99048 APRIL 2015 ABOUT THE AUTHORS GIRISH NAIR is the regional lead for The India Microfinance Story: Microfinance Advisory in South Asia. He spearheads IFC’s Putting the Focus on Borrowers Responsible Finance initiatives in the region. IFC has worked on client-protection issues since the first microfinance invest- FARZANA BIJUR is a consultant with the Access to ment in the early 2000s. These activities took on a more defined shape when Finance department in South Asia. seeds of the Responsible Finance program were sown with the Microfinance POORNA BHATTACHARJEE Credit Reporting Initiative in 2009, which aimed at reducing the significant in- is an Operations Analyst with the Access to Finance Advisory formation asymmetry between microfinance borrowers and lenders by sup- Services in South Asia. porting increased links between microfinance institutions and credit bureaus. SAKSHI VARMA This SmartLesson shares the lessons learned during the implementation of is an Operations Officer in the Access to Finance department in components of the Responsible Finance program of IFC’s Advisory Services— South Asia. and how that program is having a clear and defined impact on India’s microfi- APPROVING MANAGER nance industry. Jennifer Isern, Regional Business Line Manager, Access to Finance, South Asia, BACKGROUND mensional yet interlinked interventions, Advisory Services. pitched at different stakeholder levels, that In Andhra Pradesh, high growth in the mi- would address the multiple challenges the crofinance industry led to an overempha- industry faced. The following key project sis on the supply side, ignoring the impact components of the program (Box 1) span on the end clients, and brought the sector sector, institutional, and end-client levels: under scrutiny with the onset of the mi- crofinance crisis in August 2010. The state • The Microfinance Credit Reporting government’s restrictions on new lending project promotes use of credit and recovery led to huge nonperforming bureaus for decision making and loans in microfinance portfolios, and con- links credit bureaus to microfinance sequently bank lending to microfinance institutions, the key to reducing institutions plummeted across India, falling multiple borrowing and over- to almost zero for those with exposure in indebtedness. The project design Andhra Pradesh. Microfinance operations incorporates increasing awareness reached a standstill, and only $835 million of end borrowers as well as a study is estimated to have been lent to the sector of the impact of credit bureaus on in fiscal year 2012, compared to $2.38 bil- microfinance institution borrowers’ lion during FY11. behavior and dissemination of results. The project has a database of more Given the changed circumstances, with mi- than 100 million client records and crofinance portfolios having deteriorated has received 45 million incremental across Andhra Pradesh, IFC expanded the inquiries in credit bureaus. scope of the Responsible Finance program by promoting initiatives that incorporate • The Responsible Finance Sectoral greater customer-centricity into operations project works with the stakeholders at and raising decision makers’ and stakehold- the sectoral level and aims at building ers’ awareness of the need to effectively the capacity of industry associations, address the reputational issues facing the facilitating adoption of a common sector. The program focused on multidi- code of conduct, supporting policy SMARTLESSONS — APRIL 2015 1 microfinance institutions and financial institutions Box 1: Some Responsible Finance Program Milestones experience better business outcomes. • Under the Responsible Finance Sectoral initiative, IFC • The Risk Management project contributes to worked with the World Bank to bring together a core strengthening risk-management systems and group of stakeholders to form the “Responsible Finance practices in the microfinance sector in India. It aims Forum” in 2011. One outcome was the adoption of a common approach to responsible finance through a to promote global risk-management practices in harmonized India Microfinance Code of Conduct. Indian microfinance institutions and integrate them with responsible finance practices. On completion, • The SMART project contributed to the development it is expected to cover 28 microfinance institutions. of global standards for client protection in India and completed 20 client-protection assessments covering LESSONS LEARNED about 20 million Indian microfinance clients. IFC also helped five partners receive global Client Protection Certification, carried out eight trainings on CPPs for Lesson 1: The microfinance crisis demanded a rapid microfinance institutions, and conducted 10 assessor- and multipronged response. training workshops to create a pool of regional resources. Post-crisis, the need to reinforce responsible lending prac- • The Risk Management project team conducted risk-man- tices in microfinance institutions increased multifold, and agement diagnostics of eight microfinance institutions