HUMAN RESOURCE CHALLENGES IN MICRO FINANCE INSTITUTION – A Indian PERSPECTIVE
1. HUMAN RESOURCE MANAGEMENT (HRM)
Human Resource Management (HRM) provides an institution with an effective work force in order to meet its mission. Effective human resource management uses systems and tools to bring together: the right number of people, with the right attitude and skills, in the right place, at the right time. The goal of human resource systems, tools and activities is to help the individual employees who make up your MFI to be successful at their jobs and to work well together. In order to accomplish this goal, Human Resource Management (HRM) must be an integral part of the strategic plans of MFI. HRM in the context of microfinance into six broad categories:-
1. Human Resource Planning
2. Human Resource Policies
3. Recruitment and Selection
4. Salary, Benefits and Incentives
5. Performance Management
6. Training and Development
These functional responsibilities are influenced by the external context in which MFI operates and well as MFI’s internal strategies, goals, mission, and institutional culture. It is also important to include a process of review and evaluation to ensure that your systems and tools continue to be appropriate as MFI evolves. Each of the six HR functions plays an important role in the effective operations of MFI. These functional responsibilities are influenced by the external context in which MFI operates and well as MFI’s internal strategies, goals, mission, and institutional culture. It is also important to include a process of review and evaluation to ensure that systems and tools continue to be appropriate as MFI evolves. Each of the six HR functions plays an important role in the effective operations of MFI. Throughout this toolkit, you will learn about these functions and how, when applied appropriately, Human Resource Management can propel your institution toward Success. Why is Human Resource Management important? institution requires two major resources to operate: capital and people. The microfinance industry gives significant attention to the financial issues of operations. While finance is essential, it is only a tool in the hands of your people. Money does not manage itself; people manage it. Human Resource Management tools and systems are critical in finding, training, managing, motivating, and developing a team of staff who will effectively carry out MFI’s mission. By building strong, well functioning human resource systems and tools, institution will be poised for growth, ready to manage the challenges of an evolving environment, and responsive to the needs of your clients. All institutions are comprised of an interdependent network of individuals. In order for MFI to be successful, the individuals within it must be productive, efficient, and effective. Attention to the management of these individuals can not only enhance the success of the individuals, but can encourage a team effort capable of reaching goals beyond what one person can do alone. All employees, regardless of their position in MFI, need the same things to be successful. Everyone needs to:-
1. Identify with MFI’s mission
2. Understand their role, and how that contributes to the mission
3. Know specifically what is expected of them
4. Have the capacity, resources, and environment which make success possible
5. Receive encouragement, constructive feedback, and opportunities to develop and improve
The work of Human Resource Management is to implement systems and tools that will provide these key elements to help the individuals within MFI to be highly motivated and successful. When individuals are
Successful, MFI will be successful. Who is responsible for HRM? Ultimately, the responsibility for Human Resource Management activities rests with each manager. If a manager does not accept this responsibility, then HRM activities will only get partially done. Maximizing the potential of the human resources available within MFI is directly dependent on a manager’s skills and abilities to manage staff. Leadership and good staff management skills are essential to provide employees with what they need to be successful. HRM systems and tools can provide a good structure but will not guarantee success. Effective staff management hinges on each manager’s ability to provide leadership and relate to staff. This toolkit will briefly address critical staff management skills in Staff Performance Management Process, Development and Training. The role of HRM staff within MFI is to support each manager with strategies, systems and tools for the effective management of their staff. Just like the Finance Department, Human Resource Management is a support service with “internal clients”: staff and managers. This concept may seem contrary to what you might expect. Many staff within MFI might assume that the designated HRM staff person should complete all HRM functions. While this is true for the development, administration, review and monitoring of HRM systems, in order for those systems to be effective, your managers must understand their role and responsibility in using those systems and tools for effective staff management. How does HRM evolve as the MFI grows? From the beginning, it is important to put HRM systems in place so the MFI will be ready to cope with the administrative burdens that increase as more employees are added. Institutionalizing these structures during the start-up phase will help to ensure that effective Human Resource Management practices are ingrained into organizational culture. These HRM structures would include but not be limited to recruitment and selection procedures, personnel policies, orientation and training for new staff, and staff performance management tools. At the beginning, these systems and procedures do not need to be complicated or elaborate. They can evolve as the MFI grows. Regardless of size, putting HRM systems in place at the beginning will help Human Resource Management to evolve along with your MFI. Small MFIs (up to 20 staff) , for start-up MFIs with up to 20 staff, the functions of Human Resource Management are usually shared among various employees. For example, the finance department may administer salary and benefits. Organizational chart for a Small MFI, illustrates how HRM tasks are typically divided in a small MFI. In most start-up MFIs, the Executive Director is