who could not be served by formal banks is found to play a prominent role. The MFIs has grown remarkably during past two decades, spreading across the country reached 31.4 million clients all over India. The total number of SHGs under MFIs stood at 46.72 lakh with a total loan amount outstanding of Rs. 57119 crore. Microfinance institutions (MFIs) exist to fulfil a dual mission – financial sustainability and positive social impact on the urban and rural poor of the communities that they serve. Thus MFIs try to simultaneously achieve this twin goal of access (by the poor) and sustainability (of the institution or its micro-credit portfolio). Twin performance measures of MFIs with Access and Sustainability are shown below in Table 1.

Table 1.
Twin Performance Measures of MFIs
Low AccessHigh Sustainability1.Sustainable financial services reach the target clientsHigh Access
2. Sustainable financial services with low access by the target clients
3. Highly subsidized financial services with low access by the target clients4.Highly subsidized financial services reach the target clients
Low Sustainability

In India, MFIs provided loans for consumption and productive purposes, a major part of the credit flow, 94% are channelized for income generating activities. Agriculture, Animal husbandry and small trading are the major income generating activities that account for 79% of the micro credit provided by MFIs (2016). Non-income generating loans are mostly used for consumption, housing and education of children of their clients. The RBI issued guidelines to regulate NBFC-MFIs and retain Priority Sector Lending status for MFIs. These guidelines ensure transparency in disbursement of loans and other services offered by NBFC-MFIs by requiring them to assess client indebtedness before loan disbursement to avoid over indebtedness. MFIs are also asked to set up grievance redressal cells, thus ensuring client protection.

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