it was critical for the sector to come together and propose and formulated a customized risk-management strategy for each one. Phase 2 should reach 20 smaller microfi- concrete next steps to ensure adherence to responsible nance institutions in low-income states. The team also finance. IFC immediately took a leadership role by initi- conducted a series of five workshops/trainings with 210 ating a comprehensive effort through the Responsible participants from microfinance institutions, covering more Finance program. With its different project components than 70 percent of the Indian microfinance sector. focusing on stakeholders at sectoral, institutional, and end-client levels, the program quickly began to address • IFC-supported credit bureaus, High Mark and Equifax, have the sector’s multiple challenges. a combined database of more than 100 million micro-client records, the world’s largest repository of such data. IFC’s neutral role was critical in bringing the sectoral stake- holders together to address differences and harmonize advocacy measures, carrying out benchmarking their efforts, such as in the negotiation of the Unified studies, and creating forums for stakeholders to Code of Conduct for the sector. The individual project com- arrive at consensus on key issues facing the sector and ponents, with their focused deliverables, helped address potential solutions. The project, with its work with the such sectorwide concerns as multiple lending and client industry associations covers more than 90 percent of over-indebtedness. IFC’s credibility in the sector, ability to the microfinance sector. mobilize strong links with stakeholders, and expertise in project delivery helped microfinance institutions develop IFC also worked with SMART Campaign1 India—at the the necessary partnerships with clients and adhere to client institutional level—for the adoption of global client protection principles and codes of conduct. protection principles (CPPs) by Indian microfinance institutions. The project supports training on CPPs for Lesson 2: In project design, propose holistic solutions. microfinance institution staff and onsite assessment of the institutions, as well as guidance on appropriate For a project to have a sustainable impact on the sector product design and delivery, enhancing transparency, and to be appreciated by the clients, it needs to shift from responsible pricing, fair and respectful treatment of a piecemeal approach to providing solutions. IFC’s recog- clients, privacy of client data, and mechanisms for nition of the need for an integrated approach to address complaint resolution. challenges in the Indian microfinance sector guided all its interventions. • The Financial Awareness program works on the demand side and aims to roll out an effective and Identifying a lack of consensus in the sector on the direc- sustainable financial-awareness program for low- tion to be taken post-crisis, IFC reached out first to the income households so that the end clients make important stakeholders. The result was the Responsible informed choices about financial services—and Finance Forum,2 formed in 2011, and the Unified Code of Conduct for the Indian microfinance sector. To ensure in- tegration of Code of Conduct principles into microfinance 1 The SMART Campaign is a global effort to unite microfinance leaders around a institutions’ systems and processes, IFC then worked stra- common goal “to keep clients as the driving force of the industry.” Committed to embedding client protection practices into the institutional culture and operations of the microfinance industry, the SMART Campaign encompasses the 2 Founding members were representatives from IFC, the World Bank, DFID, following client protection principles: appropriate product design and delivery, Small Industries Development Bank of India (SIDBI), Sa-Dhan, Microfinance prevention of over-indebtedness, transparency, responsible pricing, fair and Institutions Network, Michael and Susan Dell Foundation, ACCESS respectful treatment of clients, mechanism for complaint resolution, and privacy Development Services, and individual senior microfinance practitioners Brij of client data. SMART Campaign India is housed under Accion International. Mohan and N Srinivasan. 2 SMARTLESSONS — APRIL 2015 tegically with SIDBI to carry out Code of Conduct assess- Recognizing that direct application of global tools and ments, which analyzed existing systems and processes of frameworks might not be effective, the project team put a microfinance institution, rated its compliance with the in extra effort through stakeholder workshops and onsite Code of Conduct, and identified gaps in adherence to experience to customize the toolkit to include, for exam- Code principles. Then the team worked with each insti- ple, 1) measures to identify hidden group delinquency, tution to integrate CPPs into its operations. This holistic because group lending is the common model; and 2) approach of working at the sectoral, institutional, and social performance