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Bank Outreach Models

VIEWS: 2 PAGES: 19

Prof/ Rushen's Notes for MBA and BBA students

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									Business Facilitator Model
   Banks use a wide array of agencies for
    undertaking non-financial services
   Outsourcing several functions by banks to
    increase the efficiency of their transactions.
   A large number of institutions can be
    leveraged to provide such non-financial
    services by way of contractual arrangements.
Non-financial Services
   Identification of borrowers
   Collection of application and verification
    of primary information
   Marketing of financial products
   Promoting SHGs/JLGs
   Post sanction monitoring
   Follow up for recovery
Business facilitator model
   Agencies include:
    - NGOs
    - Functional cooperatives
    - Postal agents
    - Insurance agents
    - Agri clinics
    - Local youths/retired bank employees
Business Correspondent Model
   Use several institutions as agents for
    providing financial functions on behalf of
    banks.
   Function as “pass through” agents.
   Disbursal of small value credit
   Recovery of principal and interest
   The correspondent is authorized to
    accept/deliver cash subject to the cap fixed
    by bank.
Issues
   Internal policy for identifying agencies
   Risk Management Strategies in the
    banks
   Rating of the agencies
   Due diligence to be carried out on the
    agencies
   Code of conduct for operation
   Monitoring and review arrangements
Selection criterion

   Significant rural presence
   Satisfactory dealing with banks
   Reference of third party known to bank
   Rating
   Due diligence
Due Diligence – Indicative Parameters

   Charter and Registration
    - objectives of organization permit it to
    undertake the proposed activities
   Presence in the area
   Management and governance structure
   Manpower quality
   Accounting system
   Assessment of donors and peers
MFI-Bank Partnership Model
   MFI sources loans directly in the books of the
    bank
   MFI continues to monitor and recover loans
    thus disbursed.
   The NGO/MFI continues to perform the role
    of social intermediary
   The financial intermediation and therefore the
    credit risk is left to the bank.
MFI-Bank Partnership Model
   This releases the MFIs from their capital
    constraints and allows them to achieve rapid
    increase in outreach.
   The bank relies on the MFI’s field operations
    for collection and supervision.
   MFI evaluates, recommends, originates the
    loans, helps in disbursal and subsequently
    tracks and collects the loans.
   The MFI collects a service charge from the
    borrowers to cover its transactions costs and
    margins.
MFI-Bank Partnership Model
   Loan contracts directly between the
    bank and the borrowers
    - it does not reflect on the balance
    sheet of the MFI
    - The financial structure attempts to
    separate the risk of the MFI from the
    risk of the underlying portfolio.
MFI-Bank Partnership Model
   Alignment of incentives with a first
    loss guarantee structure (FLDG)
    -The financial structure requires the
    MFI to provide a guarantee (a first
    loss default guarantee)
    - through FLDG the bank shares the
    risk of the portfolio with the MFI up to
    a certain limit.
MFI-Bank Partnership Model
   FLDG makes the provider of the
    guarantee liable to bear losses up to a
    certain specified limit, say for the first
    10 or 20 percent of loss on the
    portfolio.
   The quantum and pricing of the FLDG
    depend on the operating capability and
    maturity of the MFI
MFI-Bank Partnership Model
   Transfer of implicit capital from the bank to
    the MFI through an overdraft facility
    - Along with advancing of credit to meet
    the demand of the clients, the bank often
    provides an overdraft (OD) facility to the
    MFI.
    - The OD facility is equivalent to the
    amount which the MFI is liable to provide
    as the FLDG.
MFI-Bank Partnership Model
   The OD is drawn only in the event of
    default.
   On default, the MFI is liable to pay a
    penal rate of interest on the amount
    drawn down from the OD facility.
MFI-Bank Partnership Model
   Partnership model and securitization
    - The microfinance assets originated
    under this partnership model facilitate
    participation of a wider investor base
    through the process of securitization.
    - sale of portfolio by the originating
    bank to another bank
MFI-Bank Partnership Model
   When the microfinance pools become larger
    in size, issuance of securities that are backed
    by microfinance assets become conceivable.
   The process catalyses development of a
    secondary market for microfinance where
    some entities specialize as originators and
    others emerge as buyers/investors.
MFI-Bank Partnership Model
   The MFI also experiences rating
    arbitrage and the improved rating
    results in lower costs of financing.
MFI-Bank Partnership Model
   (i) lack of clarity with regard to the rights and
    obligations of the MFIs vis-à-vis the banks since
    although the MFI is responsible to ensure recovery
    of loan, the loan documents are executed by the
    ultimate borrowers in favour of the bank,
   (ii) maturity mismatch between the repayment
    schedule drawn by the bank vis-à-vis the MFI and
    the repayment schedule between the ultimate
    borrowers and the MFI,
   (iii) the amount of fixed deposits collected as
    margin from the MFI by the bank is often beyond
    the financial capability of the MFI,
MFI-Bank Partnership Model
   (iv) imprudent selection of MFI as
    partner in a bid to build up portfolio
    rapidly, and
   (v) risk of multiple financing by more
    than one bank.

								
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