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RISK MANAGEMENT IN SELECT

MICROFINANCE COMPANIES
Abstract

Risk is inherent in any financial activity and in the operations of a financial institution.
Microfinance movement, which started as a philanthropic activity, has gigantically grown into
a huge commercial business opportunity all over the world. This transformation has become a
challenge for the microfinance institutions in balancing their social and commercial missions.
Thus, microfinance is exposed to the risks related to the business environment (such as
competition, interest rate changes, dependence on banks for loans and so on), negative events
on the reputation of the MFIs, the regulations of the country and also the risks inherent in
balancing the interests of the investors and the poor customers. While risks cannot be totally
eliminated, MFIs have to devise ways and means to develop suitable risk management
framework in order to minimize their impact.

This study has analysed the perceptions of the one hundred executives of six select NBFC-
MFIs with regard to the statements pertaining to each of the four risk factors – Institutional
risks, Operational risks, Financial management risks and External risks, using five point
Likert scale. Then the statistical technique of Factor analysis is used to group the statements
(falling under each of the risk categories) under a small number of factors and the results were
inferred. In addition, the risk management measures adopted by the six select NBFC-MFIs in
the wake of the Andhra Pradesh Microfinance crisis, 2010 has been presented in detail.

A risk is an exposure to the chance of loss (Craig Churchill and Dan Coster, 2001). Risk is
inherent in any commercial and financial activity. It cannot be eliminated altogether. However,
it can be controlled and minimised. The most common form of risk faced by the MFIs is the
risk inherent in the lending of loans and possible default by the borrowers. This is because the
loans are not backed by standard quality collateral. Moreover, MFIs have to take calculated
risks while increasing the client outreach and for the expansion of their business. There is also
risk involved with regard to screening of clients and checking the credit history of their
household indebtedness. Other forms of general risks faced by the MFIs relate to the fraud
committed by the field staff and risks with regard to the changing laws and regulations related
to the microfinance sector. A MFI has to satisfy both its commercial and social objectives. That
is it has to balance its own sustainability and also expand its outreach to the poor people. This
delicate balancing act exposes it to many kinds of risks.

According to Mike Goldberg and Eric Palladini (2010), there are three categories of risks.
They are: financial, operational, and strategic. The subcategories of financial risks are credit
risk, market risk and liquidity risk. The subcategories of operational risks are transaction risk,
fraud and integrity risk, technological risk, human resources risk, legal and compliance risk,
and environmental risk. The subcategories of strategic risk include performance risk, external
business risk, reputation risk, governance risk and country risk.

Risk management involves two aspects. One is the prevention of the occurrence of the
undesirable events and another is the early detection of actual problems when they occur. Thus,
risk management involves reducing the likelihood of a loss and minimising the scale of loss. It
helps achieve the twin objectives of prevention of potential adverse situations and early
detection of problems to prevent them from spiralling out of control. Churchill and
Frankiewicz (2006) have categorised risks into four primary categories, namely: institutional
risks, operational risks, financial management risks, and external risks. They have also
identified subcategories of risks in each primary category.

1 Institutional Risks

Institutional risks relate to the governance structure, management succession plans and
reputation of the corporate. One of the prominent instances of poor governance is the
lack of transparency in the accounting processes. Bad reputation undermines its efforts
to sell its products/services and its ability to access funds. Hence, reputation is an
intangible asset that needs to be guarded.

The institutional risks can be categorised as follows:

i. Social Mission: The social mission of MFI is the economic welfare of the poor
people by providing them a number of valuable financial services.

ii. Commercial Mission: This is also known as bankruptcy risk wherein a MFI has to
set its interest rates and fees to such a level as to cover its operational costs.

iii. Dependence: This risk determines the extent to which a MFI is dependent on the
financial support provided by the national and international donors.

iv. Strategy: Bad business decisions and ineffective leadership and governance
would cause strategic risks.

v. Reputation: Adverse issues such as charging of high interest rates, forcing the
clients to pay when in distress, using coercive methods of collection of loans etc.,
are the risk factors which would hamper the growth of the MFI.

2. Operational Risks

Operational risk arises because of dysfunctional processes, people and systems. A MFI faces
operational risks in the form of credit risks and risks due to fraud and theft. These risks occur
in its day-to-day activities.

i. Credit: This is the most common risk faced by the MFI wherein there is
a risk of lending money to the clients and not getting it back.

ii. Employee Fraud: The field staff of the MFIs interacts directly with the
clients. In poor economic environments, MFIs are vulnerable to fraud. It
is necessary to issue directions, train the field staff and maintain adequate
controls over them.

iii. Security: Due to large volume of money being handled, it is subjected to
theft. In addition, information systems are also subjected to misuse.

iv. Personnel: The management of human resources is very important in
MFIs. Retaining staff and motivating them is essential in order to
compete with other MFIs.

3. Financial Management Risks

Financial management risks for MFIs arise while balancing their assets and liabilities. This risk
reflects in the form of liquidity risk, interest rate risk and foreign exchange risk.

i. Asset and Liability Management: Different types of risk that are included in this
category are the interest rate risk, liquidity risk and foreign exchange risk. Interest
rate risk arises when there is a mismatch between the interest earned on the assets
and interest that needs to be paid on the liabilities. There should be sufficient
difference between interest earnings and interest payments so as to earn profit.
Liquidity risk arises when the MFI does not have sufficient liquid assets to
convert them into cash and pay off the short-term liabilities even though it may
appear to be profitable. Many MFIs also receive loans denominated in foreign
currency. Foreign exchange rate fluctuations will be a source of risk for MFIs.
Foreign exchange risks arises when a MFI borrows money in foreign currency,
converts it into local currency, lends to the microfinance borrowers and again has
to repay the loan to foreign creditors in foreign currency.

ii. Inefficiency: Financial resources should be managed in cost-effective manner
otherwise, the ultimate cost has to be borne by the poor clients.

iii. System Integrity: Assessing this risk involves checking the quality of information
entering the system, verifying that the system is correctly processing data and
churning out quality information.

4 External Risks

Along with the above mentioned risks, a MFI also faces risk due to changes in the business
environment in which it operates. While the above mentioned risks may be common for MFIs
operating in different countries, they face unique external risks because of the difference in the
local environments in which they operate. These risks are related to competition, legal
compliance and changes in the business environment. A MFI has to deal with regulatory
environment, adverse political influences, global economic changes, and changes in the
physical environment (such as natural disasters).

Objectives of the Study

 To anaylse the perceptions of the microfinance executives with regard to each of the
four risk categories.
 To analyse the risk management in select microfinance institutions.

Research Methodology
Sample Selection

For the proposed study, the required sample selection is done by selecting MFIs which are
NBFCs and having their headquarters in AP.

CRISIL brought out a report in 2009 titled “India Top 50 Microfinance Institutions”. In this
report, it listed India’s top 50 leading MFIs based on certain parameters. Out of the top 50
MFIs listed by CRISIL,

 23 MFIs are NBFCs
 13 MFIs are Societies
 06 MFIs are Trusts
 04 MFIs are Section 25 Companies
 04 MFIs are Cooperative Societies
Out of the 23 MFIs which are NBFCs, 8 of them are having their headquarters in AP.
These are listed in Table 1.1.

Spandana Sphoorthy Financial Ltd. SKS Microfinance Ltd. Ltd. Future Financial Services Ltd. Private Ltd. Financial Management risks. . they have been dropped from the study and the remaining six NBFC-MFIs which have been in existence from before 2004-05 have been considered for the study. Asmitha Microfin Ltd. Ltd. Headquarter Name of MFI Legal Status No. Operational risks and External risks were considered to collect primary data in the form of opinion or perception of 100 executives of the six select MFIs on the statements related to each of the four risk categories. Public Ltd. Company (NBFC) Hyderabad 5. Institutional risks. Company (NBFC) Secunderabad India Pvt. Bhartiya Samruddhi Finance Ltd. Out of the above given 8 MFIs. Company (NBFC) Hyderabad 3. Public Ltd. Public Ltd. and Annapurna Financial Services Pvt. Company (NBFC) Hyderabad Pvt. Ltd. Annapurna Financial Services 8. Since these are new MFIS. Data Collection and Analysis The above mentioned four risk categories viz. Future Financial Services Ltd. Table 1 NBFC-MFIs with Headquarters in Andhra Pradesh S.. started their microfinance operations in the year 2008. Public Ltd. Company (NBFC) Chittor SWAWS Credit Corporation 7. Company (NBFC) Hyderabad 4. Public Ltd. Share Microfin Ltd. The designation of these 100 executives of the six select MFIs is given in the Table 1. s 1. Company (NBFC) Secunderabad 2. Company (NBFC) Hyderabad 6. Public Ltd. Private Ltd.

