Sa-Dhan Newsletter Volume 5 Issue 2

Operational Costs of Delivering Microfinance : Banker's Perspectives

Micro Finance and Commercial Banks

- Sundarashyam & Salim

T

Human resources: Given that micro-finance programs differ

he contribution of poor and vulnerable households to

radically from traditional banking, banks must look for

the economic development of the country is largely

specialist staff to manage these programs. Banks have been

affected by their ability to access credit and create wealth.

managing to do with their existing staff and issues of

Financial services permit individuals and households to

recruitment, training, and performance related incentives for

manage the risks and uncertainties they face ­ to save on

the purpose receive little or no attention.

better terms, to invest in a venture such as business or

property, or to cope with or insure against unforeseen

Cost-effectiveness: Micro-finance programs are costly

expenses.

because of the low volume i.e., small size of the loans and

because banks cannot operate them through traditional

It is estimated that more than 50 crore disadvantaged people

mechanisms and established structures, which have high

across the world need access to financial services. How-

overhead costs.

ever, established financial intermediaries such as commer-

cial banks may not always be able to serve the very poor

Within the bank's functional structure, micro-finance cannot

households for reasons that include lack of traditional

rank high among the operational divisions and the future

collateral, high cost of small transactions, and geographic

of these programs will strongly depend on the support of

isolation. Lack of awareness of financial services is a major

a few important stakeholders. Even programs that break-

drawback the poor and disadvantaged face. Poor house-

even and generate earnings have to compete with other

holds' access to financial services is generally limited to

divisions with even higher earnings for use of the bank's

transfer of funds or small loans, either individually or

scarce resources.

through savings clubs, rotating savings and credit associa-

tions, and mutual insurance societies.

Considering the regulatory environment in which the com-

mercial banks operate, their micro-enterprise programs

Following the success of some micro-enterprise credit

must meet a demanding opportunity cost criterion to

programs supported by governments and donors during the

continue growing with the bank resources.  At the same

early plan periods, a more focused micro-finance industry

time, some banks, to protect their image, may find it difficult

gradually emerged in the country. The institutions that

to charge a sufficiently high interest rate on micro-loans

provide micro-credit services are many and include non-

to cover their costs.

governmental organizations (NGOs), credit unions, non-

bank financial intermediaries, cooperatives, commercial banks

Commitment at the highest levels of the bank is necessary

and Regional Rural Banks (RRBs). The loans extended are

to make micro-finance programs work successfully.  For-

very small in size.  They are provided to serve diverse

tunately, many commercial banks exhibit the required

purposes, either to individuals or groups, ranging from

concern and anxiety to make substantial contribution to this

personal consumption loans, to production loans to small

sector. Without this support, micro-finance programs will

enterprises and rural artisans.

not receive the human and financial resources they require

to consolidate and expand.

Among the challenges faced by the developing countries

and the international community is to find ways to enlarge

Human resources

the micro-finance sector and to complement the existing

informal and private institutions, largely voluntary in nature,

Until recently, like many other activities of the banks, micro-

and promote access to these markets by the poor, and

finance methodologies were labour-intensive, and training

enhance their viability.

and motivation of staff occupied an important place in the

Till the opening up of the Indian economy in the early

whole scheme of things.

1990s, the regulatory environment of financial markets was

(as in most developing countries) interest rate prescription,

Studies of successful micro-finance NGOs reveal that their

high liquidity reserve requirements, and directed lendings.

staff salaries tend to be lower than those found in

This precluded the established banks from playing an

conventional commercial banks. This may be due to the

enlarged role in the area of micro-enterprise, as a business

non-regulatory and non- unionized environment in which

venture. After the government allowed new private sector

the employees of the NGOs operate and the hire and fire

banks to be set up, private domestic commercial banking

sort of rules that the NGOs are able to implement. Besides,

expanded rapidly in larger towns and cities. However, these

most of the appointments are contractual and short-term,

new commercial banks could not think of small businesses,

save a few exceptions.

small farmers, and micro-entrepreneurs.

In large banks, with integrated micro-finance programs,

salary levels are considerably high. Most of them use the

At first look, banks appear well placed to offer adequate

same salary structure. However, in many cases, no bonus

financial services to increasing numbers of micro-finance

system exists, perhaps because the salaries are considered

clients and earn a profit.  However, their advantages are

adequate already.  In respect of some banks that have

often offset by certain constraints, especially in the areas

independent micro-finance units, they are able to have their

of human resources and cost effectiveness.

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