Playing in the premier league

What does it take a microfinance institution (MFI) to graduate into and then succeed in the premier league of financial services — banking? It’s similar to a team or players moving for the first time into a sport’s premier league.

India’s Central bank recently granted Bandhan Financial Services a banking licence. It’s one of the two MFIs that gained a licence from a pool of about 25 applicants, which included some of India’s renowned business houses.

With nearly 5.5 million clients from among India’s poorest urban and rural districts, Bandhan has excelled in offering assistance to the needy since 2001.

Like many MFIs around the world that found themselves at the crossroads when they entered the banking arena for the first time — such as the Women’s World Bank, National Microfinance Bank Tanzania and PRASAC Cambodia — Bandhan too is in a similar position. While the direction in which they have to move is clear, the path is riddled with challenges and comes with opportunities.

By building their banking enterprises literally from the ground up, MFIs gain a huge advantage. Given that banks in India are encouraged to focus at least 25 per cent of their total business on financial inclusion and rural areas, microfinance companies have an edge over banks that have a more urban base.

Bandhan already has a 5.5 million client base, mostly comprising the rural populace. It can, therefore, acquire up to three times as many non-rural clients from the market.

Urban banks, on the other hand, would find expanding their rural footprint challenging, especially if they’re looking at the branch as their primary customer touch point. Regulations such as these give MFIs huge headroom for growth each year.

MFIs can also leapfrog over their competitors, by having access to contemporary technology from the start.. While even the world’s largest banks are hamstrung by their brick-and-mortar heritage to adequately address the needs of their Gen-Y clientele, new entrants can not only precisely chart out their social media strategy, they can also leverage the mobile for cost-efficient delivery of products and services. It’s a huge plus.

In fact, given that they have access to large sections of the population at the bottom of the financial pyramid, MFIs moving into banking have a better scope to grow their share of a nation’s economy.

It also follows that they could be innovators and disruptors in comparison with larger, less nimble, banks. It’s probably why when Bandhan gained a banking licence it was greeted with much cheer and viewed with considerable excitement.

But the weight of their successful heritage can often hamper the progress of MFIs in the banking arena. The small-league mentality can hardly enable success in the big league. MFIs need to focus on rapidly expanding their client profile: from individuals to SMEs. They also need to grow the potential and appetite of existing clients for financial products higher up the value chain. For instance, MFIs could tap the remittances of migrant workers to create innovative deposit or savings products.

One of the biggest challenges new entrants will have to deal with is risk management: from origination and disbursement through to collections.

The old norms at these institutions relating to evaluation, profiling and monitoring of risk will have to change momentously, if only from a regulatory compliance point of view.

For new entrants to succeed they would do well to integrate their risk and finance functions at their banking infancy — an advantage they naturally gain from setting up operations ground up. While on the one hand these organisations tend to score high on the human factor (a committed workforce with a sensitive finger on the pulse), they need to wed that with the benefits that modern technology brings: lower operating costs, better grasp of data and greater transparency, all of which lead to better decisions on the ground.

These issues naturally give the key point of a new entrant’s strategy particular urgency. MFIs need to get their technology partnership right, one that will take them into the next few decades.

New entrants must resist the temptation to compartmentalise their operations by opting for different systems for their various arms of business.

As “two eyes make one in sight”, so too a core system that unifies their enterprise vision — while helping them deliver products across multiple segments — is fundamental to their success.

Ultimately, be it for players or teams graduating into the premier league or MFIs moving into banking, the challenge is the same: if the talent is special and the skill sets honed and ready, what remains to be gained is the tactical nous that technology provides team management.

The writer is vice-president of Sales at Oracle Financial Solutions Services

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