No Designation of the Executives Number of the Executives . Institutional Operational Financial External Risks Risks Risks Management Risks Kaiser- Meyer- Olkin 0. 4 = Agree. In order to reflect the opinion of microfinance executives. Rating Scale: 1 = Strongly Disagree. Institutional Risks – Factor Analysis The statements related to the institutional risk factors are given in Table 2. 2 = Disagree.560 0. Unit Manager 12 8. Area Manager 6 5. Manager (Information Technology) 6 11. Assistant Branch Manager 6 4. The results of the factor analysis are given under: 7. 1. Senior Administrative Manager 6 6. General Manager (Finance) 6 3. Client Relationship Manager 12 7. Manager (Corporate Communications) 6 Total 100 The degree of opinion or agreement level of the executives was secured for statements grouped under each of the above-mentioned four risk categories. and 5 = Strongly Agree Factor analysis was used to group the statements (falling under each of the risk categories) under a small number of factors. the five point Likert scale was used. Table 1 Executives of Select MFIs S. Client Relationship Officer 20 9.623 measure of sampling adequacy . Finance Executive 14 10. Assistant Vice-President 6 2. 3 = Neutral.595 0.573 0.

5 then the results of Factor Analysis are acceptable.457 reduce their costs. Institutional Risks .05 (5%).251 Approx Chi-Square Df 28 78 28 36 Significance 0.000 0. MFI’s major dependence on banks and financial institutions for loans is a hurdle for carrying out microfinance operations. then at 95% confidence level. By being a member of MFI Stakeholders association. . Role of External 1. 275. the null hypothesis is not acceptable while the the alternate hypothesis that some of the variables are correlated is acceptable.000 which is less than 0.000 0.457 28. Bartlett's Test of Sphericity. If the KMO index is above 0.180 346.000 KMO measure is an index which defines the measure of sampling adequacy. Ideally for any factor analysis. helps in reducing political risks and interference 4.797 737. 7. Microfinance Institutions need consultancy services to 28.Variables Combined in Factors Factors Risk Factors / Variables % of variance Cumulative % 1.000 0.985 331. the number of responses should be four to five times the number of variables. When the significant value of Bartlett’s Test of Sphericity is 0.

8. . Learning lessons 3. Client counselling sessions 19. Commercial MFIs failed to 17. Inadequate public relations institutional and communication on part framework of microfinance institutions has affected their growth and reputation in recent times. The minimum Net Owned Funds of Rs.178 default help in the recovery of non- performing loans. Operational Risks -Variables Combined in Factors Factors Risk Factors/Variables % of Cumulative variance % 1. Strengthening of 2.916 build a strategy to prevent the microfinance crisis of 2010 by not learning a lesson from the microfinance crisis of 2006.341 52. 10. Good rating from the rating agencies helps in securing loans from the 24.798 banks/financial institutions. The risk of default is less when all the members of a group start a single business. Ways to reduce 4. 5 crore (stipulated by RBI for NBFC- MFIs) paves the entry of only serious companies in the microfinance business.178 19. Negative reports in the from the past mass media have hampered incidents the growth and image of MFI business. 6.117 69. 2. 5. 3.

hampers the core business of providing microcredit. 3.514 55. High attrition among the increase field staff is the major microfinance deterrent to the growth and business expansion of your MFI. 11. MFIs lack professionally skilled and trained personnel to handle their managerial and other functions. 18. Incentives to the field staff the gross loan helps in motivating them to portfolio. Lending of loans to women borrowers is less risky compared to men borrowers. Ways to 1.616 chances of frauds. Strengthening 2.. 3. increase the rate of loan recovery. instead of individuals starting their own (independent) businesses. .924 38. Providing related services such as micro-insurance. Repayment of loans is dependent upon the occupation or business of the clients. Internal audit system significantly reduces the 17. 13. 5. Widespread financial literacy awareness programs about microfinance by the government will help increase the business of your MFI. 12. 2.102 6. remittance services etc.

Government should allow NBFC- MFIs to secure deposits from their clients. 4. differential interest rates and reliance charges (depending upon the region. Ensuring financial 3. Your MFI should charge sustainability and self.788 microfinance business.829 69. . Group lending is less risky dynamics when compared to lending individual borrowers.4. 13. Lending of loans (at mutually agreeable rates) among the MFIs to one another would help in the growth and expansion of 31. Group lending 7. Size of the loan granted to the clients has a significant bearing on the sustainability of the client’s businesses. 5. Financial Management Risks -Variables combined in Factors Factors Variables % of Cumulative variance % 1. 5 8.788 31. 6.067 80.445 9.512 precede lending of microcredit and other products to the clients. Group leader plays a vital role in reducing instances of default in group lending. clients or occupation) to increase the volume of business. Training and skill development for starting microenterprises should 11.

External Risks – Variables Combined in Factors .. 7. fees or interest rates for clients who are loyal (i. 8.160 important factor in client’s decision to borrow loans from your MFI for the second time.373 57. borrow and repay regularly) from a number of years.905 76. Understanding clients’ 2. Government should not restrict the rate of interest charged to the 18.e. 3. 2. Interest rates charged is an 25. 1. Loan rescheduling helps in minimising default. You would prefer reducing the financial requirements processing charges.066 clients.

3.311 69. Transition of MFIs and 3. Arbitration (between MFIs and clients) through Ombudsman should be given 19. There should be an independent regulatory authority to approve the interest rates and financial 26. The transition from ‘Not- Regulation For-Profit’ to ‘For-Profit’ microfinance institutions is preferable in the Indian context. 22. 9. 2. not- for-profit organizations. Government should frame separate rules and regulations for ‘For-Profit’ and ‘Not-for- Profit’ MFIs. Most of the provisions of the Microfinance Institutions Regulation and Development Bill (2011) favour the growth and development of the microfinance sector. NGOs. 8.998 26. Minimising legal and 6.) hampers the growth of microfinance industry. NBFCs.791 4.Factors Variables % of Cumulative variance % 1. 7. Existence of microfinance organisations in different forms (such as societies. Co-existence of MFIs in 1.998 products for the microfinance industry. Simultaneous borrowing by political hassles for the the clients from two or more clients and the MFIs MFIs increases the rate of default. . Political interference is a significant factor in the conflict between the clients and the MFIs.103 due recognition to expedite the process of loan recovery. 2.794 49. SHGs etc. 5. Laws and regulations different legal forms presently in force are conducive for the growth of microfinance business.

.

By being a member of MFI association. Microfinance Institutions need consultancy services to reduce their costs.No Risk Factor Disagree e l e Agree . Good rating from the rating agencies helps in securing loans from the banks/financial institutions. 3. helps in reducing political risks and interference. 6. 7. MFI’s major dependence on banks and financial institutions for loans is a hurdle for carrying out microfinance operations. Strongly Disagre Neutra Agre Strongly S. Table 2 Institutional Risk Factors . Commercial MFIs failed to build a strategy to prevent microfinance crisis of 2010 by not learning a lesson from the microfinance crisis of 2006. (1) (2) (3) (4) (5) 1. Negative reports in the mass media have hampered the growth and image of MFI’s business. 4. The minimum Net Owned Funds of Rs. 5. 2. 5 crore (stipulated by RBI for NBFC-MFIs) paves the entry of only serious companies in the microfinance business. 8. Inadequate public relations and communication on part of microfinance institutions has affected their growth and reputation in recent times.

The results of the SPSS output of Factor Analysis for Institutional risk factors are shown below: The first table of the SPSS output gives the values for Kaiser-Meyer-Olkin (KMO) and Bartlett’s Test. Therefore.000 which is less than 0. the null hypothesis is not acceptable while the the alternate hypothesis that some of the variables are correlated is acceptable.797 df 28 Sig. the KMO index is 0. . According to Kaiser criterion. We find that the eight variables have been grouped into three components or factors.000 The first reading of the above given Table is KMO.560 and hence the results are acceptable. we can neglect the factors whose initial Eigenvalues are less than 1.560 Bartlett's Test of Sphericity Approx.5 then the results of Factor Analysis are acceptable. Ideally for any factor analysis. KMO and Bartlett's Test Kaiser-Meyer-Olkin Measure of Sampling Adequacy. This is because factors with Eigenvalue less than 1 are as good as the variables themselves. The second reading of the above given Table is the Bartlett’s Test of Sphericity. Hence at 95% confidence level. on both measures of KMO and Bartlett’s Test of Sphericity. The second Table of the SPSS output gives the total variance explained. Hence. . An Eigenvalue represents the amount of variance associated with the factor. . the number of responses should be four to five times the number of variables.05 (5%). the results of Factor Analysis are acceptable. If the KMO index is above 0. We find that the significant value of Bartlett’s Test of Sphericity is 0. Chi-Square 275. it is suggested to retain those factors with eigen values equal to or greater than 1. Here. KMO measure is an index which defines the measure of sampling adequacy.

