Ramesh S Arunachalam
Rural Finance Practitioner
In 2005, just a few minutes after Dr Thorat and I[i] had presented our paper on “Failures in Micro-finance”, at the NABARD High Level Policy Conference on Micro-Finance at New Delhi, a prominent industry insider and well known banker came up to us and said that, “Congratulations, that was an interesting presentation and we are indeed planning to deal with the kind of problems you have mentioned by getting MFIs to become technology users, all the way through”.
And indeed, technology can be and is widely regarded as a solution to most problems but let us not forget that it is merely a means to achieving an end. In the case of the microfinance industry, it promises to be an effective means to achieving the end goal of enhancing access to financial services for low income people and/or financial inclusion.
Technology is/can be used at three levels in microfinance: (a) Institutional level; (b) Institutional - Client interface level; and (c) Industry level.
At the institutional level, technology is very critical to building an efficient/effective MIS to manage data, information processes and activities. An appropriate MIS also helps the institution better-understand its client needs and thereby enables it to serve them better. A good MIS is therefore absolutely necessary for the MFI to manage its interface with the clients and also manage all its activities/processes in a manner that brings efficiency and effectiveness to its operations.
At the institution-client interface level, technology is typically used for delivering (efficient?) retail solutions. Here, the use of technology is to promote efficiency and client oriented products/processes, so that the overall cost of delivering financial services is minimized and customer convenience is enhanced.
Regarding the use of technology at the industry level, the primary motivation seems to be one of providing information on various aggregate segments of Individual clients and also individual institutions. In other words, technology can be (is being) used to help develop a credit bureau or more appropriately, a financial services information bureau. While the importance and utility of technology cannot be underscored, one needs to ask the question as to why the use of such technology has not percolated significantly within the Microfinance industry in India[ii]. And in this post, we look at technology at the level of the institution and subsequent posts will focus on technologies at the institution-client interface level and industry level.
An example[iii] should serve to illustrate the points better and I quote Anna Somos Krishnan, who writes the following after the SKS IPO in a very candid article, “Interestingly, the authorities, this time, have given the green signal for an entity that can’t prove its operational strength beyond, perhaps, its head office and a couple of “system generated reports. Let’s face it. SKS, till date, manually reconciles the majority of its 2,000- odd branch data and its seven million clients at the end of each month despite the unprecedented IT investment that it made four years ago. These are the three-four years when we see the largest scale of growth in an entity. ...What is thought-provoking, though, is the virtually non-existent digital and automated management information systems (MIS) for trustworthy record-keeping (this means that, with one or two exceptions, MFIs have no IT systems to reliably track customer transaction data).”[iv]
If true, this is indeed a very serious issue and one that merits the attention...from an industry perspective and the RBI sub-committee would need to analyse and understand the actual state of MIS in Indian MFIs, as they are intermediating higher sums of money and dealing with larger number of clients. Some of the key questions in this regard are given below:
1) Given that micro-finance involves large numbers of small repetitive transactions, how are the Indian MFIs currently managing data and information on their clients, products, processes and activities?
2) Do they have a fully automated MIS or are they still completely manual or are they using hybrid systems? Are there differences between larger Vs smaller institutions, For Profit Vs Non-Profit institutions etc? Are there challenges that Indian MFIs face with regard to implementation of robust MIS systems? What are these and how can these be addressed?
3) Are management information systems (in Indian MFIs) integrated[v] in real time across products, processes, client segments, branches and functions (like accounting and portfolio data)? If yes, how do these systems perform in real time in terms of reliability and validity of data used/generated as well as time taken for analysis and production of reports? If no, how are the MFIs, and especially those with a large number of clients and rapid growth rate, managing the crucial integration and the reliability/validity of their integrated data?
4) Are all features/aspects of all products for all clients in all locations available in the MIS (manual or computerised or hybrid)? What is the reliability and validity of this primary data and/or analysed information[vi] in terms of reflecting ground reality (accuracy mainly)?
5) Is the data provided (or information/reports generated) by the MIS sufficient (for various stakeholders) in terms of content, frequency and timeliness so as to give a meaningful picture of the MFI’s TRUE financial position/condition and prospects? Is it suitable for decision making and risk management from an institutional perspective?
