Question

Micro-finance operations face a number of problems with credit assessment, selling financial products, and controlling the loan book. Discuss these issues

Answer 1

Answer"-

One said that "the poor stay poor, not because they're lazy, but because they have no access to capital." Till date, a huge section of population remains outside the formal banking system.

Microfinance institutions are the only ones equipped to reach the 'unbankable' or 'unbanked' masses, and make financial services accessible to them

Microfinance is the provision of financial services to low-income individuals who lack access to the conventional banking sector.

The Above 3 lines can be used to understand why micro finance companies faces no of problems such as credit assessement, selling financial products and controlling the loan book and others.

Lets discuss them in Details:

1. Credit Assessment :-

A good credit assessment means you should be able to qualify, within the limits of your income, for most loans.

Following are issues because of which micro finance companies not able to properly assess the credit analysis of customers:-

• Cost of outreach - reaching the unbanked populations of the world means servicing small loan amounts and servicing remote and sparsely populated areas of the planet, which can be dangerously unprofitable, as it is diffcult for a finance company to assess the credit rating of a Agriculturalists, general stores owners, lady running business from home, because they are the clients of a micro finance company.

The above will Increase the chances of loan account to become NPA= non performing Assets.

• Geographic Factors - Around 60% of MFIs agree that the Geographic factors make it difficult to communicate with clients of far-flung areas which create a problem in growth and expansion of the organization

2. Selling Financial Products :-

These are some financial products offered by them :-

• Group Loans. FINCA's Village Banking and small group loans are targeted to very low-income entrepreneurs with the smallest enterprises, where group members provide a guarantee for each other.
• Individual Business Loans. ...
• Agriculture Loans. ...
• Insurance. ...
• Money Transfers. ...
• Energy Loans. ...
• Savings accounts.

Following are issues because of which micro finance companies not able to Sell its fiancial products to the customers:-

• Lack of Awareness of Financial Services :- Lack of awareness of financial services provided by the microfinance industry is a challenge for both, customer and micro finance companies. Micro finance institutions struggle to make their business more financially viable due to this lack of awareness
  
• Diverse business models - Supporting the very wide range of features and lending activities is difficult and requires a considerable amount of cost and efforts.
  
• Limited budgets – Making provisions for large upfront investments is not possible for most of the MFIs which limits their capability to purchase world-class banking solutions that can help them fulfil their requirements and support their growth targets.
  
• Regulatory Issues:- Regulatory issues have led to sub-optimal performance and failure in the development of new financial products and services through which the poorer section can be benefitted.

3. Controlling Loan Book:-

The collective value of the loans held by a bank or finance company or can say a record of the loans held by a bank or finance company.

A loan book is a book kept by financial institution that totals the amount of loans that have been given out over a certain period and it shows the details of the borrowers. It is important for calculating the financial networth of the financial institution.

Issues involved :

Controlling Loan book size, requires special attention towards granting of loan to clients and proper recording of such transactions in the loan book, in general banks or Bigger financial institutions these are prepared using software, however in micro finance company due to budget constraints and lack of infrastructure they go for manual updation of loan book.

thus chances of tampring of such book is high due to which true figures of load granted by the micro finance will not be ascertainable.