749 34.348 1.916 4 .565 7 . We also find that the cumulative variance is 69.916%.457 28.568 69.010 8 .276 3.159 1.454 5.365 2.369 17.117 69.457 2 1.982 56. Total Variance Explained Extraction Sums of Squared Rotation Sums of Squared Initial Eigenvalues Loadings Loadings % of Cumulative % of Cumulative % of Cumulative Component Total Variance % Total Variance % Total Variance % 1 2.759 21.947 24. .086 82.000 Extraction Method: Principal Component Analysis.894 6 . We therefore have to consider the Rotated Component Matrix. The third Table of the SPSS output gives the Component Matrix. If more than 60% of the variance in the data is explained by the Factor Analysis then we can accept the results of the Factor Analysis.085 13.341 52.365 34. the Component Matrix does not clearly shows which variable goes into which factor.916 1.916 1.798 3 1.749 34.982 56. For example variable 1 in the Table given below is highly correlated with Factor 1 and negligibly correlated with Factor 2 and Factor 3. It shows the correlation of each of the variable with each of the components or the factors that were extracted.671 94.568 69.365 2.002 5 .348 1. That means that nearly 70% of the variance in the data is explained by the three factors.551 6.277 28.892 88.365 34.445 98. However.759 21.967 12. A factor loading is the correlation between a variable and a factor that has been extracted from the data.085 13.990 100.

327 by not learning a lesson from the microfinance crisis of 2006. Inadequate public relations and communication on part of microfinance institutions -. Good rating from the rating agencies helps in securing . 3 components extracted.472 -.019 .903 . Commercial MFIs failed to build a strategy to prevent microfinance crisis of 2010 . Microfinance Institutions need consultancy services to -.366 -.639 .750 .550 . Negative reports in the mass media have hampered the -. Component Matrixa Component 1 2 3 By being a member of MFI association.686 .438 . MFI’s major dependence on banks and financial institutions for loans is a .200 .139 -.710 .389 -. a.108 hurdle for carrying out microfinance operations.764 .268 MFIs) paves the entry of only serious companies in the microfinance business. 5 crore (stipulated by RBI for NBFC- .077 .003 reducing political risks and interference. . Extraction Method: Principal Component Analysis.463 reduce their costs.085 has affected their growth and reputation in recent times.307 -.820 growth and image of MFI business.028 loans from the banks/financial institutions. The minimum Net Owned Funds of Rs. helps in -.

472)2 + (-0.000 . The minimum Net Owned Funds of Rs. Good rating from the rating agencies helps in securing loans from the banks/financial 1.712 institutions.710 learning a lesson from the microfinance crisis of 2006. .000 . For example the communality of the first variable is given as: (-0.003)2 = 0. Extraction Method: Principal Component Analysis.The fourth table gives the communalities of each of the variables. Negative reports in the mass media have hampered the growth and image of MFI 1. Communalities Initial Extraction By being a member of MFI association. Commercial MFIs failed to build a strategy to prevent microfinance crisis of 2010 by not 1.000 . It shows how much of the variance in a given variable is measured or accounted for by the three factors that were extracted.000 .779 services to reduce their costs.750)2 + (0. Inadequate public relations and communication on part of microfinance institutions has affected 1.767 entry of only serious companies in the microfinance business.786.807 business.000 . 5 crore (stipulated by RBI for NBFC-MFIs) paves the 1. helps in 1.000 .169 microfinance operations. Microfinance Institutions need consultancy 1.862 their growth and reputation in recent times.786 reducing political risks and interference. MFI’s major dependence on banks and financial institutions for loans is a hurdle for carrying out 1.000 .000 .

159 -.138 to reduce their costs. we consider each variable with highest correlation value (ignoring the sign) among the factors.108 . Then we assign that variable to that particular factor.766 -.062 microfinance operations. Here the Varimax procedure for rotation is used.592 . the first variable goes to factor 1.898 the growth and image of MFI business. The minimum Net Owned Funds of Rs.140 -. thereby enhancing the interpretability of the factors. Rotated Component Matrixa Component 1 2 3 By being a member of MFI association. Negative reports in the mass media have hampered -.409 -.. For example.697 .201 securing loans from the banks/financial institutions.a a. Commercial MFIs failed to build a strategy to prevent microfinance crisis of 2010 by not learning a lesson -.161 growth and reputation in recent times. MFI’s major dependence on banks and financial institutions for loans is a hurdle for carrying out -.408 . 5 crore (stipulated by RBI for NBFC-MFIs) paves the entry of -.The fifth Table of the SPSS output is the Rotated Component Matrix. Thus.049 only serious companies in the microfinance business.613 from the microfinance crisis of 2006. To determine which variable goes into which factor.308 reducing political risks and interference. Orthogonal rotation results in factors that are uncorrelated. This is a orthogonal method of rotation that minimises the number of variables with high loadins on a factor. Good rating from the rating agencies helps in -. in the first row. through Varimax procedure of rotation we obtain clear information about which variable goes into which factor.830 .697 in the 2nd column i.051 . . the second variable goes to factor 2.422 . Extraction Method: Principal Component Analysis.e. In the second row.857 -.812 -. Inadequate public relations and communication on part of microfinance institutions has affected their .381 . helps in . Rotation converged in 5 iterations. Rotation Method: Varimax with Kaiser Normalization.014 . the highest value is 0.014 -. Microfinance Institutions need consultancy services .

they can minimse the impact of institutional risks. Thus MFIs have to give due attention to their relationship with external stakeholders.117 69.798 3 3. By being a member of MFIN. Factor 3 is named as Learning lessons from the past incidents. SHARE. microfinance associations and SROs help in building strong and viable MFIs. 6 17.341 52. four of them – BSFL. Factor 1 can be named as Role of external stakeholders. Factor 2 is named as Strengthening of institutional framework. Analysis of the factors Here we shall analyse the importance of each of the above three factors in the risk management of the MFIs. Thye also need to seek consultancy services (when needed) and reduce their dependance on the banks for loans. role of rating agencies and minimum Net Owned Funds (NoF) are the variables. Hence.457 28. 8 24. 7 28. SKS and SSFL are the members of the MFIN which has been recognised as the SRO by the RBI. By being member of MFIN.Variables Combined in Factors Based on the Rotated Component Matrix. we obtain the grouping of the variables under each of the five factors as given below: % of Factors Variable Cumulative % Variance 1 1. corporate governance issues and compliance with regulatory environment. client protection. these MFIs have to adhere to the Code of Conduct with regard to the microfinance business. Commercialisation of microfinance business nessiaties the assistance for consultancy services. these MFIs can get assistance in the matters related to responsible lending. 5. Out of the six select MFIs.916 Factor 1: Membership of MFI association. Factor 3: Negative reports in mass media and failure to learn lessons of the past are the variables.457 2 2. Consultancy services will help MFIs cope with adverse situations and risks (such as those . Factor 1: The results of this factor suggest that MFIs need to give due consideration to the external stakeholders such as microfinance associations. Factor 2: Inadequate public relations. 4. seeking of consultancy services and dependency on banks are the variables. Hence.

As mentioned in the Chapter 3. As we saw in Chapter 3. MFIs have to increase their equity capital by working towards attracting private equity investments. Factor 2: The results of this factor suggest that in order to strengthen their institutional framework. Also AP based MFIs have lion’s share of 74% of the total debt distributed among the MFIs (Sa-Dhan. This is a risk factor for the MFIs because as we saw in chapter 3. MFIs are dependent upon banks to a very large extent with 70% of the assets of the MFIs being funded by outside debt and Net Owned Funds contributing only 22% towards funding of assets (Sa-Dhan. This created a risk of survival for the MFIs. get ratings from rating agencies specialised in the microfinance sector and maintain prescribed NOF prescribed by the RBI in order to demonstrate their seriousness towards the cause of microfinance. the RBI Directions with regard minimum Net Owned Funds (NOF) for NBFCs to start microfinance would weed out non-serious players in the microfinance arena and promote healthy competition.arising from the AP microfinance crisis and the subsequent promulgation of the Microfinance Ordinance by the GoAP). the fund flow from the banks reduced considerably due to the microfinance crisis and the subsequent promulgation of the Microfinance Ordinance by the GoAP. Also consultancy services will provide strategic direction for the MFIs with regard to their business development plans and the design of products and services. Hence. MFIs need to have specialised rating agencies that would rate them in an objective manner. MFIs have to maintain adequate public relations. Otherwise miscommunication may turn out to be a risk hampering their business practices. to mitigate the risk of high dependance on the banks and debt capital. The rating agencies should understand the unique business model of the NBFC-MFIs. 2012). MFIs need to strengthen their communications department so as to clear the apprehensions with regard to the rate of interest. recovery practices and sanction of loans. Otherwise entry of non-serious players might result in the risk of bad publicity for the entire microfinance sector. rating agencies not specialising in the microfinance sector may create road blocks in the effort of MFIs in securing funds from financial institutions and private equity investors. Thus. It will also help MFIs in anticipating adverse situations that may arise in future and take precautionary measures. 2011). . allegations of high-handed approach of the MFIs and the charging of high interest rates in the mass media led to the GoAP taking harsh measures against the MFIs.

Factor 3: Negative reports in the mass media and failure to learn strategic lessons are the variables. Factor 3 is named as Learning lessons from the past incidents.Hence. They can also counter the allegations by presenting a unified stand through the microfinance associations. to manage the risk of negative reports in the mass media. Such adverse reports in the mass media carry the risk of wiping out the goodwill that microfinance movement had generated. The results of this factor suggest that MFIs have to give due attention to the incidents which had occurred in the past and develop suitable strategies. They have to learn lessons from any changes. MFIs should have adopted a balanced approach towards social and commercial aspects of their business so as to prevent the microfinance crisis from reoccurring the second time in 2010. MFIs have to strengthen their public relations and communication system. For instance after the first microfinance crisis of 2006. which occur in their business environment and have appropriate strategies in place to counter the adverse effects of those changes. . which can have considerable adverse effect on their business prospects.  They need to maintain good relations with the mass media and frequently communicate their stand and status with news reporters.  MFIs have to keep guard against the negative public perception and negative news reports.