involved in all HRM functions, such as recruitment, termination, salary, etc. As such, HRM naturally plays a strategic role in institutional planning and design. This senior level involvement is an excellent way to formulate and establish institutional culture. An effective Executive Director will mentor and empower staff to take on these Human Resource Management functions over time. For Medium MFIs (20 to 49 staff), As the MFI grows beyond 20 staff, the complexity and importance of Human Resource Management increases. During this stage, one staff position (usually on a part-time basis) should be designated to work on HRM administration. This part-time HR Administrator may report to the Manager of Finance and Administration, or another senior level manager as appropriate. This transition can be difficult and may evolve over time. A good place to start is to define HRM tasks that can be done by a current employee who has complimentary duties in another role. As your MFI grows, this role will gradually expand and the transition into a full time HRM position may seem a very natural progression. During this growth phase, it is common for HRM activities to become administrative and lose some of their strategic importance, especially if the HR Administrator does not report to the Executive Director. At this stage in a MFI’s life cycle, many MFIs hire an outside HR expert or consultant to help in the further development of polices and procedures. An expert can assist in the design and staffing of an appropriate HRM department and can train the HR staff. As with all experts, it is important to find a qualified practitioner who is experienced in the challenges of Human Resource Management in microfinance institutions. Large MFIs (50+ staff), For large MFIs with more than 50 staff, the management of human resources becomes more involved; therefore, a whole department within the organizational structure may be dedicated to work on HRM issues. A very general guideline is to have one full time HR position for every 50 to 75 employees.
Depending on your size, the HRM department may have several staff, some of which are specialized in a specific Human Resource Management function. For example, it may have a Trainer or Recruiter on staff. The manager of the HR department should be a senior and experienced manager who reports to the Executive Director, and participates in the senior management meetings. It is through this representation and senior level responsibility that HRM regains credibility and strategic importance within the MFI and has the necessary support to facilitate the success of the institution. If a MFI has aggressive growth and expansion targets, it may be necessary to hire additional HR staff to support this growth. Contract HR hires can be considered.
2. HR CHALLENGES IN MFIs
During the past one decade or so microfinance has caught the fancy of development practitioners worldwide. In India, microfinance2 gained momentum in early and mid 1990’s with emergence of Basix, SHARE and SNF as major players in microfinance. Between 2000 and 2003, a number of new players (primarily Spandana and SKS) with innovative business models emerged on the microfinance radar of India. Their spectacular returns and scaleable business model attracted the attention of commercial banks like ICICI Bank, HDFC Bank and ABN AMRO Bank. Most of these banks set up dedicated microfinance lending cells and started looking microfinance as a business opportunity rather than part of their priority sector obligation. Microfinance gained further momentum after 2003 – sector growing for more than 100% from year to year. A number equity funds (national and international) and banks started aggressively looking at Indian microfinance as business opportunity. Riding on this new wave, a number of new MFIs came into existence (eg Ujjivan, Swadhar, Sonata, Bandhan, Arohan and KAS Foundation). Some of older MFIs, who were conservative in their growth plans earlier altered their plans drastically and started planning aggressive expansion. The growth momentum is expected to continue for a few more years, given the plans of the commercial banks, equity funds and the MFIs. Total outstanding portfolio of all Indian MFIs taken together along with the expected growth has been presented in Table 1.
The total outstanding of the MFIs is expected to be to the tune of Rs10, 000 crores by March 2009.
Table 1: Growth in Microfinance Outstanding3
year | Outstanding (Rs Crores) | year | Outstanding (Rs Crores) |
Mar-02 | 200 | Mar-06 | 2300 |
Mar-03 | 300 | Mar-07 | 4000 |
Mar-04 | 400 | Mar-08 | 7000 |
Mar-05 | 1100 | Mar-09 | 10000 |
The number of employees presently working in the microfinance sector is over 18,000 and this number is expected to increase to over 45,000 by the March 2009. Although, the microfinance sector still covers only a fraction of the estimated total demand of over Rs60, 000 crores in India; in terms of human resource requirement, this is still a significant figure.
Table 2: HR Requirements in Microfinance
year | HR Requirement | year | HR Requirement |
Mar-02 | 3430 | Mar-06 | 18400 |
Mar-03 | 4252 | Mar-07 | 26446 |
Mar-04 | 4685 | Mar-08 | 38250 |
Mar-05 | 10648 | Mar-09 | 45158 |
Two Types of MFIs: - MFI- A & MFI-B
MFI-A was started as a conscious attempt to provide financial services to the underprivileged segments of the society. The promoter of this MFI was a social entrepreneur who, after experimenting with many alternatives in the field of development intervention, was fascinated by the role of microfinance in poverty alleviation. The promoter was well-educated, had about 10 years of experience of working in an NGO, was informed of the risks and complications involved in the microfinance business and was committed to build a professional organization. The promoter took up the challenge, designed a good operating methodology, designed its products well, set up good accounting system and MIS and built strong internal controls. MFI-A started somewhere in mid-nineties, now has a portfolio outstanding of Rs100 crores with a client base of 200,000 and staff strength of about 800. Most of this portfolio growth has come during the past three years. MFI-A is planning to grow aggressively during the next three to four years and is targeting a portfolio outstanding of over Rs500 crores and a client base of 1 million by March 2010.
