Risk Assessment Strategies Microfinance Companies Use to Maintain Compliance
The risk assessment strategies are mandatory for a microfinancing lender as they justify how efficiently they can lend and provide support to the borrowers. The industry mainly depends on the rural population and the semi-urban regions, where the majority of the population becomes the potential customers for this lender.
Now, for a bank, it’s important to consider all the credit checks and balances that will accurately examine the profile of the customer and find whether it will be the right decision to lend the customer the required amount and approve the loan.
Importance of Microfinance Companies in Society
In a country like India, it’s necessary to have a proper institute that will have the right processes where it can help the underpreviledged section of the country. Previously, this banking system became the responsibility of the government. However, in recent years, private lenders have been taking the role of providing underprivileged group loans profitably and creating a business out of it.
These companies are tied with the DSA partner app, and through that, they can find customers who are verified users, and banks can check the customers’ risk profile and provide them the loans.
How the Lenders Complies With the Risk Standards
A lender needs to assess the risk standards, and through that, they can verify whether it’s the right time to lend to a customer. For example, in a low-income group, there are chances that one might fall prey to a debt trap.
Here, a bank checks the capacity of repayment on behalf of the customer, and through that, they can gain an understanding of the liabilities that the person has. Through that, it can manage the risk standard of the institute and can always maintain a high capital adequacy ratio, which is good for the liquidity of the microfinance banks.
Steps Microfinance Uses to Assess Risks
A microfinance bank is one of the most prudent institutions that can manage a business that has high volatility and seasonality. A prudent microfinance company can understand the seasonality and increase or decrease the loan book based on that.
A common pattern that can be observed from the operation of a microfinance lender is that the net NPA of the bank tends to shoot up suddenly, and while it decreases, it again takes the bank to a healthy condition. Therefore, the issue of liquidity is a major threat to this industry, and one must follow its structure.
- Choosing to Take Calculated Risks
The first activity for a microfinance bank is tot take a calculative risk without disturbing the liquidity of the bank. For example, it must work to reduce the gross and net NPA and sanction loans that are effective and have a higher chance of returns.
Previously this work used to be done by loan agents. Now, the banks put technology in place, and through that, they can maintain the records of the customer and verify whether the bank can take the risk of lending to that person.
- Making Institution Cost-Effective
The operation of the microfinance institutes is getting lean, and they are leveraging technology to give them a better edge. For example, the loan collection methods must be improved, and the recent push for AI has already been in place for the majority of microfinance companies.
It helps them to gauge how the collection resource they need to put in one place and what’s the effect of that so that the operation remains cost-effective.
- Getting Financial Help from the Big Lenders
The big lenders, such as large NBFCs or banks, tie up with the microfinance institutions, keep them as partners, and run the business under a JV. Here, the big banks can lend funds to these microfinance companies, and it can generate returns through lending making the venture profitable in the process.
Some banks that have the cooperative status can take deposits and also get borrowers from the DSAs. DSA’s full form is Direct Selling Agent and they are the ones who can connect borrowers with the lenders and can help both the parties to smoothen out the transaction and make the loan approved.
Finally, a business that’s in the microfinance space operates separately and is one of the significant lenders in any rural area, providing working capital help to the artisans and farmers.