Strongly Disagre Neutra Agre Strongly No Risk Factor Disagree e l e Agree . Incentives to the field staff helps in motivating them to increase the rate of loan recovery. High attrition among the field staff is the major deterrent to the growth and expansion of your MFI. Internal audit system significantly reduces the chances of frauds. micro-insurance. Lending of loans to women borrowers is less risky compared to men borrowers. instead of individuals starting their own (independent) businesses. (1) (2) (3) (4) (5) 1. 2. 12 Repayment of loans is dependent upon . 4. Group leader plays a vital role in reducing instances of default in group lending. remittance services etc. Operational Risks – Factor Analysis Table 3 presents the statements related to operational risks. 6. Client counselling sessions help in the recovery of non-performing loans. 3. 8. Widespread financial literacy awareness programs about microfinance by the government will help increase the business of your MFI. 11 Providing related services such as . Group lending is less risky when compared to lending individual borrowers.. 5. hampers the core business of providing microcredit. 8. members of a group start a single business. 7. Table 3 Operational Risk Factors S. Training and skill development for starting microenterprises should precede lending of microcredit and other products to the clients. 10 The risk of default is less when all the . 9.

the results of Factor Analysis are acceptable. An Eigenvalue represents the amount of variance associated with the factor. we can neglect the factors whose initial Eigenvalues are less than 1. the number of responses should be four to five times the number of variables.180 Df 78 Sig. . five factors whose Eigenvalues are greater than 1 are obtained.05 (5%). Therefore. Here. the value of KMO index is 0. We find that the thirteen variables have been grouped into five components or factors. The second Table of the SPSS output gives the total variance explained. Thus. Hence.51%. it is suggested to retain those factors with eigen values equal to or greater than 1. Ideally for any factor analysis. KMO and Barlett’s Test Kaiser-Meyer-Olkin Measure of Sampling Adequacy. If more than 60% of the variance in the data is explained by the factor analysis then we can accept the results of the factor analysis.5 then the results of Factor Analysis are acceptable. the occupation or business of the clients.595 Bartlett's Test of Sphericity Approx. The second reading of the above given Table is the Bartlett’s Test of Sphericity.000 which is less than 0. The first table of the SPSS output gives the values for Kaiser-Meyer-Olkin (KMO) and Bartlett’s Test of Sphericity. According to Kaiser criterion.595 and hence the results are acceptable..000 The first reading of the above given Table is KMO. We find that the significant value of Bartlett’s Test of Sphericity is 0. KMO measure is an index which defines the measure of sampling adequacy. Hence at 95% confidence level the null hypothesis is not acceptable while the the alternate hypothesis that some of the variables are correlated is acceptable. Chi-Square 737. trained personnel to handle their managerial and other functions. 13 MFIs lack professionally skilled and . This is because factors with Eigenvalue less than 1 are as good as the variables themselves. . It is found that the cumulative variance is 80. . If the KMO index is above 0. That means that nearly 80% of the variance in the data is explained by these fivee factors. on both measures of KMO and Bartlett’s Test of Sphericity.

102 3 1.058 8.128 .269 2.622 100.924 38.000 Extraction Method: Principal Component Analysis.825 62.973 11 .378 13 .294 72.786 7 .065 31.557 93.798 13.269 4.269 31.081 .269 31.922 95.141 80. The third Table of the SPSS output gives the Component Matrix.338 10.178 2 2.305 10 .065 31.983 49.669 96.217 1.250 1.686 5. For example variable 1 in the Table given below is highly correlated with Factor 1 and negligibly correlated with other factors.462 3.277 17.274 85.141 80.067 80.040 89.338 17.417 98.493 19.616 4 1.512 6 .371 1.184 1.252 2.294 72. It shows the correlation of each of the variable with each of the components or the factors that were extracted.371 1.988 99.383 9 . A factor loading is the correlation between a variable and a factor that has been extracted from the data.667 12. .445 5 1. Total Variance Explained Extraction Sums of Squared Rotation Sums of Squared Initial Eigenvalues Loadings Loadings % of Cumulative % of Cumulative % of Cumulative Component Total Variance % Total Variance % Total Variance % 1 4.058 8.460 18. the Component Matrix does not clearly shows which variable goes into which factor.512 1.667 12.252 2.825 8 .825 62. We therefore have to consider the Rotated Component Matrix.514 55.077 2.338 10.439 11.512 1.390 12 .829 69.983 49.338 17. However.178 19.077 1.525 4.

259 .055 .815 .483 .029 .647 -.130 -. The risk of default is less when all the members of a group start a single .197 etc.448 -.552 -.047 recovery of non-performing loans.752 -.658 .332 -.702 -.341 .118 -.449 .455 . instead of individuals starting their own (independent) businesses.645 .156 less risky compared to men borrowers.280 . Repayment of loans is dependent upon . Lending of loans to women borrowers is .597 . Widespread financial literacy awareness programs about microfinance by the .616 .247 lending of microcredit and other products to the clients.256 .332 government will help increase the business of your MFI.149 reduces the chances of frauds.154 .386 . remittance services .347 -.389 -.099 .338 -.358 .708 .310 .598 -.082 -.170 . Internal audit system significantly .145 .562 borrowers.095 -.194 -.268 . Extraction Method: Principal Component Analysis a.414 the occupation or business of the clients.266 . Incentives to the field staff helps in motivating them to increase the rate of .265 -. hampers the core business of providing microcredit. 5 components extracted. MFIs lack professionally skilled and trained personnel to handle their -.300 .168 managerial and other functions. Group lending is less risky when compared to lending individual .549 -.340 business. Component Matrixa High attrition among the field staff is the major deterrent to the growth and -.074 . Client counselling sessions help in the .327 -..280 .446 .132 expansion of your MFI. .262 .344 lending. Providing related services such as micro-insurance.696 .181 loan recovery.154 . Group leader plays a vital role in reducing instances of default in group .041 -.625 . Training and skill development for starting microenterprises should precede .589 -.

000 .812 recovery. Here.775 expansion of your MFI. Varimax procedure for rotation is used.000 .268)2 + (-0. For example. in the first row.645)2 + (0. each variable with highest correlation value (ignoring the sign) among the factors is considered.830 business.796 government will help increase the business of your MFI. 1. remittance services etc.The fourth table gives the communalities of each of the variables.888 hampers the core business of providing microcredit. through Varimax procedure of rotation we obtain clear information about which variable goes into which factor. In the second row. To determine which variable goes into which factor. Then that variable to that particular factor is assigned.449)2 + (-0.705 Group lending is less risky when compared to lending individual borrowers. the first variable goes to factor 2. 1.000 .824 MFIs lack professionally skilled and trained personnel to handle their managerial 1.829 Widespread financial literacy awareness programs about microfinance by the 1. the highest value is 0.262)2 + (-0.000 .000 . Lending of loans to women borrowers is less risky compared to men borrowers. It shows how much of the variance in a given variable is measured or accounted for by the five factors that were extracted. Providing related services such as micro-insurance.000 . Communalities Initial Extraction High attrition among the field staff is the major deterrent to the growth and 1.. instead of individuals starting their own (independent) businesses.653 The risk of default is less when all the members of a group start a single 1. Incentives to the field staff helps in motivating them to increase the rate of loan 1.852 Client counselling sessions help in the recovery of non-performing loans. Group leader plays a vital role in reducing instances of default in group lending. 1. 1. Orthogonal rotation results in factors that are uncorrelated.000 .000 . . This is a orthogonal method of rotation that minimises the number of variables with high loadings on a factor. Internal audit system significantly reduces the chances of frauds.666 in the 3rd column i. 1.844 lending of microcredit and other products to the clients.e. thereby enhancing the interpretability of the factors. 1. The fifth Table of the SPSS output is the Rotated Component Matrix.000 .000 .000 . the second variable goes to factor 3. Thus. Extraction Method: Principal Component Analysis.. 1.775.844 and other functions.816 Training and skill development for starting microenterprises should precede 1.000 . Repayment of loans is dependent upon the occupation or business of the clients. For example the communality of the first variable is given as: (-0.000 .132)2 = 0.

