Strategies and Structures for Commercial Banks in Microfinance

This paper discusses the reasons for commercial banks' entry into microfinance, and addresses the question whether banks should enter micro-lending and possible options for the same, and offers lessons for banks trying to downscale. The various structures under which micro-lending is currently done are through:

• Internal units where lending is done in-house;
• External units where lending is either done through a lightly or heavily regulated subsidiary or a service company.

The various chapters focus on the advantages and disadvantages of each structure; issues like:

• Autonomy, branding, risk reduction and delinquency are some considerations pertinent to external versus internal decision making.
• Cost reduction, funding advantages, and subject to regulatory authorities are important considerations for service company versus subsidiary decision making.

As per the paper, the best practices for banks entering micro-lending would involve:

• Choosing the right structure;
• Right products to avoid delinquency and decrease cost of operations;
• Providing enough autonomy to the structure.

The paper concludes by stating that advantages and disadvantages of both structures and the balance between them vary from bank to bank. Special considerations for banks doing microfinance in-house would involve:

• Giving a high bureaucratic rank to the microfinance division;
• Getting good technical assistance to avoid reinventing the wheel;
• Championing the cause of microfinance as a worthwhile commercial venture within the institution.