HR Challenges In Micro Finance Institutions

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In today's context whole business world is taking slowdown due to financial meltdown and recession, the micro finance sector is recording continuous growth and touched billion dollar mark. Currently the sector is attracting many entrepreneurs including youngsters to enter into this business with an ambition to start a microfinance institution (MFI). It is estimated that there are more than one thousand MFIs currently operating in India and have disbursed only for 10% of the potential demand of over $ 50 billion because, large proportion of Indians are living below poverty line and this demand for credit for the poor is still expected to surge ahead.

The quality of service delivery in microfinance industry depends on person to person contact and relationship. Due to various challenging circumstances in business, MFIs competitive positions will keep on change constantly. Hence it is more human resource intensive and sourcing of skilled and quality human resources will play a critical role for sustaining the growth of this industry. In order to play an effective role by HR-Department at any MFI, the importance lies in integration of several important components of organizational architecture.

Building a solid and long lasting institution is a very challenging and multifaceted task for the top level management as well as for HR-Department. But, HR is the most neglected function in Indian microfinance sector and HR planning is mostly run on ad-hoc basis through quantitative in nature and used mostly for determining new recruitments or promotions to estimate the salary expenses. Other side this data would be useful for financial projections required to submit to the financial institutions for their loan proposals. The most critical issue in HR-Planning is finding right people for different MFI's functions and their willingness to compensate adequately for people with relevant experience. There are very few people available with relevant experience because, microfinance sector has scaled up recently and there are very limited training institutes or business schools to churn out people with required attitude and skills set. Here the author emphasized as how the HRM department should ensure to provide an effective workforce to meet the vision and mission of the organization. In this direction the author also recommended that, HR professionals have to formulate ideal HR policies and procedures with reference to MFI business to make available right number of people with right attitude and skills in the right place at the right time.

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HR Challenges in Micro Finance Institutions (MFIs)

In today's context whole business world is taking slowdown due to financial meltdown and recession, the micro finance sector is recording continuous growth and touched billion dollar mark. Currently the sector is attracting many entrepreneurs including youngsters to enter into this business with an ambition to start a microfinance institution (MFI). It is estimated that there are more than one thousand MFIs currently operating in India and have disbursed only for 10% of the potential demand of over $ 50 billion because, large proportion of Indians are living below poverty line and this demand for credit for the poor is still expected to surge ahead.

About MFIs:

Usually Micro finance institutions provide credit and small loans to poor people for starting a business or for buying/ consuming goods. Several MFIs offer services like accepting small savings starts from Rs 10/- to Rs 25/- and insurance services also. For such services, MFIs charge interest of 30% annually. In reality, this could be considered very high but many poor people are borrowing from many private lenders who will not maintain transparency and are known to charge well over 100% annually. Still demand is plenty and available MFIs across the nation are not adequate and not pleasing the needs of many poor people in this direction. Contrary to what majority of people believe about bad loans or bad debts in micro credit are very rare as compared to organized sector. Here only 2% of the total loan disbursement has shown bad so far.

Till couple of years ago an MFI was just another non-profit activity for the cause of social change. Predominantly the sector was mostly dominated by NGOs, donor-driven organizations and few individuals in rural markets. Surprisingly, investments in microfinance sector are on the rise due to the involvement of the capital market and several other private investors. At present, major international finance institutions and banks like Deutsche Bank, Citibank, HDFC and ICICI Bank entering this segment as well. Microfinance is fast emerging area for global players' with an estimation of $ 3 billion investment in India and around $ 20 billion globally by 2010. Based on a research recently conducted by Deutsche Bank, the volume of total microfinance loans increased from $ 4 billion in 2001 to approximately $ 25 billion in 2006 and about 51% of the total borrowers are only from South Asian region [1] .