025 -.051 . remittance services etc.051 default in group lending.182 .010 .310 -.100 increase the rate of loan recovery.849 .027 .060 . Incentives to the field staff helps in motivating them to .305 .765 .129 non-performing loans. The risk of default is less when all the members of a group start a single business.155 providing microcredit.815 .019 .060 .010 -. MFIs lack professionally skilled and trained personnel -.413 -.353 .874 -.133 .837 . Extraction Method: Principal Component Analysis.747 .172 .005 increase the business of your MFI.301 .077 .120 .043 .. instead of individuals . Rotation converged in 8 iterations.914 microcredit and other products to the clients. Lending of loans to women borrowers is less risky .149 starting their own (independent) businesses.076 .231 or business of the clients.246 . Training and skill development for starting microenterprises should precede lending of -. Rotation Method: Varimax with Kaiser Normalization. Widespread financial literacy awareness programs about microfinance by the government will help .018 .016 .347 -. Group leader plays a vital role in reducing instances of -.054 -.666 .842 -. Rotated Component Matrixa Component 1 2 3 4 5 High attrition among the field staff is the major -.434 -. hampers the core business of -.103 .833 -.734 .304 deterrent to the growth and expansion of your MFI.365 .227 -.314 .455 .a a.355 of frauds.063 .084 . Group lending is less risky when compared to lending .064 .005 -. Providing related services such as micro-insurance. Internal audit system significantly reduces the chances -.073 individual borrowers.174 .487 compared to men borrowers.048 -.037 .837 .116 to handle their managerial and other functions.547 . Repayment of loans is dependent upon the occupation .176 -. Client counselling sessions help in the recovery of .048 . .

Financial literacy. clients stopped repaying when encouraged by their peers and political activists. 6. it is necessary to conduct client counselling sessions so as to explain them the benefits of repaying the loans.067 80. Analysis of the Factors Factor 1: The results of this factor suggest that by organising client counselling sessions. Factor 1 is named as: Ways to reduce default Factor 2: High attrition.514 55.Variables Combined in Factors Based on the Rotated Component Matrix.512 Factor 1: Client counselling. MFIs deal more often with poor clients who may not be highly educated. 5.616 4 7. Reducing default through joint business and Need for professionally skilled and trained personnel are the variables. As mentioned in Chapter 3. 12 17. In such situations client counselling session would help in presenting factual information so that the clients are not misguided. 13 19. MFIs can reduce defaults. 11 18.445 5 8 11. Factor 3 is named as: Strengthening the gross loan portfolio. giving loans to microenterprises started by a group of people and by appointing professionally skilled and trained personnel. repayment will be prompt. Moreover. we obtained the grouping of the variables under each of the five factors as given below: Factors Variables % of variance Cumulative % 1 4. Internal audit system and Repayment of loans are the variables. Client counselling sessions would help in the recovery of loans and help MFIs in minimising write- offs.178 2 1. Factor 4: Group lending and the role of a group leader is the variables. Lending of loans to women borrowers and Providing related services are the variables. Factor 3: Incentives to field staff.924 38. during the microfinance crisis.829 69. In group borrowing due to peer pressure. Another way to reduce default is to fund microenterprises started by a group of borrowers. Factor 2 is named as: Ways to increase microfinance business. Factor 4 is named as: Group lending dynamics.102 3 2. Hence.178 19. the liability to . 3. 10. 9 13.

if the government can take measures to increase the financial literacy levels then MFIs can reduce their overheads and operational costs involved in explaining to the clients about the concept of microfinance. For instance. Since microfinance operations are labour intensive. Hence. As mentioned in Chapter 2. 2010). 2013). Most of the select MFIs in the present study lend exclusively to women borrowers. microfinance industry associations can partner with the government in increasing financial literacy programmes. the demand for micro credit is so high and only a fraction of this demand is satisfied.V. Hence. by lending loans to women borrowers. and by concentrating primarily on providing micro credit. In large number of MFIs. Hence. Factor 3: The results of this factor suggest that by giving incentives to the field staff (which acts as a motivating factor). operational costs are. by means of robust internal audit system (to prevent frauds) and by giving due consideration to the businesses of the clients with regard to loan repayment. . through government sponsored financial literacy programmes.repay will be equally divided in when compared to businesses started by individuals where the liability will be more. Microfinance business is manpower intensive. MFIs should concentrate on core activity of providing micro credit. The microfinance industry has not reached the maturity level in India. In this regard. MFIs can strengthen their gross loan portfolio. the Human Resource (HR) department has mentioned the attrition among the field staff is a major challenge and the rate of attrition ranged from 5. MFIs have to properly train their field staff who constantly interact with the clients and provide valuable inputs with regard to client aspirations and perceptions and the nature of products and services needed by them. MFIs can outsource the provision of micro-insurance services to the insurance companies so as to reduce the operational costs.7% to 53% (Access Assist. SKS microfinance has attrition levels of more than 25% (M. Santosh Kumar. Still there is no sector specific law in the country. Factor 2: The results of this factor suggest that by controlling attrition of the field staff. MFIs have to take measures to reduce the risk of attrition among the experienced field staff. Hence. MFIs can improve their business.S. Professionally skilled and trained manpower is needed to run the commercial microfinance organisations so as to ensure the viability and efficiency of the institutions. Many studies have concluded that lending of loans to women borrowers is less risky when compared to lending to men borrowers.

When clients repay properly. the gross loan portfolio of the MFI is strengthened. Field staff plays a prominent role with regard to increasing the microfinance business. In the six select MFIs considered for the study. Factor 4: The results of this factor suggest that MFIs should concentrate on group lending and in the selection of the group leader. Hence. thereby weakening the gross loan portfolio. SSFL and SHARE follow both JLG and individual lending models. Frauds are a risk that would have a negative effect on the microfinance business. peer pressure plays an important role in the repayment of loans. MFIs also have to choose the group leader after due diligence while lending to a group.” 2013). an individual borrower may not be able to repay the loans. . MFIs have to encourage field staff through incentives. MFIs have to install a robust internal audit system that will ensure the financial integrity of the institution. there were financial frauds to the tune of Rs. the risk is minimised when loans are lent to a group with the sharing of liability among the group members. accidents or failure of the microenterprise. BSFL follows the diversified lending model. On the other hand. ASML and SWAWS microfinance institutions exclusively follow the Joint Liability Group (JLG) lending model. Hence it is more risky to lend to individual borrowers. This will help MFIs to make recoveries accordingly and thus strengthen the gross loan portfolio. 2. For instance. SKS. robust internal audit system and repayment of loans on the basis of business of the clients. This is because an influential group leader will turn out to be instrumental in the repayment of loans by the group and thus strengthen the gross loan portfolio. MFIs have to take into account the businesses of their clients while lending loans. There is also a possibility that due to death.It relates to the ways and means of strengthening the gross loan portfolio through prompt recoveries.1 crore in SKS microfinance. committed by the employees and this was mentioned in the company’s annual report (“Frauds to the. They can develop personal relationship with the clients and encourage them to repay in time. which are dependent on the seasonal business cycles of the concerned microenterprises. Hence. It should consider repayment patterns. MFIs lend loans to the clients without collateral. On the other hand. during the financial year 2013.

Size of the loan granted to the clients has a significant bearing on the sustainability of the client’s businesses. Interest rates charged is an important factor in client’s decision to borrow loans from your MFI for the second time. (1) (2) (3) (4) (5) 1. Your MFI should charge differential interest rates and charges (depending upon the region. Government should not restrict the rate of interest charged to the clients. 8. .9..e. 6. Lending of loans (at mutually agreeable rates) among the MFIs to one another would help in the growth and expansion of microfinance business. fees or interest rates for clients who are loyal (i. 4. 5. Loan rescheduling helps in minimising default. Strongly Disagre Neutra Agre Strongly No Risk Factor Disagree e l e Agree . 3. Financial Management – Factor Analysis Table 4 Financial Management Risk Factors S. Government should allow NBFC- MFIs to secure deposits from their clients. 2. You would prefer reducing the processing charges. clients or occupation) to increase the volume of business. borrow and repay regularly) from a number of years. 7.

KMO measure is an index which defines the measure of sampling adequacy.07%. The eight variables have been combined into three factors based on the Kaiser Criterion.5 then the results of Factor Analysis are acceptable.000 The first reading of the above given Table gives the value of KMO index.000 which is less than 0. If the KMO index is above 0. We find that the significant value of Bartlett’s Test of Sphericity is 0.05 (5%). Hence at 95% confidence level the null hypothesis is not acceptable while the the alternate hypothesis that some of the variables are correlated is acceptable. Ideally for any factor analysis. If more than 60% of the variance in the data is explained by the factor analysis then we can accept the results of the Factor Analysis. on both measures of KMO and Bartlett’s Test of Sphericity.573 and hence the results are acceptable. This means that nearly 76% of the variance in the data is explained by the three factors. the KMO index is 0.573 Bartlett's Test of Sphericity Approx. We also find that the cumulative variance is 76. Hence. KMO and Bartlett's Test Kaiser-Meyer-Olkin Measure of Sampling Adequacy.The first table of the SPSS output gives the values for Kaiser-Meyer-Olkin (KMO) and Bartlett’s Test. Chi-Square 346. . Communalities and Rotated Component Matrix are the same as given for the Factor Analysis of institutional risks and the operational risks. The explanation given for the Total Variance Explained. Component Matrix. Here. the results of Factor Analysis are acceptable. . The second reading of the above given Table is the Bartlett’s Test of Sphericity. . the number of responses should be four to five times the number of variables.985 df 28 Sig.