management, considering its impor- end-client levels has increased the success rate and pace tance in the risk-management context in India. of institutionalizing responsible-finance practices in the Indian microfinance institutions. During implementation of the Risk Management proj- ect, the team identified the need to customize according One of our clients, Cashpor Microcredit (based in Uttar to the scale of operations or size of clients. For instance, Pradesh) underwent CPP assessment and worked with IFC small institutions usually have nascent risk-management on institutionalizing client protection principles. Cashpor systems and find it easier to integrate the project’s risk- Microcredit is among the first microfinance institutions in management standard framework into organizational the country to be certified by the SMART Campaign. strategy and processes without huge modifications or cost implications. On the other hand, for larger microfi- Lesson 3: Engage with key stakeholders for maxi- nance institutions with better-developed systems already mum sectoral outreach. in place, we need to demonstrate value-addition through more nuanced and system-specific recommendations. A multistakeholder approach is critical for a large sectoral project where it is important to holistically address the Lesson 5: Ensure client buy-in early on. underlying gaps. The project’s credibility and acceptabil- ity is heavily influenced by how successfully the team can Any new process or system involving a considerable shift mobilize strong links with stakeholders—to clearly gauge from the norm requires the institutions dealing with it to the stakeholders’ expectations and willingness to partici- be willing to change and to be supportive of the efforts to pate in the project and take collective responsibility. do so. So it is important for the project team to be actively involved with the client right from the design phase—and As the primary strategy, IFC successfully engaged with at all levels. This implies a substantial investment in time sectoral stakeholders such as development institutions, by senior management and staff across the organization. lenders, investors, credit bureaus, and network asso- Hence we emphasize a consultative approach, which helps ciations, thus ensuring that everyone was on the same in outlining priorities and concerns, thereby preventing platform—and lending more credibility to IFC’s efforts. unrealistic expectations on either side. This stakeholder engagement resulted in a high level of participation by microfinance institutions, technical ven- With one of our clients, Ujjivan Financial Services, we en- dors, and consultants in credit bureau workshops and gaged right from the inception for the integration of cli- risk-management workshops/trainings across the country. ent protection principles in its operations. This helped Ujj- This approach generated buzz about the IFC project and ivan set up its service quality department in line with its made it easier to get buy-in for the project’s implementa- decentralized operational structure by empowering the tion. Similarly, reaching out to key stakeholders can lead branch-level staff to handle client complaints and griev- to further expansion of the project to a large number of ances. Engagement with the client from an early stage microfinance institutions, as with SIDBI, which has seen significantly improved IFC’s understanding of operations value in the risk-management initiative and will support and enabled us to consistently support and strengthen the rollout of the risk-management framework for an- the organizations’ efforts. other 15 microfinance institutions. The project team also ensures the involvement of a micro- Lesson 4: Master the balancing act: customize finance institution’s senior management right from the content and standardize quality. project design stage. For instance, under the Risk Manage- ment project, the team makes detailed presentations to Differences in regulatory framework, operating models, the senior management on the proposed risk-management and political environments make it important to custom- framework prior to the diagnostic to understand expecta- ize a project to suit the local context. The key is to identi- tions and concerns. We also send the final list of recommen- fy the optimal level of customization without undermin- dations from IFC as a letter to the board for its approval. ing the quality of the project. This balancing act requires Implementation does not begin until the board approves. close collaboration with clients, consultants, and other stakeholders to determine the optimal level. Lesson 6: Engage in global-regional collaboration for better outcomes. An example of the effectiveness of this approach was the customization of IFC’s Global Risk Management As- Clients appreciate that a strong sectoral/institutional im- sessment toolkit to suit the Indian microfinance context. pact is always a focus of IFC projects. The team has strate- SMARTLESSONS — APRIL 2015 3 gically collaborated