1. idg mfi risk jan 27

Phnom Penh, Cambodia
January 27, 2010

Financial Presented By:
Nandan S. Bisht
Risk for Director
Nimbus Consulting, India
MFI’s
www.nimbusconsulting.net, Email: info@nimbusconsulting.net

Nimbus Consulting
Private Limited
is management consulting company
based in India with specialization in
management solutions in IT, Audit,
Accounting, Internal Control, Risk
INTRODUCTION
Management, Financial Management,
Financial and Legal Structuring, Risk
Management, Process Mapping and
Improvement.


Financial risk is normally any risk
associated with any form of financing.
Risk is probability of unfavorable
condition; in financial sector it is the
probability of actual return being less
than expected return. There will be
INTRODUCTION uncertainty in every business; the
Financial Risk level of uncertainty present is called
risk.


MFI’s an Offshoot from NGO sector /
activities

Risks due to specialized operational
activities and products

MFI’s Special Low Capital Base, heavy dependence on
Features debts funds

Typical nature of assets of an MFI


Typical Nature of Liabilities of an MFI

Low Capacities of MFI’s Staff

MFI’s Special Low Technological Absorption
Features

High Growth Expectations


MFI’s an Offshoot from NGO’s!

Most of the MFI’s of the present day world are
offshoot or have genesis in the social
Risk Factor
development

Improperly developed or non-aligned vision,
mission of the organization resulting in lack of
Risk
good commercial sense for decision making
and day to day functioning.

Professionally handled transformation stages
Mitigating Risk i.e. from NGO activities to commercial
microfinance.
Adequate training and capacity building
efforts by MFI’s

Operations or product related !

Small loans in cash, large volume of customer
and transactions
Risk Factor
Unsecured nature of loans

Stress on internal control and monitoring mechanism,
i.e. control and monitoring become inadequate to cope
Risk with huge no. Of small cash transactions.
Recovery of distressed, irregular or NPA becomes
difficult due to non-realizable security or collateral i.e.
Credit Risk

Well researched products in debt and savings.
Mitigating Risk Use of banking channel for disbursement and
collections i.e. product structured or technology used
to reduce cash handling i.e. ATM vending machines
etc.


Low Capital Base, heavy dependence on Debt !

Portfolio expansion is based on long term
debts ( refer snapshot -1)
Risk Factor
Low capital-equity base and resulting in high
financial gearing i.e. credit default risk, reputation
Risk risk.
Ever dependence on debt funds for expansion.
Small time debt non-availability results in serious
implication for MFI portfolio.
More equity based funding sources to be crated,
Mitigating Risk i.e. more Micro-finance investment vehicles (
MIV) need to be created nationally or
internationally preferable with private-public
participation.


Low Capital Base, heavy dependence on Debt !

Snapshot: 1

High Debt Equity
Ratio of MFI’s In
Cambodia in last
4 year

Source: Mix Market
Information


Nature of Assets of an MFI !

Loans of small value distributed to large number
of people, where such people mostly operating
Risk Factor in un-organization sector i.e. small vendors,
farmers, SME’s with irregular cash flow.
Recovery of irregular and overdue loan is difficult
due to small value, unrealizable security and
Risk week regulatory environment i.e. recovery risk
Portfolio susceptible to cyclical, seasonal, natural
and other calamities.
Participation / co-operation with insurance
companies resulting in creation of a partnership for
Mitigating mutual benefit whereby microfinance clients get
Risk access to insurance services, MFI secures its loans
and insurance company get to the bottom of the
pyramid.

Nature of Liability of an MFI !

Mainly long term debts with low innovation in
Risk Factor debt products
High cost of financing the loan portfolio i.e. market risk
In few case savings with unpredictable withdrawals
trends
Risk Plain debt products not allowing MFI the flexibility in
financing matching their typical needs and requirements.
( i.e. securitizations, partnership with big banks missing
examples in India)

Innovative method of financing the micro-
Mitigating finance portfolio needed like securitization of
Risk existing loan portfolio, partnership with big
banks and financial institutions as successfully
experienced in India.

Low Capacities of MFI’s staff !

Most of the MFI’s have low training quotients
resulting in low capacities.
Risk Factor

Low capacities of staff i.e. both relating to staff
with client’s responsibilities and information
Risk processing and analysis in back office results
in inadequate information processing and
decision making information.

Increase training efforts, information sharing
Mitigating and developing of association like CMA for
Risk information exchange, trainings and capacity
building.


Lower Technological Absorption !

Though providing services akin to banking
sector still lagging far on technologic absorption
Risk Factor

Making it difficult to cut down on cost, thereby
making ultimate services to clients costly.
Risk Needed support for fast expansion is missing
resulting in compromised control and monitoring
mechanisms.

Experimenting with latest technology and methods
Mitigating , developing new service delivery channels like
Risk use of mobile banking, creating partnership with
existing delivery channels like partnering with post
office network etc.

High growth expectation from sector !
High growth expectation from high growth potential.
Year on year growth in Microfinance portfolio for last 4
Risk Factor year has been around 100%, in Cambodia most of the
MFI grown at more than 50% (see the snapshot 2)

High growth expectation results in undue strain on
Risk the existing systems and resources and thereby
creating sub-optimal service delivery.
Avoidable competition and unfair practices by MFI.

Developing fair practice code at MFI association
Mitigating level i.e. CMA.
Risk Supporting the development and sharing
information for


High growth expectation from sector !

Snapshot: 2
Year to
Year
Growth of
gross loan
portfolio

Source:
Mix Market

Nature wise specific risk for MFI’s!

Due to gap in maturity pattern ( i.e. timing ) of assets
Liquidity and liabilities of MFI’s
Risk

Currency Due to fluctuation in currency rate resulting in gap
Rate Risk between foreign currency assets and liability

Due to fluctuation in interest rate charged by
Interest lenders and resulting in low interest margin.
Rate
Risk


Liquidity Risk for MFI’s

High gap of assets and liability maturity time buckets,
bullet payments of debts, over dependence on debts
Risk Factor

Liquidity risk i.e. High gap of cash or maturity
Risk pattern of assets and liability resulting in inability of
MFI to met expansion demands and honour
lenders repayment schedules.

Better AML Process in the Microfinance
Mitigating Institutions, better negotiated debts products,
Risk increase in capital base of the MFI.


Currency Risk for MFI’s

Dealing in multi-currency, external borrowing and
micro-finance portfolio being in different currencies.
Risk Factor

Currency risk results in foreign exchange loss i.e.
Risk Due to value of foreign currency assets being less
than foreign currency liabilities.



Interest Rate Risk for MFI’s

Interest being charged by lenders being flexible or
benchmarked to other standard rate i.e. Libor or Sibor
Risk Factor though no changes in interest rate of MFI portfolio over
the period of the loan.

Risk Interest Margin is reduced resulting in operating
loss to MFI’s



Thank you !

Nandan S. Bisht
Director
Nimbus Consulting Pvt. Ltd.
Email:
nandan@nimbusconsulting.net
www.nimbusconsulting.net


1. idg mfi risk jan 27

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