130 would help in the growth and expansion of microfinance business.273 8 .066 4 .000 Extraction Method: Principal Component Analysis.619 -.657 58.280 6 .550 the region.805 35.179 -..786 .893 23.805 35.931 -.408 .280 from your MFI for the second time.442 Extraction Method: Principal Component Analysis.533 .343 76.274 sustainability of the client’s businesses.030 25.707 8.905 5 .109 -. Interest rates charged is an important factor in client’s decision to borrow loans .359 4. Loan rescheduling helps in minimising default. fees or interest rates for .613 .138 1.387 17.764 7 .343 76.484 95.065 2.201 2.228 .723 1. borrow and repay regularly) from a number of years.297 . 3 components extracted.375 91. Total Variance Explained Extraction Sums of Squared Rotation Sums of Squared Initial Eigenvalues Loadings Loadings % of Cumulative % of Cumulative % of Cumulative Component Total Variance % Total Variance % Total Variance % 1 2.512 18. Government should allow NBFC-MFIs to secure deposits from their clients.249 .788 2 1.065 35.727 100. Component Matrixa Component 1 2 3 Government should not restrict the rate of interest charged to the clients.066 1.373 57.060 Size of the loan granted to the clients has a significant bearing on the .066 1.669 -.788 31.625 -. Your MFI should charge differential interest rates and charges (depending upon .618 -.657 58.e.509 98. .160 3 1. clients or occupation) to increase the volume of business.510 6.065 35. .839 84. a. Lending of loans (at mutually agreeable rates) among the MFIs to one another .543 31.905 76.001 .152 clients who are loyal (i.065 2.387 17.723 2. .732 . -.832 You would prefer reducing the processing charges.893 23.

865 . Your MFI should charge differential interest rates and charges (depending upon the region. clients or occupation) to increase the volume of business.000 . Lending of loans (at mutually agreeable rates) among the MFIs to one another would help in the growth and expansion of microfinance .. .298 volume of business. Government should allow NBFC-MFIs to secure deposits from their clients.e.000 .109 -.000 . Lending of loans (at mutually agreeable rates) among the MFIs to one another 1. Government should allow NBFC-MFIs to secure deposits from their -.618 Size of the loan granted to the clients has a significant bearing on the 1.852 from your MFI for the second time.e.051 .916 clients. Loan rescheduling helps in minimising default.863 . Here the Varimax procedure for rotation is used. fees or interest rates for 1.000 .000 .066 . 1.000 . thereby enhancing the interpretability of the factors.643 . borrow and repay regularly) from a . fees or interest rates for clients who are loyal (i.. The fifth Table of the SPSS output is the Rotated Component Matrix. Interest rates charged is an important factor in client’s decision to borrow loans 1. Your MFI should charge differential interest rates and charges (depending upon 1.425 would help in the growth and expansion of microfinance business.863 Extraction Method: Principal Component Analysis. You would prefer reducing the processing charges.000 . Orthogonal rotation results in factors that are uncorrelated.080 business. Rotated Component Matrixa Component 1 2 3 Government should not restrict the rate of interest charged to the . This is a orthogonal method of rotation that minimises the number of variables with high loadins on a factor.747 .366 -.745 sustainability of the client’s businesses.843 You would prefer reducing the processing charges. 1.118 -. through Varimax procedure of rotation clear information about which variable goes into which factor is obtained. Thus.099 number of years.219 clients.851 the region.889 clients who are loyal (i. clients or occupation) to increase the .000 . 1. borrow and repay regularly) from a number of years. Communalities Initial Extraction Government should not restrict the rate of interest charged to the clients.042 -.

size of the loans granted are the variables in this factor. Loan rescheduling helps in minimizing default. Lending of loans amongst the MFIs.788 31. Factor 1 is named as: Ensuring financial sustainability and self-reliance. Rotation converged in 4 iterations.149 . MFIs can charge a little . Factor 2 is named as: Understanding Clients financial requirements. a. Interest rates charged is an important factor in client’s decision to .788 2 2.775 -.431 Extraction Method: Principal Component Analysis. Analysis of the Factors Factor 1: The result of this factor suggests that MFIs may have to adopt diffeential interest rates to the clients. 4.Size of the loan granted to the clients has a significant bearing on the . The third factor contains only a single variable and hence can be neglected. 7. Securing deposits from the clients.905 76. RBI has permitted NBFC-MFIs to charge differential rate of interest to its clients such that the maximum variance in the interest rate does not exceed 4% (Source: RBI). Variables combined in Factors: Based on the Rotated Component Matrix. Factor 1: Differential rates of interest.794 . Rotation Method: Varimax with Kaiser Normalization. 8 25.266 borrow loans from your MFI for the second time.373 57. lend and borrow amongst themselves.425 .160 3 1 18. secure deposits from the clients and take into account the size of the loans granted to the clients in order to become financially self- reliant. we obtained the grouping of the variables under each of the five factors as given below: Factors Questions % of variance Cumulative % 1 3.514 sustainability of the client’s businesses.677 . Differential rate of interest scheme comes under social banking programmes which will help improve the economic conditions of the people living below the poverty line. 5. . Factor 2: Giving discounts to loyal customers. 6 31. Influence of interest rates on client decision to re-borrow and Rescheduling of loans to avoid default are the variables in this factor.066 We shall consider two factors since they explain nearly 57% of the variance in the data.217 .

e. resulting in the credit risk for the MFIs. the microenterprise may become non-functional.higher interest rates to the clients who are poor and a lower rate of interest to the clinets who are the poorest of the poor. Securing deposits from the borrowers helps MFI reduce their dependence on the banks and financial sources. MFIs can reschedule the loans with regard to the loan tenure or the amount of loan instalment. the client would not be able to repay the loans. 2012 have recognised collection of thrift (i. This will help them in not only increasing their outreach but also expand their business. . Moreover. Therefore. Sometimes if the loan granted to the client is not adequate. Hence MFIs should consider giving such clients discounts with regard to the processing fees. During the AP Microfinance crisis (which occurred in 2010). the clients and the banks with regard to loan rescheduling. Rescheduling of loans would be a ‘win-win’ situation for the clients and the MFIs. MFI may have to consider all these risk factors in order to ensure financial sustainability. Lending of loans amongst MFIs can help reduce their dependance on the banks and financial institutions. Thus. deposits) as one of the financial services under microfinance services. Interest rates have a major influence on the borrowing decision of the poor clients. Through loan rescheduling. If a MFI is able to attract clients by designing appropriate interest rate structure. that during the AP Microfinance crisis. MFIs can lend their surplus amount to one another so as to tide over risk of tight financial situation. charges and interest rates. MFIs can avoid loan write-off and clients would not become stressed to repay their loans. the draft Micro Finance Institutions (Development and Regulation) Bill 2011 and the draft Micro Finance Institutions (Development and Regulation) Bill. MFIs should also have an appropriate financial policy for the restructuring of the loans. It is less risky for the MFIs (in terms of credit risk) to lend loans to loyal clients than to scout for new clients. banks may impose certain conditions while lending loans to the MFIs. This is because they deal with clients who do not have regular source of income. MFIs have to determine the apporpriate size of the loans granted to the clients. If MFIs succeed in collecting substantial deposits from the clients then they can use those deposits to lend to the clients at a reduced rate of interest. Factor 2: The results of this factor suggest that MFIs have to forego their benefit or profit by giving discounts to loyal clients and flexibility to other clients. As mentioned in Chapter 3. As mentioned in Chapter 3. This will ensure understanding of the financial requirements of the clients. In order to mitigate such risks. banks reduced their lending to the MFIs. MFIs could have convinced the GoAP. As the old and loyal clients of the MFIs intend to expand their businesses.. they require more loans from the MFIs. then the volume of the MFIs’ business would also increase.

(1) (2) (3) (4) (5) 1.10. Arbitration (between MFIs and clients) through Ombudsman should be given due recognition to expedite the process of loan recovery. 4. Political interference is a significant factor in the conflict between the clients and the MFIs. Existence of microfinance organisations in different forms (such as societies. Strongly Disagre Neutra Agre Strongly No Risk Factor Disagree e l e Agree . SHGs etc.) hampers the growth of microfinance industry. External Risk –Factor Analysis Table 5 External Risk Factors S. 5. Laws and regulations presently in force are conducive for the growth of microfinance business. 9. The transition from ‘Not-For- Profit’ to ‘For-Profit’ microfinance institutions is preferable in the Indian context. not-for-profit organizations. 8. Government should frame separate rules and regulations for ‘For- Profit’ and ‘Not-for-Profit’ MFIs. Most of the provisions of the Microfinance Institutions Regulation and Development Bill . There should be an independent regulatory authority to approve the interest rates and financial products for the microfinance industry. 6. NBFCs. 7. NGOs. Simultaneous borrowing by the clients from two or more MFIs increases the rate of default. 3. 2.