MFI-B was an NGO for the past two decades doing many community development activities like health, education and enterprise promotion. It also had a small programme for formation of SHGs and promotion of thrift as well as credit for these SHGs. In early 2000, MFI-B obtained loan funds from FWWB for on lending to these SHGs. The loan portfolio in March 2001 was about Rs10 lakh. There was no separate staff for its microfinance programme. In 2002, MFI-B obtained loan funds from SIDBI for on lending to its borrowers. The microfinance programme of MFI-B received major boost in 2004 when it was linked to ICICI Bank and its loan portfolio increased sharply. MFI-B was promoted by a community leader (CEO of the original NGO) who decided to catch the microfinance bandwagon realizing little what could be complications involved in doing this. Huge un-met demand for financial services in its operational area, coupled with nearly unrestricted supply of funds from the commercial banks, gave rise to temptation to scale-up fast. Growing acceptance of microfinance as ultimate solution to poverty alleviation among the donor community validated the actions of the community leader.
Today, the loan portfolio of MFI-B stands at about Rs10 crores with about 25,000 clients and 150 staff. MFI-B is planning to rapidly increase its portfolio size aiming at a loan portfolio outstanding of Rs100 crores by March 2009. At this level the organisation will have over 1,000 employees. MFI-B has weak accounting system, MIS and internal control systems. It struggles to get its financial statements prepared in time for the annual audits; no periodic financial statements are prepared. The MIS of MFI-B consistently reports a repayment rate of over 98%, but the recent rating report of the organization indicates suspect portfolio quality citing problems in lending policies and MIS. MFI-B does not have any internal audit systems or operational and financial analysis systems. There have already been unconfirmed reports of misappropriation of funds as well as ghost clients.
3. HR CHALLENGES IN PLANNING, RECRUITMENT, DEPLOYMENT IN MFI-A
MFI-A has good operating procedures, excellent MIS and accounting system, adequate control systems and good overall management systems but is still facing major HR challenges. Promoter of MFI-A has been its CEO since the beginning. He now has extensive experience in microfinance and has attended most of the national and international trainings available for microfinance and has been to almost all the major microfinance destinations in the world (Bangladesh, Peru, Bolivia and Indonesia). His main responsibility now is to interact with the funders and oversee the functioning of the organisation. He also takes most of the strategic and policy decisions but finds very little time for this and this has led to very little innovation in the field. Head of Operations was once a field staff, became a Branch Manager after two years of his recruitment, became an Area Manger in next two years, became a Divisional Manager in the next three years and is now the Head of Operations for the past couple of years. Before he became the Head of Operations, the CEO used to handle this function. Head of Finance has been in this position for the past 10 years. He is a Master in Commerce from the local university and has mostly learnt on the job. He does not have great communication skills and the CEO mostly handles communications with the funders and the donors. Heads of other departments (IT, Internal Audit and HR) have also been with the organization for past a number of years and have mostly learnt on-the-job. All of them are mostly postgraduates from the local universities and do not have any professional qualification. The volume of operations of MFI-A have increase immensely over the past one year and these heads of operations have been finding it difficult to handle increasing complexities of operations. The CEO is finding himself overburdened with the increasing pressure of work but is not sure what to do. The second line of leadership of MFI-A is extremely weak. The MFI-A tried to hire a few management graduates (fresh graduates from IRMA and XIMB) at the senior management level but had a bitter experience – they left in just about one year. Following are the current practices of MFI-A in planning, recruitment and deployment functions. In Planning, The MFI-A has a moderate system of HR planning. Most of its HR planning focuses on the number of field staff and the people in the middle management. This planning is mostly quantitative in nature to determine how many field staff recruitments it will have to do in the next a few years and how many promotions it would require. There is hardly any planning for the incentive structure, motivational issues and training needs. Developing and organizational structure and a second line of leadership is almost out of the planning radar of MFI-A. In Recruitment, MFI-A has to recruit mostly its field staff, for which it advertises in the local newspapers. It conducts a written test, test of public speaking and group interview for selecting candidates. It has well-laid out criteria for the qualifications and experience for the field staff. Most of the field staffs selected has higher secondary qualifications while some of them may be with graduate degrees. Through, check on the background of the candidate is carried out before appointment letter is handed over to him/her. As discussed above, there is no policy for selecting staff for the middle and senior management levels. Most of them have been promoted from the ranks and have good understanding of the processes and policies of the organization. The management graduates from IRMA and XIMB were recruited during the campus placements in the institute In Deployment, The MFI-A has a very structured system of induction for its field staff. All the new recruits are subject to four days of rigorous classroom training where they are told about the mission and vision, organizational structure, processes and procedures and basic concepts in MIS and accounting system. At the end of the training they are handed over a detailed operational manual and job description. After this classroom training they are sent to some branch of the MFI and are attached to one of the experienced field staff for two months. The new recruit assists the experienced field staff in his/her duties and learns on-the-job. After this training period the new recruit is placed in another branch with regular responsibilities of the field staff. There is no structured training for other category of staff. They occasionally attend trainings sponsored by the lenders and the donors. The IRMA and XIMB graduates were put straight in charge of operations after an exposure stay of one week in a branch.
