From Risk to Resilience: Controlling Portfolio at Risk in Microfinance for Long-Term Success

Passionate about microfinance? Let’s discuss a crucial pillar of any MFI (Micro-Finance Institution) sustainability: Controlling Portfolio at Risk (PAR).

PAR, or Portfolio At Risk, is a key indicator impacting microfinance operations profitability. It is the percentage of a microfinance institution’s loan portfolio that is at risk of default. E.g. PAR 30 = Principal outstanding of overdue loans above 30 days / Total principal outstanding.

But here’s an insight: controlling PAR isn’t just about minimizing risk—it’s about empowering borrowers with the right guidance, fostering financial inclusion, and driving sustainable impact by ensuring clients don’t fall into a debt trap.

So, how can we keep PAR in check and ensure the continued success of our microfinance initiatives? Here are a few strategies:

1.🔍Risk Assessment

Start by conducting a comprehensive risk assessment of your loan portfolio. Identify potential red flags like possible loan sharing, and fraudulent KYCs, assess borrower creditworthiness, and proactively address any other areas of concern.

2.📊 Data-Driven Insights

Data is your best friend when controlling PAR. Leverage analytics to monitor portfolio performance, track repayment trends, and identify early warning signs of default. The more data-driven your approach, the better equipped you’ll be to make informed decisions.

Early warning systems with regular portfolio scrubs can halve credit risk.

3.🤝 Client Engagement

Building strong relationships with your clients is paramount. Provide financial education, offer support and guidance, and empower borrowers to make informed decisions about their finances. The more engaged and empowered clients are, the lower the risk of default.

Client engagement can be promoted with the right training and incentives for employees. With high attrition these days, this becomes a challenge sometimes but achievable.

It is important to remember that client engagement reduces if the repayment follow-up is implemented during odd hours. Respecting client privacy may also promote engagement.

4.💡 Diversification

Don’t put all your eggs in one basket. Diversify your loan portfolio across different sectors, regions, and borrower profiles to spread risk and minimize exposure to economic volatility.

During COVID it was observed that PAR levels were higher in Urban areas than Rural due to higher migration. Thus diversification always helps.

However, diversification also spreads resources thin for small organization’s. It is a delicate balance to maintain.

5.🔄 Adaptability

The microfinance landscape is constantly evolving. Stay nimble, be prepared to adapt your strategies in response to changing market conditions, and proactively adjust your approach to controlling PAR.

The OCR (Operating Cost Ratio) is an important parameter to keep track and should be aimed to remain below 10%. Technology can help a lot to reduce Operating costs by flagging issues early on.

E.g. Promoting digital payment channels, reduces Operating cost for the organization and is also profitable for clients, while reducing cash risk.

6.🌱 Sustainability

Last but not least, focus on long-term sustainability. Ensure that your microfinance initiatives are not only financially viable but also socially responsible, environmentally sustainable, and ethically sound. By prioritizing sustainability, MFI’s can mitigate risks and maximize impact for the communities served.

Controlling PAR is no easy feat, but with the right strategies and a commitment to client engagement and financial inclusion, MFI’s can build a brighter, more equitable future for all. 💡 #Microfinance #FinancialInclusion #ImpactInvesting #PARManagement

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