We find that the significant value of Bartlett’s Test of Sphericity is 0. If more than 60% of the variance in the data is explained by the factor analysis then we can accept the results of the factor analysis. Hence at 95% confidence level the null hypothesis is not acceptable while the the alternate hypothesis that some of the variables are correlated is acceptable. KMO measure is an index which defines the measure of sampling adequacy. If the KMO index is above 0. . The nine variables have been combined into three factors. .103%. Here. The second reading of the above given Table is the Bartlett’s Test of Sphericity. operational risk factors and the financial risk factors. . on both measures of KMO and Bartlett’s Test of Sphericity.5 then the results of Factor Analysis are acceptable. Communalities and Rotated Component Matrix are the same as given for the factor analysis related to the institutional risk factors. Hence. KMO and Bartlett's Test Kaiser-Meyer-Olkin Measure of Sampling Adequacy. We also find that the cumulative variance is 69. the results of Factor Analysis are acceptable.000 which is less than 0.623 Bartlett's Test of Sphericity Approx.000 The first reading of the above given Table gives the value of KMO index.251 df 36 Sig. The analysis for the Total Variance Explained. That means that nearly 69% of the variance in the data is explained by the three factors. the number of responses should be four to five times the number of variables. the KMO index is 0.05 (5%). Chi-Square 331. Ideally for any factor analysis. (2011) favour the growth and development of the microfinance sector.623 and hence the results are acceptable. Results of Factor Analysis The first table of the SPSS output gives the values for Kaiser-Meyer-Olkin (KMO) and Bartlett’s Test. Component Matrix.

206 Bill (2011) favour the growth and development of the microfinance sector.620 -.311 69.972 33. Government should frame separate rules and regulations for ‘For-Profit’ and ‘Not-for- .023 5 .791 3 1.998 26.020 33. Simultaneous borrowing by the clients from two or more MFIs increases the rate of . not-for- profit organizations.579 6. Political interference is a significant factor in the conflict between the clients and the .051 22.885 100.006 .653 .370 4.429 -.226 2.920 79.972 33.717 .794 49.242 -.655 .063 financial products for the microfinance industry.039 -. Existence of microfinance organisations in different forms (such as societies.430 26.210 1.103 4 .190 53.115 9 .103 1.681 -.) hampers the growth of microfinance .020 33.366 recognition to expedite the process of loan recovery.893 9.571 .738 19.190 53. Total Variance Explained Extraction Sums of Squared Rotation Sums of Squared Initial Eigenvalues Loadings Loadings Cumul % of Cumulative ative % of Cumulat Component Total Variance % Total % of Variance % Total Variance ive % 1 2. SHGs etc.817 20.043 91.998 2 1. Most of the provisions of the Microfinance Institutions Regulation and Development .893 69.428 85.494 7 .000 Extraction Method: Principal Component Analysis.451 6 .107 95.103 1. Component Matrixa Component 1 2 3 Laws and regulations presently in force are conducive for the growth of microfinance -.430 15.893 69.818 .403 business.498 . .239 in the Indian context. The transition from ‘Not-For-Profit’ to ‘For-Profit’ microfinance institutions is preferable . 3 components extracted. a.170 1.430 15. Arbitration (between MFIs and clients) through Ombudsman should be given due .742 MFIs.250 .513 98.362 industry. Extraction Method: Principal Component Analysis.462 .544 6.210 2.237 .020 2.020 2.720 .817 20.433 Profit’ MFIs.602 8 .174 . There should be an independent regulatory authority to approve the interest rates and -.452 -.401 default. NGOs. NBFCs.

000 . Communalities Initial Extraction Laws and regulations presently in force are conducive for the growth of microfinance 1. There should be an independent regulatory authority to approve the interest rates and 1. SHGs etc.801 organizations.) hampers the growth of microfinance industry. 1. NBFCs.000 . Extraction Method: Principal Component Analysis.705 Arbitration (between MFIs and clients) through Ombudsman should be given due 1. .613 Most of the provisions of the Microfinance Institutions Regulation and Development Bill 1. 1. Simultaneous borrowing by the clients from two or more MFIs increases the rate of default.777 recognition to expedite the process of loan recovery.000 .672 MFIs. not-for-profit 1. Government should frame separate rules and regulations for ‘For-Profit’ and ‘Not-for-Profit’ 1. NGOs.707 financial products for the microfinance industry. The transition from ‘Not-For-Profit’ to ‘For-Profit’ microfinance institutions is preferable in the 1.000 .846 Indian context.000 .483 (2011) favour the growth and development of the microfinance sector.000 . Existence of microfinance organisations in different forms (such as societies.000 .000 .000 . Political interference is a significant factor in the conflict between the clients and the MFIs.614 business.

213 .9 26.066 interest rates and financial products for the microfinance industry. NGOs. Rotation converged in 6 iterations.077 -. 2. Rotation Method: Varimax with Kaiser Normalization.816 the rate of default. 5. SHGs etc.063 is preferable in the Indian context.014 -.828 given due recognition to expedite the process of loan recovery.810 -. not-for-profit organizations. we obtained the grouping of the variables under each of the five factors as given below: Factor % of Cumulative Questions s variance % 1 3.118 .290 . Most of the provisions of the Microfinance Institutions Regulation and Development Bill (2011) favour the growth and development of the .015 hampers the growth of microfinance industry. 8 19. Existence of microfinance organisations in different forms (such as societies.103 . Political interference is a significant factor in the conflict between the . Government should frame separate rules and regulations for ‘For-Profit’ .791 3 6. The transition from ‘Not-For-Profit’ to ‘For-Profit’ microfinance institutions . Extraction Method: Principal Component Analysis.757 .311 69.) .556 clients and the MFIs.998 2 1. Simultaneous borrowing by the clients from two or more MFIs increases -. 7. NBFCs.794 49.212 microfinance business.668 .083 .418 -. There should be an independent regulatory authority to approve the -. Arbitration (between MFIs and clients) through Ombudsman should be .998 26. 4 22.789 .359 .066 and ‘Not-for-Profit’ MFIs.135 . Variables Combined in Factors Based on the Rotated Component Matrix.751 -.477 .918 .135 microfinance sector.a a. Rotated Component Matrixa Component 1 2 3 Laws and regulations presently in force are conducive for the growth of .216 .158 .

In this way they can increase their credibility in the eyes of the investors and reduce the risk of not getting enough funds for their expansion. They can increase their scale and scope of their operations and also tap commercial sources for funds. . Factor 2 is named as: Co-existence of MFIs in different legal forms Factor 3: Simultaneous borrowings by the clients from two or more MFIs. Factor 2: The results of this factor suggest that might be a risk for the microfinance industry due to the existence of MFIs in different legal forms and this risk can be mitigated through separate laws for ‘For-profit’ and ‘Not-for-profit’ entities. Factor 1 is named as: Transition of MFIs and Regulation. The select MFIs in the present study started as ‘Not-for-Profit’ MFIs and then transformed into ‘For-Profit’ NBFC-MFIs. Arbitration through Ombudsman. and Political interference in the loan recovery process are the variables included in this factor. This will help MFIs in mitigating the risk of having to comply with a number of laws of different states in different geographies of the country. MFIs became regulated institutions. through the appointment of a regulatory authority for approving interest rates and products. Factor 3 is named as: Minimising legal and political hassles for the clients and the MFIs.We shall consider all the three factors since they explain nearly 69. By this transition to ‘For-Profit’ institutions. Factor 2: Laws and Regulations for MFIs in force.103% of the variance in the data. Separate rules for ‘For-Profit’ and ‘Not- For-Profit’ MFIs and Existence of MFIs in different legal forms are the variables included in this factor. and by the passage of a uniform law for the entire microfinance industry in the country. A regulatory authority for deciding the interest rates and financial products for the microfinance sector would standardise and legitimise the products and services offered by the MFIs. Analysis of the Factors Factor 1: The results of this factor suggest that it is beneficial for the MFIs by transforming into ‘For-profit’ from ‘Not-for-profit’ entities. Factor 1: Transition of MFIs from ‘Not-for-Profit’ to ‘For-Profit’ institutions. The enactment of the microfinance Bill in the Parliament would help in implementing a uniform law for this sector throughout the country. Regulatory authority for interest rate approvals and products and Microfinance Bill are included in this factor.

there will be unfair competition between MFIs existing in different legal form. These factors pose a risk of survival to the entire microfinance industry. political activist encouraged microfinance clients not to repay their instalments. The business mission. In addition to loans for business needs. purpose and the governance aspects of ‘For-Profit’ and ‘Not-for-Profit’ MFIs is different. An Ombudsman for the microfinance sector will help in solving the disputes between the MFIs and the clients without resorting to time consuming and costly legal recourse.Even in the absence of uniform law for the microfinance sector. When the clients failed to repay their instalments. there are no such norms for the ‘Not- for-Profit’ MFIs. Moreover. Hence. they may borrow from two or more MFIs and become indebted. the clients had to resort to borrowings from the money lenders at exorbitant interest rates. Factor 3: The results of this factor suggest that the problems faced by the clients due to indebtedness and the problems faced by the MFIs due to political interference can be solved through the appointment of an Ombudsman for the microfinance sector. it is necessary to have separate legal framework for the ‘Not-for- Profit’ and ‘For-Profit’ MFIs for their coexistence. The clients of microfinance are poor with no regular source of income. the Directions of the RBI with regard to the NBFC-MFIs have reduced legal ambiguity. Therefore. There is no association or code of conduct for the MFIs existing in other legal forms such as societies. While NBFC- MFIs are governed by the prudential norms of the RBI. . Trusts and so on. Hence. MFIs stopped giving fresh loans. they also need loans to satisfy their personal requirements. Thus. For instance. there were allegations of MFIs using harsh measures of recovering loans from the indebted clients. NBFC-MFIs who are members of the MFIN follow a code of conduct and have to charge a uniform rate of interest on the loans given to the clients. Moreover. As mentioned in Chapter 3. MFIs in India exist in different legal forms. This will also prevent the poor clients from being misguided by the vested political elements. microfinance clients will not get same level of service and products from MFIs existing in different legal forms.