6) Are the data/information/reports in the MIS comparable[vii] to that in other institutions and as per good practices/RBI norms?
7) Does the MIS of Indian MFIs have transparent business rules in line with good practices and RBI norms in critical areas including (but not limited to) the following:
· Asset classification and provisioning - including methods for determining quality of assets and related indicators (PAR, Provisioning ratios etc). Some relevant aspects here are:
ü Transparency and verification must be possible with regard to the sequence of appropriation of client repayments which needs to be as per good practices standards and RBI norms
ü Grace periods, if any along with the number of instalments must be clearly discernable and/or stated upfront, if hard coded in the MIS
ü The specific conditions for calculating indicators like PAR - e.g., Whether PAR is calculated based on principal overdue or all overdues etc - must be clearly stated and transparently discernable
ü There must be standard good practices procedures for regular monitoring and management of past due or impaired assets/credit relationships, evaluating the adequacy of credit (loan) loss provisions and credit (loan) loss allowances etc
· Accounting policies and practices – Those followed in the MIS must be as per good practices standards and RBI norms. The integration of the accounting, portfolio and other modules must be through a transparent process and as per good practices standards/RBI norms
· Effective Product Cost for Client - The effective cost for various products (interest rates, fees, all forced conditions including credit insurance etc) must be transparently available and capable of being compared with actual portfolio yield and/or earnings
· Other Aspects – Clarity and transparency in risk management aspects including controls, ALM issues, exposure norms across products/regions/sectors/clients etc
8) Are the data from the MIS consistent with the financial and other statements that the MFI generates and uses internally to measure, manage and monitor its portfolio and other risks?
9) Are the data from the MIS consistent with the financial and other statements that the MFI generates and files with concerned regulators on a periodic basis?
Without question, there is a critical need to establish standards for certain non-negotiables in terms of minimum system requirements for the MIS in Indian MFIs and the RBI Board Sub-Committee should utilise this opportunity to enable the Indian micro-finance industry to ‘arrive’ in terms of having transparent, integrated and comprehensive management information systems that really work on the ground.
[i] The author has over a decade of experience in designing and implementing MIS systems including ERPs and CBSs. The author does not have any MIS to sell to the micro-finance industry and therefore, has no conflict of interest in writing on this topic.
[ii] A caveat is in order: Over the years I have repeatedly heard that ‘Microfinance’ is an area that has significant scope for use of technology, especially with a view to reduce transactions costs. This is because microfinance, is typically said to have a large number of small value and repetitive transactions. Agreed that technology can play an important role in enhancing efficiency and reducing transactions cost, especially in such a setting. However, in an operational sense, neither has this happened at the pace and volume at which it should have happened nor has the impact of technology in reducing transactions costs been very visible. This is certainly not to blame any technology (all of which have their merits and demerits) but rather to highlight the fact that things have not happened on the ground with regard to technology, on the scale expected. I strongly believe that ‘Mobile Wallets’ and related products could break this phenomenon of ‘technology innovations and low scale of operations’.
[iii] The example of SKS is being used for illustrative purposes and I would like to state that, from my own knowledge of MIS in the Indian micro-finance industry, the SKS MIS is perhaps one of the better operating systems in the Indian micro-finance industry.
[v]From the perspective of users of information and enabling them to make meaningful evaluations/decisions, information from MIS should be comprehensive in terms of aggregation and consolidation and assessment of information across products, processes, client segments, geographies and activities.
[vi] There was a recent news item where the Andhra government claimed that one of the MFIs was supposedly charging 60.5% and the MFI pointed out that this could have been due to an error in the conversion of data. This concerns the reliability and validity of the MIS
[vii] Data/Information needs to be compared across institutions and over time. Hence, standardized procedures must be used to develop the MIS and standard definitions of indicators and standard methods for calculating the same must be rigorously followed. This does not imply loss of flexibility but rather suggests standard use of best practices oriented indicators and methods for portfolio quality measurement. This is often reflected in the methodology of developing the business rules