How to start an MFI:

Starting an MFI is in fact not as complicated as other financial business. MFIs are existing from past several years in different unorganized methods as, credit societies and trusts and disbursed credit amongst those they serve. Individuals or group of people can incorporate a 'not-for-profit company' under the Companies Act, 1956. The other category to start is 'for-profit companies' have to be registered as Non-Banking Finance Companies (NBFCs) with the RBI and require huge paid-up capital. As per the norms of RBI, the minimum capital to be raised for start-ups in case if someone is operating as a Section 25 company or not-for-profit company must not be lower than Rs. 25 lakh. Whereas starting an NBFC requires Rs. 2 crore.

Scope and Opportunity for MFIs:

The microfinance business practice movement in India is in limelight according to various national and international business and commerce survey analysis reports and seen as an attractive market with high potential investment opportunities. Hence, this trend definitely attracts many more business magnets to find more space to invest into MFIs arena. According to Arjun Muralidharan [2] , CEO, ASA-GV's observation - "the situation may not be as simple as before, but the field is certainly growing and anyone entering into the sector should arrange alternate source of funds now," he said. His MFI, ASA-GV has not limited itself to only micro credit, it disbursed into other related areas over Rs 700 crore and offering a combination of financial products for women by aiming at the economic empowerment of poor women. At the moment, ASA-GV is in the process of developing special schemes related to social security for its members by offering the benefit of life insurance and accident insurance and old age annuity similar to pension scheme offered by the organized sectors like SBI, HDFC, Etc.

According to a research report by Hyderabad based organization- Intellecap [3] , Indian MFIs are expected to build a portfolio of $ 6.27 billion by 2012 through managing over 48.7 million borrowers. It's another survey [4] with a sample of the 60 largest MFIs in the country (based on their number of clients) collectively achieved close to 10 million clients in 2007 with a cumulative portfolio of INR 31.14 billion ($ 769 million). All categories of MFIs jointly displayed average CAGRs of over 70%. In addition to this their operating cost ratios came down and returns increased significantly. The efficiency and profitability indicators of Indian MFIs are highly favorable as compared to other Asian counterparts due to better management skills and the availability of right financing practices and building up of institutional abilities to make effective utilization of the financial resources will define the performance of several MFIs in the next stage of growth. The growth trend and impressive performance of MFIs in India attracted the attention of many mainstream commercial investors across the local and global markets and shown growth year after year according to the table -1 mentioned below [5] . Microfinance gained its actual momentum after 2004 and started growing more than 100% year to year. The growth momentum is expected to continue for a few more years

Table 1: Growth in Microfinance Outstanding

Year

Outstanding

(Rs Crores)

Year

Outstanding

(Rs Crores)

March - 2002

200

March - 2006

2300

March - 2003

300

March - 2007

4000

March - 2004

400

March - 2008

7000

March - 2005

1100

March - 2009

10,000

Source: http://www.m2iconsulting.com/Documents/HR%20Issues.pdf

Intellecap identified nearly 40 domestic and international players interested in equity infusion of almost INR 1.74 billion ($ 43 million), out of which INR 1.54 billion ($ 38.2 million) flowed in during first quarter of 2007. The investment trend continued positively in 2008 also. But, the investment focus was largely towards Tier-1 MFIs like Bandhan, Microcredit Foundation of India, Sa-dhan, Grameen Koota, SHARE, SKS, GK, Spandana, BASIX etc.

The quality of service delivery in microfinance industry depends on person to person contact and relationship. Due to various challenging circumstances in business, MFIs competitive positions will keep on change constantly. Hence it is more human resource intensive and sourcing of skilled and quality human resources will play a critical role for sustaining the growth of this industry. In order to play an effective role by HR-Department at any MFI, the importance lies in integration of several important components of organizational architecture.

