Micro Finance Institutions (MFI) garnered the headlines in the late 1980s as they tried to fill in the gap in the availability of banking for the unserved and under-served rural population of India. Inspired by the Grameen Bank model in Bangladesh and the innovations taking place in the non-banking finance companies (NBFC) sector, many of the larger MFIs graduated to become NBFCs themselves, while their smaller cousins continued to face rough weather.
Some of the well-known NBFCs converted into Small Finance Banks (SFBs) when RBI started issuing licenses to them in November 2014. As of now, 10 SFBs have started functioning. While the MFI industry witnessed an impressive y-o-y growth of 27% and 40% respectively in FY 18 and FY 19, much of the growth had come from banks and SFBs. In addition to these challenges, they are also facing competition from FinTech companies.
After recording substantial growth in the last few years, NBFCs had to grapple with uncertainties in the aftermath of the collapse of IL&FS and DHFL. Stiff competition from incumbents and the entry of FinTech players, leveraging technology-based operating models to compete, has only made matters worse for these NBFCs. Besides, they have to contend with dynamic regulations, increasing cost of compliance and pricing pressure amidst rapidly rising customer expectations.
From the above, it is evident that MFIs and NBFCs need training in certain areas. What these areas are and what the prerequisites to consider a training partner are the subjects we would be exploring here.
Training needs of MFIs and NBFCs
One of the main challenges facing MFIs and NBFCs is that being primarily cash-intensive due to lack of financial literacy of the customers, the focus would have to be on improving the financial literacy of the customers and moving them towards adopting digital payment methods.
While loan disbursals have been growing at the rate of 20 per cent plus, there is also the need for these MFIs to transition towards customer-centric products based on robust customer profiling based on lifestyles, personalities, occupations and behaviours. Reduction in overall Turn Around Time (TAT), operational costs for lenders and credit access costs to borrowers through technology enablement would be another challenge.
With ground-level staff not being well versed with technology, there are risks around customer data protection and privacy, along with strategic and credit risks and hence there is a need for developing a robust risk management framework.
With increasing competition, aggressive lending by MFIs has led to a rise in NPAs (Non-performing assets) of these MFIs. This is further compounded by lack of formal credit history, absence of collateral, laborious customer acquisition process and low digital and financial literacy on the part of the borrowers and lack of proper training of staff and weak governance of these entities. There is also higher attrition among the staff.
While the larger MFIs and NBFCs have been able to turn according to the weather change due to the stiff competition by the entry of FinTech players and while some of the better-managed have also transitioned as SFBs, the smaller ones have not been so lucky. Pricing pressures amid eroding margins; attracting new customers while retaining the existing ones; overhauling the processes and transforming operations; technology tools to transform the underwriting and decision-making process; maximizing recovery while minimizing write-offs, building tight information security controls are some of the challenges they face. Product innovations to suit the changing needs of the customers by customizing the product offerings are also some of the other challenges.
Improving processes at mid and back-offices, building robust treasury management from the scratch, on the spot decision-making using digital technology and credit assessment scorecards, customer-focused data-driven approach to collections, management of fraud by staff and loan defaults are some other challenges facing these organizations.
Seven prerequisites to consider a training partner
Having understood the challenges facing NBFCs and MFIs, let us turn our attention to the prerequisites for an NBFC/MFI to consider a training partner for their employees.
- One of the major areas of challenge for NBFCs and MFIs is to improve the selling skills of their staff, in comparison to the talent available in banks and insurance companies. After globalization, most of the banks and insurance companies, especially those in the private sector have been aggressive in selling their products as well as cross-selling of third-party products. By recruiting and providing intensive training to the staff involved in sales, these organizations have steadily improved their market shares and bottom lines. If NBFCs and MFIs have to compete with banks, it is necessary for them to recruit and aggressively train people with a flair for selling skills. While their compensation structure and the pool from which they recruit (mostly from rural and semi-urban and tier 3 and below cities) would act as deterrents, these must be overcome by providing intensive training to these staff. Hence, the first question for them to ask while zeroing in on a training partner would be whether they would be able to provide such training to their staff.
- Asset Liability Management is another challenge facing the NBFCs and MFIs. The collapse of the systemically important IL&FS in 2018 and the crisis situation engulfing the entire sector, RBI has felt the need for having a relook at the regulation and supervision of the entire NBFC sector. During the year ended March 2019, RBI cancelled the licenses of 1,701 NBFCs for failing to meet minimum capital requirements. The central bank is also proposing new rules to monitor the asset-liability and risk management framework of these entities. Hence, Asset Liability Management (ALM) is one area, where NBFCs need to focus on. Several NBFCs are faced with the liquidity crunch, liabilities maturing faster than assets in the same tenor. This also adversely impacts their profitability. Hence, the training partner should be able to provide intensive training on ALM. The training partner with experienced bankers as trainers in this area would definitely be in an advantageous position.