with IFC’s global team, credit bureaus for capacity enhancement which brings credibility and expertise, in and promoting the use of credit informa- the design and implementation of the re- tion in microlending decisions, when the gional projects. This strategic alignment en- World Bank used its influence with SIDBI sures that there is greater awareness about and other lenders to make it mandatory for the project and better buy-in among the microfinance institutions to report to credit stakeholders. bureaus. The project team also successfully leveraged the Bank’s relationship with the The ongoing Risk Management project ex- apex body, SIDBI, by collaborating with it emplifies the effectiveness of the collabo- in rolling out risk-management diagnostics ration of the regional IFC team with the for an additional 15 microfinance institu- global team. Risk-management workshops, tions, which could speed up the impact on conducted jointly by the global and region- institutionalizing adoption of customized al teams, succeeded in creating awareness risk-management frameworks by microfi- and better buy-in for the product in Indian nance institutions in India. microfinance institutions, as it combined the global team’s know-how on risk man- CONCLUSION agement with the regional team’s in-depth understanding of the nuances of the Indian Through its Responsible Finance program, microfinance sector. The project team also IFC with its partners has helped microfi- successfully leveraged the global team’s nance institutions institutionalize client risk-management expertise in developing protection principles and codes of conduct. the project design at the regional level, Across South Asia, the Access to Finance selection of consultants, maintenance of team is managing 16 microfinance institu- quality standards in deliverables, and ef- tion projects with a built-in Responsible Fi- fective communication of IFC’s branding as nance component. The Indian microfinance well as in customization of IFC’s Risk Diag- institutions are nearly 60 percent of the nostic Framework for Indian microfinance. banking sector’s outreach to small lenders; therefore, the impact of these IFC initiatives Ensuring alignment with this strategic col- may be felt by as many as 26 million clients. laboration, the team has also aimed for an integration of Investment Services and Ad- Commitment to responsible finance re- visory Services. During selection, the proj- quires participation from all stakeholders, ect gave priority to direct IFC microfinance and this program serves to bring them to- investees or indirect IFC investees (through gether on the same platform. It requires investee funds). This IS-AS link was a great innovative and proactive approaches at help in showing the microfinance institu- the sectoral, institutional, and client lev- tions the advantages of meeting the proj- els. These collaborative efforts aim to build ect standards. sustainable partnerships in Indian microfi- nance—partnerships that clearly demon- Lesson 7: Leverage the IFC-World Bank strate the social impact of the work being link. done and that do a better job of commu- nicating the microfinance success story. The DISCLAIMER Greater strategic alignment between IFC systematic approach this program follows SmartLessons is an awards and the World Bank and coordination of has had a profound impact on the sector. program to share lessons learned activities can bring effective and sustain- in development-oriented advisory services and investment able results. According to its mandate, the We hope these successes—and how the operations. The findings, World Bank’s project focused on govern- program addressed the challenges—can interpretations, and conclusions ment, public entities, and other sectoral in- provide insights that will help those devel- expressed in this paper are those stitutions. IFC has successfully leveraged the oping similar approaches in other regions. of the author(s) and do not necessarily reflect the views of credibility of its partnerships with the Bank IFC’s Responsible Finance advisory program IFC or its partner organizations, to bring about better impact in its projects can continue to be a key factor in build- the Executive Directors of The with private institutions. ing capacity and revamping the sector in World Bank or the governments they represent. IFC does not fledgling and mature microfinance markets assume any responsibility for the An example of leveraging this link is im- throughout the world. IFC is geared to play completeness or accuracy of the plementation of IFC’s Responsible Finance a critical role by replicating lessons learned information contained in this document. Please see the terms Advisory program in coordination with from successful interventions globally. and conditions at www.ifc.org/ the World Bank’s Scaling Up Sustainable smartlessons or contact the and Responsible Microfinance project. IFC program at smartlessons@ifc.org. received a boost to its advisory services to 4 SMARTLESSONS — APRIL 2015