Importance of HR-Dept in managing the MFIs growth:

Building a solid and long lasting institution is a very challenging and multifaceted task for the top level management as well as for HR-Department. But, HR is the most neglected function in Indian microfinance sector and HR planning is mostly run on ad-hoc basis through quantitative in nature and used mostly for determining new recruitments or promotions to estimate the salary expenses. Other side this data would be useful for financial projections required to submit to the financial institutions for their loan proposals. The most critical issue in HR-Planning is finding right people for different MFI's functions and their willingness to compensate adequately for people with relevant experience. There are very few people available with relevant experience because, microfinance sector has scaled up recently and there are very limited training institutes or business schools to churn out people with required attitude and skills set. According to a survey report by an MFI- 'Sa-Dhan', nearly 25 institutions in India have exclusive courses in microfinance, which is totally inadequate in the light of the demand for the sector.

Craig Churchill, in his research paper - "Managing Growth: The Organizational Architecture of Microfinance Institutions", clearly outlined three elements interplay in this task as Human Resource Development, Organizational Structure, and Institutional Culture as mentioned in diagram below. The diagram depicts how each of these three elements is distinct from each other and their overlap and influence with each other.

Figure -1: Architecture of Microfinance Institutions. Craig Churchill, 1997.

Source: Managing Growth: The Organizational

Human resource development:

Human resource development area plays a large role in influencing organizational structure and institutional culture. In fact, any MFI must be very strong in all the above three areas to meet the demands of business growth.

Institutional Culture:

Each institution will have its own unique culture. The core values, vision, mission and code of conduct form the basis of this culture and heavily influenced by the Chairman or Executive Director of the company and senior management team. Usually any institutional culture is difficult to pinpoint because it is not something which is readily apparent on the organizational chart. Moreover culture is mainly reflected in the informal procedures like staff interactions, working environment, institution's day-to-day operations and so on. Effective Human Resource Management is one of the most important tools to institutionalize culture. The most significant HRM tools and practices that shape institutional culture are like:

The guiding principles, values and the firm's code of conduct alignment based on the MFI's vision and mission

HR Policies which reflect the MFI's value systems

The general standards of Performance Management existing in the MFI to evaluate the employees performance in transparent manner

Well designed application forms, advertisements and recruitment processes that create an impression and portray about the respective MFIs reputation during recruitment

The direction of employment contract and orientation process for new staff reveals the MFI's strength of value statement

On the whole, it is critical to understand the overall HRM systems and tools by all employees. But, it is very important as how formally and directly setting the tone and communicating to staff about the respective MFI's culture.

Organizational Structure:

In present management context, flat and simple organizational structure is the best model for any growing organization. Team based work approach is only considered as the best procedure in every organization to increase the productivity, efficiency and responsiveness. All staff members must be organized in teams based different branches, products, regions types of clients. At the same time, employees also prefer to work in smaller business teams because they find more challenging work and better chance to see their ideas adopted. Smaller teams also help to foster more sense of responsibility and accomplishment. Organizational structure should facilitate increased teamwork environment to experience success and growth potential. During expansion MFIs should create a dynamic and decentralized organizational structure to encourage even various branch offices. In the beginning, decentralization process may create some challenges in the form of administrative issues and managing growth for some period of time. Therefore communication must remain as an important tool to manage effectively.

HR Challenges at MFIs:

There are several HR Challenges faced by the most of practicing HR Professionals in this sector as it is just emerging sector and the availability of workforce with relevant experience is very limited. According to an online survey by 'Microfinance Insights' on Human Resources Challenges and Solutions (February to March 2008) highlighted some important HR issues like more employee turnover, staff retention and recruitment and training as the biggest challenge [6] . The existing supply of human resources are more from NGOs sector, naturally they will have more NGOs orientation rather than Microfinance orientation. Hence, the professionalism in microfinance sector is very much limited. Moreover there are no educational institutions offering relevant programs in the area with relevance to microfinance.

The HR challenges in MFIs can be broadly classified into three levels as

Sectoral level challenges: as a sector, microfinance has extraordinary growth potential. But it is recognized by few players who involved in this business and few strategists who know the potential only. Other people are largely unaware and skeptic about opportunities that lie before them. Microfinance being employees' intensive industry, their interpersonal relationship and service quality to customers will make large difference in developing the organizational wealth. Otherwise it will effect on shrinking margins on business and discourage the spending on human resources and finally result both quality and quantity of human resources suffer.