- Regulatory adherence to compliance is another area in which training is needed and the training partner should be able to provide extensive training on these aspects. Due to long periods of slack regulatory guidelines, the regulatory practices of NBFCs and MFIs have been found wanting. The regulator is in no mood to be lenient towards regulatory lapses and, in the aftermath of the recent liquidity crisis facing the industry, is in the process of having a relook at their regulation and supervision. All this would mean that NBFCs and MFIs should strictly adhere to regulatory compliance. Regulatory compliance includes, but is not limited to, adhering to prudential regulations applicable, periodical returns to be submitted to RBI by deposit-taking and non-deposit taking companies, adherence to fair practices code for lenders, KYC/FATCA regulations etc.
- Digital literacy of both the front-end employees and customers is another challenge faced by these organizations. Digitalization is critical to these organizations since this would translate into lower operating costs and higher customer satisfaction. Many of these organizations are increasingly turning towards tablet banking for various activities such as customer onboarding, e-KYC, loan disbursements, monitoring of loans disbursed etc. However, as discussed elsewhere, many of the employees and almost all of the customers lack digital literacy. Also, technology adoption comes at a cost and smaller organizations would not be able to absorb the high cost of technology adoption. Further, the usage of data for back-end operations and data analytics would help these organizations reap the benefits of digitalization fully. Hence, another prerequisite to consider a training partner would be their capability to provide extensive training on digitalization of operations.
- Customer Relationship Management is another area where training is required by these organizations. Depending on the size of these organizations, there is a need for selecting the right segmentation strategy and focusing on customer relationship management. As has been happening in banking since the 1990s, today’s customers are aware that they are in the buyers’ market and are well aware of their rights. Increasingly, customers are also willing to embrace technology. As a result, digital-driven distribution models are being adopted for new customer acquisitions. However, it is important to understand that no target customer segment is fully digital— the human touch-point will always remain vital. Thus, the training partner should be capable of providing training on using CRM tools for customer acquisition, retention and marketing suitable products based on their needs.
- Underwriting skills is another area that needs focus. Given the talent pool available for NBFCs and MFIs to recruit from and also the challenges of providing suitable compensation to these staff, underwriting is one area of weakness for many of these organizations. Also, stiff competition and the need to achieve lending targets have resulted in dilution of credit standards. While banks depend on CIBIL scores to evaluate the creditworthiness of the proposed borrowers, fintech companies are deploying innovative credit methodologies such as psychometric evaluation, behavioural scoring etc. While each method has its advantages as well as disadvantages, there is an urgent need for training the staff of NBFCs and MFIs on these methods. Technology or score-based models can also help in providing customer-friendly experience and at the same time providing lenders with scalable business models. There is also a need for following segment-specific underwriting policies. This is another prerequisite to consider a training partner – will they be able to provide rigorous underwriting training to the supervisory staff involved in credit decisions?
- Robust risk management techniques. Given the nature and area of operations of these organizations, it is inevitable that their operations involve handling significant amounts of cash, making them susceptible to operational risks, including fraud, petty theft and embezzlement. While many of them are increasingly moving towards a cashless model, most of the collections continue to be cash-based. Tightening of internal control standards and internal auditing systems and computerizing back-office operations would help in mitigating this risk. Additionally, there is also a need for cybersecurity measures to protect the data of customers, particularly in the context of a high volume of transactions, including through the internet, mobile and tab banking. Employees also lack experience with newer technologies, thus exposing the organizations to huge risks. Thus, risk management is one area, where the training partner should be able to provide valuable inputs.
In conclusion, we may say that while there may be other prerequisites to consider a training partner for NBFCs and MFIs, the seven mentioned above would be able to take care of most of their training needs. Institutions like Manipal Academy of BFSI are focusing on these elements in their training programs for new and existing staff in NBFC and MFI.
About the Author
Rajan Sundaram is a banker with more than 3 decades of experience with Canara Bank. Earlier, he was a faculty with Canara Bank, specializing in the area of Credit, Risk Management and Legal & Recovery. He has also been AVP (Credit Analyst) with Wells Fargo.
A holder of MBA (Finance) and PG Diploma in Human Resources Management from IGNOU, Rajan Sundaram has been Academic counsellor for the MBA Program at IGNOU and guided students for their MBA projects. He has taught papers on Statistics for Management and HR for IGNOU. Sundaram has also taught papers on Trade Finance and Quality Management at B Schools. Apart from academic teachings, he is a freelance trainer on credit and soft skills programs.
Furthermore, he contributed articles to Canara Bank House Magazine and Vinimaya a publication from NIBM Pune. He has presented research papers at Management Development Institute (MDI), Gurgaon and other colleges. Currently, he is serving as a faculty of Banking in Manipal Global Academy of BFSI.