2011). Risk Management Measures of Select MFIs Table 5. control over cash management and over . January 13. SSFL and SWAWS in AP and outside AP due to the impact of AP microfinance crisis in 2010. SWAWS–75%. Risk Management measures of SKS: SKS has decided that their exposure in any single state will not be more than 15% of the total portfolio outstanding and will not cross 50% of the reported net worth. for others it is current ** Collections are as a percentage of loans Source: The Economic Times.6 presents the portfolio exposure and loan collection details of SKS. ii. Table 6 Name of the MFI Portfolio (Rs. SSFL–50%. Asmitha–50%. SKS having less portfolio exposure in AP suffered the least while SWAWS having 75% of its loan portfolio exposure in AP suffered the most. Hence.  Collections in AP: SKS and SSFL being large MFIs (in terms of gross loan portfolio and geographic diversification) were able to collect about 30% of their dues in AP while SWAWS being a small MFI was able to collect only 1% in AP. With reference to Table 6 and other sources.000 4. The collections of BSFL in Andhra Prdesh was just 10% (Dinesh Unnikrishnan. 2011 Risk Management Measures of Select MFIs i.000 2.250 3. SWAWS suffered more. It has also strengthened internal audit controls. SHARE –50%. Hence. in crore) Collection (%)** Percentage Outside In AP Outside AP Total Portfolio in In AP AP AP SKS Microfinance 1. BSFL–45% (Tamal Bandyopadhyay.750 5. we find that  Loan portfolio Exposure in AP of the six select NBFC-MFIs is as follows: SKS–25%.000 25 30 99 Spandana Spoorthy Financial 2.000 50 33 99 Limited SWAWS* 75 25 100 75 1 Normal AP Microfinance Crisis (2010) – Portfolio Exposure and Loan Collection *Portfolio of SWAWS is of September 2010. 2011).11.

SSFL-74 districts and 8 states. Geographical diversification: The geographical spread of operations of the six select MFIs is as follows: SKS-213 districts and 18 states. those MFIs which had diverse geographical operations suffered less impact of the AP Microfinance crisis.sa-dhan. 2011). Similar is the case with SKS which is concentrating on giving gold loans. BSFL-77 districts & 11 states. Diversified products: For SSFL. But for BSFL its ABCO decreased or remained constant (resulting in higher operating costs) . even though the micro-loan repayment is almost nil in Andhra Pradesh. It also started to lend more money under its Karshak scheme which advanced money to farmers for buying tractors and other farm equipment (G. iii. the tractor finance division has up to 90% repayments as they are mortgage loans. SWAWS-20 districts & 4 states (Source: Sa-Dhan. It is found that MFIs which have adopted just simple credit model (such as SKS and SSFL) show more growth compared to MFIs like BSFL which have adopted ‘credit plus’ model (Rajesh Chakrabarti and Shamika Ravi. Simple credit and Credit Plus models: All the MFIs (except BSFL) followed simple credit model.field staff (Procuring indemnity bond. Such MFIs faced severe cash crunch as equity investors were reluctant to invest additional funds in the wake of the crisis. iv. Thus. surprise checks. 2011). SKS completed securitization transactions through qualified institution placement (QIP) and it witnessed increase in foreign institutional investors.htm). their Active Borrowers per credit officers (ABCO) was higher. Size of the MFIs: SWAWS is a smaller MFI compared to SKS and SSFL. Simple credit model only involves distribution of loans and their collection once a week. Hence there is less travelling and operating costs. v. competition for them reduced. Large MFIs could survive crisis and in the aftermath of the crisis. Asmitha- 120 districts & 13 states. vii. http://www. SHARE-167 districts & 16 states. Hence. vi. Corporate Restructuring: All the MFIs reduced operating costs by closing down or merging their branches. Employee-wise daily reconciliation of cash balances etc. involving higher operating costs.net/files/Sa-dhan- indian-map.) (Source: Annual Report of SKS). Naga Sridhar. On the other hand BSFL followed Credit Plus model under which it also provided Livelihood & enterprise development services.

However. as of March 2013.207 crore through a qualified institution placement (QIP). Improved rating has helped Asmitha in securitization deals and in raising funds (Abhay Nayak. xii. 1. it faced no difficulty in raising equity capital (Arlene Chang. 2013). There was a delay of 1 year for SWAWS and BSFL. Strategy in aftermath of crisis: Asmitha and SHARE distributed loans even during crisis in AP since new loans would help customer repay old loans. many small MFIs withdrew from the market. Thus. 2012). Similarly. Merger Plans: To cope with the adverse financial situation arising out of the AP Microfinance crisis (2010). SHARE has received fresh equity capital of Rs. x.8 crore from its investors Legatum Ventures and Aavishkaar Goodwell (Vishwanath Pilla. as ‘sacrifice value’ to satisfy the Corporate Debt Requirement (CDR)(Namrata Acharya. However. xiv. its promoters had to put in Rs 1. Asmitha. ix. . xi. it found difficulty in servicing its debt. Equity Investment: Due to no equity investment in SWAWS on account of microfinance crisis. It also raised almost Rs. in case of SKS. 4. 2013). other MFIs took quick action by accepting CDR to mitigate the financial crisis arising out of the AP Microfinance crisis (2010). Corporate Debt Restructuring (CDR) arrangement: Asmitha. SHARE and SSFL went for CDR in 2011 while SWAWS and BSFL went in for CDR in 2012. Competition: During and after the AP Microfinance crisis. 2013). This down grade in rating would negatively affect BSFL’s position in attracting equity capital. xiii. CDR team has also permitted Asmitha to raise funds through securitisation. Credit Rating: The ratings of Asmitha improved from CRISIL C to CRISIL B/Stable. On the other hand due to bad loans BSFL faced insolvent financial position and liquidity problems. SHARE and SSFL had earlier planned to go merger but dropped it after CDR was cleared.25 crore. 2011). During 2012-2013 also SKS completed 12 securitisation transactions aggregating to Rs. 2013). BSFL did not do so at that time. Thus. CDR helped MFIs in coping with adverse financial situation. The repayment rate was 100%. This improved rating is on account of timely servicing of its debt and its improved liquidity position. the company witnessed increase in its foreign institutional investors to 36% and increase in their financial holding by more than 1.5 times over the previous financial year. This helped it secure the much needed equity capital (Arlene Chang. Thus. This reduced the competition for SKS and helped it to expand its business by attracting borrowers of other MFIs (Arlene Chang. Thus. there was a delay of one year for it in restructuring its financial plan after the crisis. it opted for CDR in 2012. Corporate Debt Restructuring: While other MFIs (except for SKS) opted for CDR in 2011. This resulted in CRISIL downgrading its rating from ‘CRISIL C’ to ‘CRISIL D’.viii. 300 crore from equity investors.

900 crore. xvii. 50% customers are men and farmers. Now they have found that there is a 55% to 60% gap in the market for serving the poorest of the poor to whom availability of credit is very scarce. Urban and rural geographies: Cost of operations for BSFL is higher since its focus is rural areas where long travel is involved to reach remote customers. the net worth of BSFL reduced to between Rs. Loan Product: Unlike other MFIs. xviii. 2011. Hence. the ROA of the MFIs was very high (example. diversifying their operations helps them avoid financial and operational risks (Trushna Udgirkar. No lesson from the first microfinance crisis: At the time of first microfinance crisis (2006). SSFL – 9%). Again just before the second microfinance crisis (2010).xv. ROA was high. For BSFL. Hence. . it suffered from paucity of funds. For instance. When banks stopped lending. For BSFL. xvi. Heavy Dependence on Banks: 80% funding to microfinance sector is from banks. in September. Thus. Other MFIs provided loans for trading activities where weekly repayments are almost ensured. 150 crore to Rs. Exploring new market segments: Previously SHARE and Asmitha concentrated on the urban market in order to ramp up their business growth. Thus. Rapid commercialization is risky for the microfinance business. equity investors became reluctant to invest further (In case of BSFL and SWAWS). xix.200 crore from its earlier value of Rs. these companies are planning to increase their outreach in this market segment. 2012). Customers: Except for BSFL. for all other MFIs majority of the customers are women. banks decided not to offer fresh loans to BSFL until its financial position improves. ROA never exceeded more than 3%. xx. BSFL gave crop loans wherein repayments are not regular due to drought and delay in agricultural output.

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