March 27, 2006	Monday	Safar 26, 1427

Microfinance banks and Micro financial institutions are in business for providing basic financial services, through various loans and saving instruments to financially disadvantaged segment of the society.

This enables them to set up or expand their micro businesses, generate income and build up risk-efficient assets portfolio of movable and immovable properties and smoothen their consumption pattern through building up their savings in profitable saving schemes in situations of crop failure and other natural calamities.

In a situation of natural disasters like earth quakes and floods,, sometimes it becomes incumbent upon MFIs and MBIs to provide additional financial assistance to their clients to re-establish business or for rehabilitate work.

Those affected by recent earth quake in the northern areas and Azad Kashmir, particularly people from low income class, are in need of rebuilding their damaged houses and reviving their businesses.

Microfinance banks operating in those areas must come forward to float special loan products carrying soft terms, keeping in view the repayment capacity of borrowers.

Further, MFIs and MFBs must endeavour to offer loan and saving products and other ancillary services according to changing needs of clients. This necessitates creation of research department for development of innovative products on continuous basis, which are not only beneficial to clients but also involve low transaction cost.

Apart from floating loan products according to peculiar needs of cross sections of financially disadvantaged population, they need to add innovation and value to various credit schemes by providing support services like market linkage in order to enhance viability of client’s business, which in turn ensures timely and safe return of MFI’s funds, thus reducing transaction cost.

Clients, particularly those from rural areas, market their products through middle men and hence do not get fair price. MFIs / MBIs having branches in big cities can develop market linkage for rural area clients for products like milk, fruits, etc with manufacturing concerns of dairy products, fruit juices, jams and jellies etc to ensure not only better price for products but also regular supply of raw material to the manufacturing units. This also ensures regular recovery of loan from borrowers.

Normally, owners of micro businesses are in a disadvantaged position due to lack of knowledge of the market trends, poor packing of products and inability to hold products particularly of food items till they get the desired price.

MFIs/MBIs must arrange to provide orientation to clients in the areas of packing, basic marketing techniques, cold storage facilities, behavioural skills, particularly assertiveness to develop bargaining skills.

This will not only enable clients to get better price for their products, but also new avenues of business like packaging and cold storage business to go into with the help of extended loan ( within maximum limit of loan size allowed) from MFI concerned. This in turn will augment core business of the MFIs which is a key to their sustainability.

The developing countries are often motivated to provide non-financial services like education to their clients. At the same time, their legitimate concern for sustainability prevents them from entering this area of activity. In this regard, group approach to lending can help MFIs to provide low cost business and vocational education to clients just to improve performance of business.

No doubt, transaction cost with MFIs / MBIs is exceptionally high due to their providing services at door step of clients in the far-flung areas. Efforts should be made to develop such a delivery and collection of loans mechanism so that transaction cost and the risk involved are minimized.

The setting up of computerized satellite units, forming linkage between far-flung/rural areas and branches in urban areas would be a feasible strategy, saving large capital and recurring cost involved in having a full- fledged branch in an area where operations are not expected to be viable for quite a long time.

Under this set-up, loan applications would be collected by satellite unit and particulars of would-be borrower communicated to designated branch on line and on receipt of approval from branch/regional office satellite unit will arrange disbursement of loan through a bank having wide network of branches or through area post office with whom agency arrangements are established for the purpose. One of the MBI in private sector has successfully started operations on this pattern in far-flung areas of Punjab, Sindh and the Northern areas of the country.

At the initial stage when core business of a micro finance institution has not developed much, unutilized funds need to be invested prudently in government securities and other avenues coming within the purview of permissible treasury transactions to make the operations sustainable, right from the beginning.

However, earnings from sources not forming part of core business of MFI/MBI should not be considered as a parameter to assess their viability / sustainability. Apart from financial viability, social welfare of clients and improvement in quality of their lives should also be the parameters to determine the level of operational efficiency of a micro finance entity. Apart from amount disbursed, the outreach level should be the criteria for determining performance rating.

Generally, ratings have been focused on financial and management performance of MFI/MFB. No doubt, sustainability is a vital issue for any financial organization, but for a micro finance institution, it is not an end itself, but a means to an end. MFIs / MBIs have a social mission. Credit rating of an MFI is needed to be linked with its social rating.

Social rating is a graded assessment of an MFI / MBI’s ability to reach and serve target market. It is a tool to determine whether an MFI is achieving or likely to achieve ( if MFIs are assessed at start up period) its social mission and whether its social objectives are in line with wider development values.

Social rating when combined with credit rating compares social and financial performance and facilitates or gives justification for additional funds allocation to an MFI at start-up period and also for those who have not yet reached financial sustainability stage but are strong on social parameters.