Organizational level challenges: when organizations are growing rapidly, the human resources are not increasing accordingly. It leads to improper ratio of clients per officer to keep costs down. Finally it will impact on low morale, beginning of turnover, MIS backlogs and decline in portfolio quality. Sometimes, to scale-up operations and portfolio, it demands recruitment of new staff in large numbers. Usually the hiring process found with cost in mind and thus hires less qualified people. This may tolerate up to certain extent, thereafter the organization faces the growth crisis.

Individual level challenges: Most of the talent particularly youngsters are reluctant to work in remote areas. Initially few may work with small MFIs and then move on to higher paying jobs with bigger employers. MFIs at rural places function with limited requirements and the lack of induction, training and skill enhancement remains a challenge. Employees may struggle for growth and increments, limited exposure as compared to city environment.

HR Challenges Pertaining to Human Capital Issues:

HRM department should ensure to provide an effective workforce to meet the vision and mission of the organization. HR Professionals have to formulate ideal HR policies and procedures to bring right number of people with right attitude and skills in the right place at the right time. In order to this, most of the HR Professionals of MFIs will face all classic challenges like

Recruitment of qualified staff

Training and capacity building

Managing turnover

Designing incentives

Financial constraints etc.

Today most of the head hunters are facing tough problems to provide qualified staff for managing MFIs. It is a critical issue for every MFI in India and abroad as well. Concurrently it has been proven by several important research report findings also. According to the Microfinance Banana Skins Report (March 2008) [7] , the most pressing task for microfinance institutions is "Managing Quality". By echoing to this finding the respondents of 'Microfinance Insights Survey' rated that, human capital issues are the most challenging to deal with. The study revealed as 51% of MFIs are facing challenges pertaining to Human Capital issues as compared to financial issues (29%), and technical issues (15%) as shown in figure-2 below.

Figure - 2: Challenging issues in MFIs

Source: http://www.microfinanceinsights.com

Surprisingly, financial issues are not rated highly as everyone expects in present microfinance market situation which is becoming very competitive and demand more specialized knowledge and faster scaling than ever before. The report also highlighted that recruiting qualified staff, offering relevant training and capacity building, and controlling employee turnover are the most difficult issues because of its distinctive nature of business. According to Kibukuna Samuel from The Association of Microfinance Institutions of Uganda, "Resources mobilization for program implementation and promoting industrial standards" is their very important HR challenge. In Indian micro finance business context, talent retention in MFIs for longer time is a challenging task because the employees are more attracted by banks and they poach them without any qualms.

Challenges in Recruiting Right People:

At present, MFIs are competing more with commercial banks and NGOs for finding appropriate talent. For effective functioning of any MFI today, it is necessary to lead in search of targeted recruitment for specialized talent. The study has clearly revealed the requirement of talent in three major areas of their importance. The first one is strategic thinkers with relevant experience in microfinance sector requires 63%, which is the most challenging area of concern. Second one is staff for basic operations need 21% and the third is strategic thinkers with the experience of capital markets are with 16% as shown in figure- 3 below.

Figure- 3: Challenging Positions to Recruit for MFIs

Source: http://www.microfinanceinsights.com

Challenges in recruitment criteria of MFIs:

Several research findings highlighted across the board of MFIs from the highest levels to the lowest levels of staff, the most important criteria in recruitment is about local knowledge. Awareness of local knowledge is ranked higher than having management degrees, capital markets, international knowledge and proficiency in local language for all levels of staff members.

Criteria for C-Suite Recruitment:

Filling top-level positions like CEO, CFO and COO can be difficult for MFIs because of the complex skills requisite in every position and the leadership team has to know about the regions of operation as it is for lower level staff. This decisive factor conceals the need for a management degree, capital markets experience and international experience (Figure- 4).

