One of the key metrics tracked closely by microfinance institutions (MFIs) is the percent of the loan portfolio at risk (PAR) after 30 days. That is, what % of the loans outstanding are in arrears more than 30 days. This is viewed as an important indicator of the “health” of a loan portfolio and the health of the MFI.

In some countries, there is a perception/expectation that 30-day PAR (PAR30) should be almost zero. For instance, in India, most the high-growth organizations have PAR30 of less than 2% and some have very close to zero. This is achieved through a number of methodology implementations including manageable loan sizes/payments, group guarantee/social capital, frequent repayments, etc. In other countries (e.g. many countries in Latin America), the typical PAR30 is in the 5-10% range. There are no absolute right or wrong levels (although getting above 10% can have some potentially very negative tipping point issues), just different models in different locales.

At the recent Unitus Leadership Summit, there was an interesting discussion amongst some of the world’s fastest-growing and innovative MFIs around what the target rate for PAR30 should be. On one hand, low PAR indicates that your system is working well and you don’t have to have your in-good-standing clients paying more to subsidize your delinquent borrows. On the other hand, it is very difficult to innovate in without experimenting … and experimentation often leads to, at least, some short-term decrease in PAR as you’re ironing out the process.

Some of the innovations under development are:

• moving from weekly to bi-weekly repayments … this is an oft-requested feature by clients as it would reduce the amount of time spent on transactions
• individual loans instead of group loans … essentially not using a group incentive model
• loans to men … most MFIs only loan to women
• different repayment installment models … e.g. rather than typical equal amount of principle and interest on each repayment, offer some balloon repayment options
• agriculture-related loans … most MFIs currently don’t provide this type of loans due to the high risk of crop failures and the seasonality factors
• higher loan size … ramping up size of loan more quickly based on individual needs and capacities … most MFIs have fairly similar loan size increases purely based on how long you have been a borrower in good standing
• early repayment options … requested by some borrowers who want to pay off early to lower interest payments and, in some cases, accelerate to next larger loan size
• new financial products such as insurance

I think that we should encourage MFIs to be more innovative in developing and experimenting with new financial services for the working poor even if this results in some marginally higher default rates in the short-run as ultimately the innovations will provide more value/benefit to the clients.

Photo by me of rural microfinance center meeting near Bangalore, India in September 2007. The gentleman in the middle is the loan officer from Grameen Koota MFI. The woman to his right is the elected center leader for this group of 30 women. The others were part of our Unitus Partner Expedition trip which my wife & I hosted … enabling westerners to get a hands-on experience of microfinance.

Last week, I was in the Philippines for the Unitus Leadership Summit, an annual gathering of some of the globe’s top social entrepreneurs running many of the most innovative and fastest-growing microfinance institutions in some of the poorest areas of the world. It was a privilege to listen in on sessions where they shared what was working, what wasn’t, their challenges and their aspirations. While some of them are considered competitors, they shared very openly about the experiments they were doing in areas such as mobile banking, product development, increasing operational efficiency, raising capital, high-capacity staff recruiting and training and more.

One of the most fascinating topics was their focus on innovating to increase the productivity of their largest group of staff, loan officers. Loan officers are the front-line staff who directly provide financial services (including microcredit) to their bottom of the pyramid customers and make up 70%+ of their staff count. If they can increase loan officer productivity, their whole cost structure goes down and ultimately they can pass the savings on to the customer in the form of lower interest rates. So, this is a very important metric!

Many MFI’s are happy if a single loan officer can serve 300 clients at a time. [Remember the loan officer goes to the client and often they meet once per week with every client, so the number of touchpoints and travel time is significant.] The conversation started off with how they were not satisfied that 750 (!) clients per loan officer was the maximum productivity. Many of them are now reaching this level of productivity. They get to the 750 number as center groups of 50, 3 center meetings per day and 5 days per week. Of course, there’s the recruitment of new members, new member training, follow-up on members, data entry, various paperwork, etc. which also needs to be done.

So, we had a brainstorming session on ways to further increase productivity without overloading a loan officer. Here are some of the ideas that came up:

• Reduce the maximum radius to client location to 10km (usually now further)
• Collections every 2 weeks (half the # of trips/meetings)
• Deploy handheld/wireless devices to loan officers to reduce paperwork and cash-handling time and cost of float (and reduce group meeting time)
• Create pre-printed stickers to put in client passbooks (rather than having to handwrite each entry in each passbook…loan officer has to do this as most women are illiterate)

But then the discussion went in a different direction … rather than focusing on the # of clients per loan officer as the productivity metric, why not focus on margin generated per loan officer? This has a number of implications and issues including:

• This would encourage innovation around offering additional products to clients so that meeting times have a lower relative transaction cost. e.g. if you also provided insurance products or health products in the same client meeting, there is a much smaller incremental cost as the meeting is already scheduled.
• Would loan officers be able to handle a broader range of products well?
• Would this type of focus increase or decrease client retention long-term?
• Will loan officers then seek to focus on less poor clients who have capacity for say larger loans with more margin?

So, there wasn’t any silver bullet and with every attempt to innovate there is going to need to be experimentation and refinement. But, I really liked the continuous improvement attitude that they demonstrated and the willingness to challenge the current status quo thinking.