Ongoing performance tracking
Post disbursement of finance, last mile financiers lack the means to track or monitor how the funds have been utilized. Even in cases where the funds have been utilized properly, it is fairly impossible to know how the business is performing.
Even the entrepreneur struggles, as the mentoring needs change with the growth stages of business. If the entrepreneur is grappling with strategic marketing issue today, one may struggle with altogether a different issue (say, labour attrition) some days later.
In majority of cases, entrepreneur does not even know where one is going wrong. Struggling on daily basis with one’s head down, an entrepreneur does not get time to handle larger strategic issues like poor location, uncompetitive pricing, limited variety of offerings, quality improvement etc. A mechanism is needed to receive need-based ‘intelligent’ mentoring at one’s door step.
A larger problem is absence of business history and credit history for the banks to lend. The primary eligibility criterion for unsecured lending by any formal financial institution is existence of at least three years of business history and credit history. In case of unorganized entrepreneurs, due to lack of books of accounts, such business history and credit history does not exist. There is need of mechanism to create such history of unorganized entrepreneurs.
Further, from financial institution’s point of view, quantification of risk is of utmost importance. A formal financial institution hesitates in unsecured lending unless the risk of business loan is quantified – and therefore, by aggregating all the loans – the portfolio risk is quantified.
In India, microfinance portfolio is rated based on qualitative factors like top management, internal controls, portfolio history etc rather than quantitative factors/ quantifiable risk. The securitization and credit rating of microfinance portfolio is, therefore, sub-optimal. As a result, the pricing that microfinance institutions receive from larger banks is also sub-optimal. The pricing (read the interest rate offered by banks to Microfinance Institutions) is sub-optimal as banks cannot use the qualitative risk as part of their internal ratings-based approach to capital requirements (as per Basel II guidelines). Banks have to resort to sub-optimal capital allocation for adhering to Capital Adequacy Ratio (CAR). This limits the corpus for on-lending. This directly impacts bank’s bottom-line. Therefore, there is a need of a mechanism through which the microfinance portfolio risk can be quantified. It may release untapped value in entire supply chain.
How the problem can be addressed
Through mobile bookkeeping, the accounts of business are maintained. Apart from creation of business history and credit history, which makes an enterprise bankable over time, the book keeping also facilities in –
- Creation of spatial and time series benchmarks
The performance metrics of individual businesses are compared with the dynamic benchmarks from spatial and time series data. This facilitates the identification of areas of concern, if any, in the business.
For e.g. an individual business may be underperforming on sales compared with local peers. MVC, in such a case, can provide advisory on improving competitiveness on key success factors (like improving quality, offering more variety, better pricing or even change of location of shop to high footfalls zone).
In another scenario, an individual business may be underperforming on profitability compared with local peers. MVC, in such a case, can provide advisory on reducing the fixed and variable costs (like reducing rent, reducing labor cost, sourcing raw material at lower cost etc)
In another scenario, an individual business may be underperforming due to sub-optimal utilization of working capital. Funds may be stuck in dead stock or in some cases, business may be understocked compared to peers. MVC, in such a case, provide advisory for optimal usage of working capital.
2. Portfolio monitoring
One-time appraisal and then bookkeeping facilitates quantification of risk. Aggregation of individual risks facilitates assessment of portfolio risk. Apart from portfolio monitoring, risk quantification also facilitates securitization of loan portfolio. Securitization, in which the securities are graded on basis of risk and return expectations, facilitates more reliable ratings, which may help a microfinance institution in achieving better pricing from larger banks (interest rate or cost of capital can be linked to the rating of the portfolio).
Such an ecosystem would also be beneficial as better rated microfinance portfolio would assist banks in optimal allocation of capital. Freed up capital would translate into higher bottom-line. All in all, quantification of risk at individual business level in unorganized sector can have direct impact on Financial Institution’s bottom-line. It can lead to optimal utilization of resources in financial supply chain.
3. Managing a large number of enterprises effectively
For field level officers, who handhold and guide a number of entrepreneurs simultaneously, the task of mentoring all the enterprises regularly becomes cumbersome and, in the long run, inefficient. This issue can be successfully addressed by insightful time-series and spatial reports produced by Performance Tracking System. These reports, based on the individual performance of the enterprises, alert the field level officer by flagging the poorly performing enterprises. This enables the MVC to effectively prioritize and tend to businesses that have utmost need for handholding.