Figure- 4: Criteria for C-Suite Recruitment

Source: http://www.microfinanceinsights.com

Criteria for Director Level Recruitment at MFIs:

Recruitment of Director Position also resulted with similar necessitate of those C-Suite officers of MFIs. After the prerequisite of local knowledge (57%), international experience rated as very important by 29% followed by capital markers experience and having management degree by 22% (Figure- 5).

Figure- 5: Criteria for Director Level Recruitment

Source: http://www.microfinanceinsights.com

Criteria for Staff Level Recruitment:

For recruiting the staff-level positions like branch managers and credit managers, the need for local knowledge (55%) and local language proficiency (54%) are very essential prerequisites followed by English language proficiency rated very high as 52% and years experience by 43% (Figure - 6).

Figure-6: Criteria for Staff Level Recruitment

Source: http://www.microfinanceinsights.com

Issues and Challenges in Employee Motivation and Retention:

Incentives are one means to motivate the employees and reduce high turnover rates in organizations. Majority of the MFIs i.e. 57% are using monetary based incentives and 20% are using non-monetary based incentives like public recognition for achievements, sponsoring holidays and increased vacation days. Only 9% of the MFIs are offering ESOPs (Employee Stock Option Plans) as incentive schemes to their employees due to their complexity and nature of business and lack of knowledge on the part of MFIs in administering them.

Figure- 7: Types of Incentives

Source: http://www.microfinanceinsights.com

To study more about the effects of incentive schemes on turnover, various types of incentives were cross-referenced with the MFIs (Figure: 8) that cited turnover as a major problem to deal with. The analysis revealed that 87% of the MFIs are more concerned about turnover make use of monetary performance-based incentives. Then again, for MFIs that view turnover as a minor concern or not a concern at all, there is a higher utilization of non-monetary performance based incentives and ESOPs. The study indicates a need for the MFIs using monetary based incentives to reorganize their incentive scheme policy.

Figure - 8: Turnover Perception Vs. Incentive Schemes

Source: http://www.microfinanceinsights.com

Capacity Building through Training Programs:

Ongoing training programs are very important for employees to build required skill-sets and keep them engaged. Most of the MFIs offer training at least once or twice a year and nearly 39% of them offer it more than four times per year. Many MFIs prefer to offer basic in-house training for newly joined employees to provide general information about the company and product knowledge. It includes classroom training programs along with field work training as a means of learning various delivery methodologies of the micro finance institution. A part from this more in depth training programs will be organized in the areas of field monitoring, management information systems (MIS), accounting basics for branch managers, needs assessment, monitoring methodologies, finance and human resource management for managerial level staff. A small number of MFIs also arrange visits to established MFIs as part of their training programs.

Addressing the gender gap:

Though microfinance business gained popularity to empower the women and women clients, the presence of women staff is not reflective. According to the research nearly more than 25% of all MFIs have less than 10% women staff and only 9% of all MFIs have a staff comprised of more than 75% women [8] . The study also highlighted that nearly 46% of all MFIs have less than 10% women in their management team and only 3% of MFIs have more than 75% of women in managerial positions.

Conclusion:

Building a solid and long lasting institution is a very challenging and multifaceted task for the top level management as well as for HR-Department. But, HR is the most neglected function in Indian microfinance sector and HR planning is mostly run on ad-hoc basis through quantitative in nature and used mostly for determining new recruitments or promotions to estimate the salary expenses. Other side this data would be useful for financial projections required to submit to the financial institutions for their loan proposals. The most critical issue in HR-Planning is finding right people for different MFI's functions and their willingness to compensate adequately for people with relevant experience. There are very few people available with relevant experience because, microfinance sector has scaled up recently and there are very limited training institutes or business schools to churn out people with required attitude and skills set. The HRM department should ensure to provide an effective workforce to meet the vision and mission of the organization. In this direction HR professionals have to formulate ideal HR policies and procedures with reference to MFI business to make available right number of people with right attitude and skills in the right place at the right time.

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