Increasing Credit Risk of Microfinance Banks - Which Steps Need to be Taken

If we look at Microfinance banks data for the last two years, this will be not difficult to understand that core issue of Microfinance Banks in these days is increasing credit risk. It is observed that from 2017 to 2019 PAR>30 of Microfinance Banks increased from 1.5% to 6.1% (Source: Microwatch), this is 307% increase which is ever highest in two years. While in same period active borrowers increased by 25%, gross loan portfolio 51% and number of savers 54%. So the credit risk is increasing 600 times more rapidly then gross loan portfolio, which indicates a big threat to the industry in coming years.

Microfinance Bank has taken some steps to control credit risk but these are not enough to fix it. I think banks need some major changes in their organizational structure, business model, products and in technology infrastructure. Yet there are many banks running with the old business model, organizational structure, products and technology, which is too old as old was business model of Grameen Foundation which laterally converted to Grameen Bank of Bangladesh. So if we're all doing the same thing as before or we don't want to do anything new then how can we expect that we will change or do something improved in credit risk? Some steps have been suggested for taking Microfinance Banks to decrease credit risk and minimize cost.

Organization Structure The first thing Microfinance Banks need to review is the organizational structure, still Microfinance Banks are struggling in between Microfinance Institutions and commercial banks. They need to come up with a strong governance structure in which loan sanctioned only on a strong basis/business. No one can take advantage of structural flaws, the chances of wrong loan selection, frauds or any other mall practices are limited. A structure in which everyone's role is define and no one can go beyond his her role, everything is being performed in a discipline way. They need to design a structure in which authority and responsibility mechanism is clearly defined, if anybody misuse his authority must be responsible for it quickly by identifying systematically.

Product Differentiation The other task is needed to design a different product suit with unique features and characteristics to distinguish your product from similar offering in the market. Also product suit focuses on the customer' daily spending pattern, financial need, behavior and financial inflows and outflows to take customer attention on one or more key benefits of product that make it better than other choices. Currently all Microfinance Banks are offering almost same products to same segment since last two decades, so these products are losing customer interest and confident. Which bank will offer new product with distinguish feature will lead the market. For example no bank is offering female loan with features to supporting females and differentiate it from all similar loans.

Product Diversification currently almost 80% to 90% of the total lending of Microfinance banks is in Agriculture, Livestock and Karobar in similar income and household segment which leads to increase the credit risk of Microfinance Banks. They hardly needed a strong product diversification to mitigate credit risk on immediate basis. They need to enter into a new segment with a new product lines, while needed to shift some percentage of current portfolio into new market, involving substantially different income and household segments.

Technology Inclusion technology inclusion in every segment of life is the need of time, it has become habbit of the poeple. Now customer demands innovation, ease and convenience in every product including financial products. With technology advancing more people are able to have access to Microfinance products with a quick and convenient way. It increase customer outreach by bringing services beyond branches which minimize the operational cost of microfinance banks. Further, technology based business models are the best serve urban customers, rural people who can use mobile apps, and the few smallholders who participate in value chains. Technology based business models are best fit for urban branches where MFBs have shortage of resources and due to population densities outreach is low. with the use of technology MFBs can reduce their operational cost and generate additional revenue which could be translated into a possible reduction in the interest rate. Moreover serving customers with small loans and saving accounts will continue to be an attractive proposition with digital methods are adopted.

Mainly inclusion of technology minimize the chances of wrong product selection which is one of the major reason of increasing credit risk. Technology empower customers to choose the best suit interest rate, loan amount, loan tenure, repayment mode from available product line. Customer could access updated & accurate information beyond the places, days or timings. It improves customer service to current and potential customers by providing safe and convenient ways to disburse and repay loans, save money, purchase insurance for themselves & their families and check their balance, check their repay amounts.