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We are working with a group of experts to improve our performance cycles for the microfinance space. The aim is to understand credit risk. Microfinance lenders were criticised for profiteering from unfairly high rates of interest. This made it imperative to review practices, understand the universe of microfinance variables and see if an objective system could be arrived at to assist the sector players.

Though microfinance has a moralistic role of creating social impact, it’s hard to draw the line between profit and a social cause. What happened in Andhra Pradesh with SKS has created a flutter among players. The ‘for profit’ players attempt to walk the tight ‘social cause’ rope. Also, we have an economic cycle that connects consumption patterns, basic demand and economic growth to microfinance. And, a downward economic cycle hurts all finance players, whether micro- or conventional finance.

This is why we took up the challenge to build an industry-wide model for the sector. Microfinance is a bit different compared to conventional finance. On one side are social impact variables like poverty alleviation indicators and, on the other, are financial variables and microfinance institutions that are a part of the listed exchange market. The approach that identifies outliers in a group of stocks could also do the same for social variables. The idea of seasonality is not only about a sector’s good or bad behaviour over a period of time, but also about its quarterly performance in an overall bad year. Our performance cycle approach could also look at social variables like poverty, infant mortality and trends in the health services….

This article was written for Business Standard ^[2]