Microfinance institutions have been around for more than three decades now and yet they have to face a certain degree of risk in this trade. This is what gives rise to the need for coming up with plans to tide over such risks.
Some of the risks include –
1.Low income
2.Fewer opportunities in rural areas
3.dependence on monsoon by the agrarian community
Even though these risks cannot be avoided, there are ways by which their effect can be minimized. This is why MFI companies have come up with strategies over time to help them overcome such obstacles.
Types of Risks
The types of risks which microfinance institutions face can be categorised into the following types –
1.Market
2.Strategic
3.Credit risk
4.Operational
5.Frauds by staff
6.Staff mismanagement
7.Diversification into commercial banks
Strategies to Offset Risks
The top MFIs in India have contributed a lot towards the upliftment of the rural areas. Despite this, the risk associated with this kind of work is immense. This is why a number of risk management strategies are adopted, a few of which are –
Quantitative Assessment
One of the biggest risks faced by microfinance institutions is that of delayed payments and the next one being investment by clients in businesses which can become solvent anytime. In order to offset such risk, microfinance institutions do the following –
a.Tracking activities of the client
b.Limiting the amount of loan offered
c.Offer incentives to prevent delinquencies
d.Quantitative assessment of the customer
e.Penalties in case of defaulting on payment
Focus on Recruitment
Operational risks have increased significantly in the microfinance institutions owing to increasing diversification, offices in remote locations and transfer of officers to far-flung areas. To tide over such risks, microfinance institutions use tactics which are –
A)Documenting fraudulent staff
B)Staff verification during recruitment
C)Staff training for client-centric work
D)Standardisation of company policies
E)Technology upgradation to reduce human error
Portfolio Diversification
Market factors are another big risk which is faced by microfinance institutions. One of the biggest concerns happens to be the interest rate. The reason here is two-fold. These are –
Slow adjustment of institutions to changes in interest rate
Risk of liquidity owing to an increase in the number of loans
The solution here is to invest in a wide portfolio of businesses which keeps the funds flowing and opens the room for further investment.
Skilled Company Board
An efficient and skilled board is needed to help avert any strategic risks which can crop up. Such a board can come up with the right policies, take the right course of actions and review the consequences of those actions.