4. HR CHALLENGES IN PLANNING, RECRUITMENT, DEPLOYMENT IN MFI-B
MFI-B has been struggling to find right people for its microfinance programme. The community leader is still the CEO of MFI-B. He has master’s degree in sociology and does not have much understanding of finance and business. Over the past three-four years he has attended all major national as well as international microfinance trainings. He also had exposure visits to most of the prominent MFIs in India and Bangladesh. As MFI-B has been involved in many other development activities, the CEO devotes only about 40-50% of his time in microfinance. Head of Operations is a postgraduate in social work from one of the reputed universities in India. He has been with MFI-B for the past over 10 years. Earlier he was head of the education programme. When the microfinance programme of the organization started, he was given additional responsibility of the microfinance programme. When the volume of operations in the microfinance programme increased, he was made the sole in-charge of the microfinance programme. He has attended several training programmes conducted by the national level training institutions. He has also visited couple of reputed MFIs for exposure visits. The Head of Finance looks after all the programmes of the MFI-B. He is a postgraduate in commerce and has over 10 years’ experience in handling accounts and finance of large-sized NGOs in India. His main responsibility is to maintain repayment schedules of the lenders and to send them periodic reports. He is also responsible for the external audit of the financial statements of the organization. There are no other functional heads. The Head of Administration looks after general administration and HR issues. Senior field staff of MFI-B has mostly been with the organization for a long time. They were hired for other development projects but as and when the projects ended they were absorbed by the microfinance programme of the organization. The organization has recently recruited a number of field staff due to significant increase in the scale of operations. Workload has been increasing and recent ratings as well as assessments have pointed out weak HR as the major area of concern. CEO is afraid of hiring management graduates as his friends in other MFIs did not have good experience with them. He is not sure what course of action he should be taking now. Most of the energy and time of MFI-B goes in managing complications of the MIS and accounting system as well as audits due to ever-increasing demand of reporting requirements for audit, rating and funds mobilization. HR has been a neglected function and today it virtually consists of only payroll accounting and transfers.
Following are the current practices of MFI-B in planning, recruitment and deployment functions.
In Planning, There is virtually no planning for HR. Planning is restricted to ascertaining the requirements of field-staff for the next two-three months. No planning is carried out for the organizational structure, second line of leadership, motivational issues, compensation structure, training and development of staff. In Recruitments, Most of the recruitments are carried out for the field staff. Advertisement in the local newspapers (60%) and the references from the existing staff (40%) are the major sources of manpower in MFI-B. Preference is given to the staff who has previously worked with the MFI-B on one or more development projects. Recruitments are based on a written test and an interview. The organization does not have clear criteria for recruitment. There is hardly any background check carried out of field staff to check their employment history. Supervisory staffs of MFI-B are mostly drawn from the other development projects of the organization. They have mostly been absorbed in the microfinance programme as and when the other projects got over. In Deployment, There is systematic training for the staff at any level. Staffs that are new to the organization are given two-day orientation where the history, origin as well as mission and vision of the organization is explained. For staff taken from the other programmes, there is hardly any training or orientation given before deploying them on to the microfinance programme of the organization. Staffs are occasionally sent to the microfinance trainings sponsored by the funders and donors.
5. Conclusion
It has been widely accepted that the Human Resource is the most important and critical resource in MFI has. In private and public discussions MFIs have always raised the issue of inadequate and untrained manpower. At the same time, it has been one of the most neglected managerial functions in the MFIs. At current growth rates, the MFIs would find it difficult to manage performance unless a systematic approach to HR management is adopted. MFIs can use some of the insights and issues highlighted in this paper to improve their HR practices.
written by ajay kumar
