Sa-Dhan Newsletter Volume 5 Issue 2

Operational Costs of Delivering Microfinance : Banker's Perspectives

the mind of the bankers at all. The market is really at its

Correspondingly, the resource allocation, be it management,

infancy. The scope for expansion is enormous. Banks still

focus, manpower, training, placement, etc., is taken care of

look at mF as an activity prescripted by the economic policy

in a routine fashion by these banks. It is recognised by

of the government. Further, there are only half a dozen or

them that for very large number of branches in rural and

so MFIs in the country. The central bank has not been able

semi-urban areas, mF under the Bank-SHG linkage

to grapple with the issue of regulation for an orderly

programme offers an excellent business opportunity. Besides,

development of MFIs. Admittedly, the task of supervision

they are also genuinely development oriented. Therefore, the

and oversight of MFIs, if allowed to mushroom, will be

approach of these institutions is one of being benign

gargantuan to make it well nigh impossible. The remedy

patrons of mF programme.

perhaps lies in self regulation to a large extent whereby

the MFIs could grow to sufficient numbers and strengths.

As a corollary, the banks do not have any estimate of cost

Only then MFIs will appear on the radar screens of large

of mF. In any case, Indian banking industry is yet to develop

commercial banks from the point of view of competition.

management accounting tools for arriving at costs for

different activities on a regular basis. Naturally, they have

Yet another scenario could also be developed for orderly

developed certain methodologies for cost estimation for

growth of mF industry in the country. It should be

significant lines of business. As mentioned earlier, the size

recognised that large commercial banks are not ideally

of mF is so small that the banks do not mind even if some

suited to purvey micro-credit on a retail basis. The costs

cross-subsidy takes place. They are encouraged to carry on

would be unaffordable. Rather, they could take care of the

along these lines also by the fact that up to now, the cost

wholesale end of the market by providing lines of credit/

of forming and nurturing the SHGs have been borne by

refinance or purchasing bonds/debentures floated by MFIs/

the NGOs from donor funds. Further, the percentage of non-

RRBs, etc. The relationship between the commercial banks

performing loans is also low.

and MFIs could be turned into that of lender and borrower.

Naturally as lenders, the commercial banks would watch

The situation may appear to be idyllic. But the scenario is

the financial position of MFIs, thereby to a large extent

not conducive for development and maturation of mF

sharing the burden of supervision with RBI.

business, as hard-headed commercial calculations have not

played any part so far. Therefore, banks have not worked

To sum up, one may state that mF having grown

out the economics of mF activity.

phenomenally over the last decade and a half is on the

threshold of further progress. Commercial banks hitherto

The treatment with regard to allocation of lendable resource

have shown a healthy, benign but paternal attitude to this

is not a problem as most banks have surfeit of funds. The

line of activity. There is opacity in cost calculations and

scope for expansion of this line of business is restricted

certain disinterest in watching the revenue stream because

at the moment only by the attitude and aptitude of junior-

the line does not constitute a significant portion of the

level managers and availability of SHGs formed by the

assets. They are happy to be part of the process and helping

NGOs. By and large, where NGOs have been active and have

along by purveying credit as the operational burden and

formed groups, establishing bank linkages have not been

cost of organising the group and to a large extent

a problem. Thus, the southern states of Tamil Nadu, Kerala,

monitoring the progress and recovery is borne by a third

Karnataka and Andhra Pradesh, the eastern states of Orissa

party, viz., the NGOs.

and Chhattisgarh, the western state of Maharashtra have

shown remarkable progress. By and large, these areas are

Commercial banks do make efforts to fashion the attitude

also the ones administered properly in the country.

of the employee and build skills in managing micro-credit.

But by tradition, these banks have not been specialising

The attitude and aptitude of the operating staff are to a

in any one single line of activity. Hence, they do not offer

large extent developed by the banks in their training centres.

any special incentives for the employees engaged in mF

One of the strengths of the Indian banking industry has

activities. They do not feel any pressure of competition.

been the in-house training system it had developed to cope

with the punishing rate of branch expansion in the country

If the mF market is to grow further in an orderly fashion,

in the 1970s and 1980s. This system has been put to good

for which undoubtedly enormous scope exists, there is need

use to provide training for the operating staff in mF.

for-

However, the in-house training systems aim at developing

all round general managers of banking rather than specialists.

i.

Upgradation of technical and managerial skills of

The placement of officials also is generally based on uniform

SHGs.

rules. Hence, no specialisation is feasible. Therefore, no

ii.

Development of self-regulation by MFIs blessed by

special incentives for postings or placements for employees

RBI.

posted to branches dealing in mF has been thought of nor

iii.

For some time de-linking the issue of micro-saving

is it feasible.

from micro-credit and

iv.

Commercial banks developing skills in wholesale

Finally, how these banks face the issue of competition from

lending through different instruments to MFIs.

mF institutions (MFIs) needs to be examined. To put it

bluntly, the issue of competition in this area has not entered

(M. A. Krishnan' is a retired Banker. He was the Chief General Manager (Development Banking, SBI)

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