Thursday, April 17, 2008

All Broken eggs donot form an omlette - some thoughts on BRI as an mFI

BRI experiences -- Sustaining the sustainer!!
Do all broken eggs make an Omlette ?

Traditionally, micro banking by Rural Financial Institutions world over is beset with chronic problems like financial non-viability, inefficiency and poor recoveries. In marked contrast to this general situation, Bank Rakyat Indonesia’s (BRI) micro lending stood out as a beckon of hope during the economic crisis that lashed Indonesia in late 1990’s. During the period of crisis it was a case of micro taking care of macro- a case of Reverse-subsidization- Micro banking supporting retail, commercial & investment banking units of BRI. BRI and its Unit Desa has been a storehouse for researchers and practitioners of microFinance. Many experts have considered the Rural Financial Institutions in Indonesia and more particularly BRI as "the world's laboratory of rural financial market experiments". There is hardly a forum on micro-credit that does not get a mention of BRI and its Unit Desa (or Unit system that it is called now). The much talked about microFinance delivery model is a world beater not only for its achievements in micro banking but also when it comes to number of times its achievements are repeated in power point presentations by mF enthusiasts … sometimes a bit cacophonic!!

Retail Micro banking requires an altogether different lending and management culture as compared to commercial banking. The clientele is distinct and their needs are different. Their requirements are meager and loan size is small. What attracted many to BRI was the institutions clear-cut mission, its simplicity of approaches, its explicit delegation of powers for the Units & branches. Staff requirements in BRI were assessed based on certain easily identifiable and instantly recognizable benchmarks (like Credit-man: 400 customers, Teller: 200 daily cash transactions, Bookkeeper: 150 average daily book transactions). Each unit was honed to serve as independent profit centres – "perform or perish strategy". Each stand-alone profit centres had their own separate Balance Sheet & P & L Account, with very simplistic transfer price mechanisms. Added to this was the performance linked incentive system for the staff that spurred a work culture and perhaps harnessed the best out of the staff. The bank also invested heavily in iterative training and capacity building processes for its staff. The corporate policy itself states that 5% of the staff cost will be used as training budget and for HR building, exhibiting the corporate commitment and purpose. Further to this was the only naive loan product- KUPEDES an all-purpose flexible credit scheme, usually given for productive activities and that too only to the family with spouse as a co-signatory. The loans were collateralized (150% of loan amount), with prompt payment incentives and life (loan cover) Insurance for all borrowers. The recovery rates were high basically because the loan products were designed with short maturities and regular payment schedules, financial incentives were built into the loan product for prompt servicing of loans and above all an implicit promise of higher repeat loans also sustained high repayment rates. These progressive lending practices were depended on record of borrower classification:

Rating Criteria Subsequent loan ceiling
A All payments on time Increase of 100%
B Final payment on time,
one or two late payments Increase of 50%
C Final payment on time,
2 or more late instalments Same amount
D Final payment late,
but within 1 month of due date Reduction by 50%
E Final payment more than
two months late No new loan

Another key factor in the success of BRI has been its focus on deposit mobilization through sustained Strategic potential mapping and marketing exercises that focused on savers with reasonable surpluses. 87% of the BRI Units funds originate from about 25 million small savers. These resources are normally are not prone to wide fluctuations as rural savings are found to be more stable. Besides this is an incentive system for savers with the bank through periodic lottery and lucky dips ensured greater customer loyalty.

Heaped in all this great features are the not so visible aspects of micro banking which may perhaps need the attention of the bank? A closer look at the loan portfolio reveals that with the excessive emphasis on short-term loans, the investment credit needs of the rural clients have been given a go by. It needs no emphasis to mention that capital formation in rural areas would come through sustained investment in capital assets. Majority of the loans offered through the over simplified loan product; KUPEDES has resulted in supporting predominantly trading activities, with little or negligible asset creation. This perhaps has also resulted in skewed loan portfolio of the BRI units-, which are, not only short -term but also tilted heavily to a particular credit segment- a likely portfolio risk!!! It is not idealistic to think that a holistic development of villages as economic units would come through a balanced approach to farm and non-farm activities as well as an appropriate mix of short term and long- term credit needs. This is perhaps possible and needs to be addressed by institutions that purvey credit to those critical segments of the village community. Of course there could be loans for projects with long gestation period as well, a formal institution like BRI have to address this need / requirements. Sometimes a thrust on activity based loaning provides the enabling conditions for diversification of investments even at the borrower level.

Another moot point is - Is the bank really catering for the poor? - The stand taken by the bank to provide credit to existing production or trading units, what happens to the segments of the population that are unbanked? Do they continue to be served by the informal sector? Does the bank believe they are not bankable? Could it not come out with product lines to serve this niche segment with suitable collateral substitutes? If a government owned banking system well placed in rural areas does not address this need, then which formal institution would address this need or bridge this gap?

The spread available to BRI is too huge that one cannot even dream of. One wonders whether managing this high spreads is sustainable. Another concern is the high cost of financial intermediation in BRI units. It is estimated to be around 10-15 %, which works out to about 5 times the cost of intermediation by a Regional Rural Bank in this country. Are we in the guise of market related interest rates, transferring the high cost of financial service delivery to the poor? Who keeps a check on the inefficiency in credit delivery? Do the existing clients have any alternate arrangement or options to fall back on?

Another moot issue is the incongruity in assets and liabilities of the BRI unit system. Looking at its predominantly short term loan portfolios and resources being mobilized predominantly as term deposits - could there be mismatches in the assets and liabilities? Would it be advisable to contract long-term deposits at high costs in a falling interest rate regime? Would this in the longer term prove detrimental to the interest of the bank? A moot point!!

BRI has made a conscious decision to invest considerable time and resources in the development of the unit savings instruments and products. This has resulted in the units being able to mobilize substantial deposit resources. Surprisingly issue of cheques has been confined only to current account holders. This has led to high amount of cash transactions and cash handling in BRI units. Could this be a reason for the high cost of transactions? Does this make the system become more prone to risk of leakages?

As a holistic micro banking unit spread across the 3000 + villages of the country, the banking system has little or minimum efforts at increasing its fee based income. The non-interest incomes are very low BRI Unit System, which perhaps need a closer look and careful study. The BRI should attempt to address and serve the needs of rural communities who like any other client would need a host of other financials services which could range from safe deposit lockers, remittances, guarantees, mutual funds etc etc

It is important to add that there are many points to learn from the BRI's experiences and very few to quibble about. These issues have been raised to serve as points for debate, which perhaps would help microFinance enthusiasts, look at institutions and credit delivery mechanisms more holistically and pragmatically.

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Works at NABARD for poor HH / was Research Affiliate at CDS, Tvm / was Visiting Faculty on microFinance for MBA students NMIMS, Mumbai.