CHALLENGING TASKS OF HUMAN RESOURCE DEPARTMENT IN MICROFINANCE INSITUTIONS

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1 CHALLENGING TASKS OF HUMAN RESOURCE DEPARTMENT IN MICROFINANCE INSITUTIONS ABSTRACT S.N.SELVARAJ* *Assistant Professor, Wisdom School of Management, Udumalpet. Pinnacle Research Journals 41 The values of HR in various fields are taken as important aspect to achieve the business. Unfortunately, HR is the most neglected function in Indian microfinance sector and HR planning is mostly run on temporary basis and used mostly for determining new recruitments or promotions to estimate the salary expenses. Finding right people for different MFI functions and their willingness to compensate for people with relevant experience become most critical issue. The task is to formulate ideal HR policies and procedures with reference to microfinance business to make right number of people with the right attitude and skills in the right place at the right time. Currently, the sector is attracting many entrepreneurs including youngsters to enter into business with an ambition to start a Microfinance Institution (MFI). There are more than 1000 microfinance institutions operating in India. The quality of service delivery in the microfinance industry depends on person to person contact and relationship. These institutions are searching for the right people who can manage and handle the monetary or credit business with smooth approach with the community. They expect to provide effective monetary service to the public for which people with good attitude and genuineness to build a high confidence level in connection with the small, medium business society are needed. Recruiting qualified staff, offering relevant training and capacity building and controlling employee turnover are the most difficult issues in MFI because of its distinctive nature of business. Building a strong and long-lasting microfinance industry is a challenging task for the management and the Human Resource Department. The focus of this paper is to analyze the importance and challenges of the HR function in MFI. KEYWORDS: HR, Values, Issues, Challenges, MFI, People, Development, Management. INTRODUCTION Usually, MFIs provide credit and small loans to poor people for starting a business or for buying or consuming goods. At present, several MFIs are offering services like accepting small savings starting from Rs.10 to 25 per day as well as customized insurance services for the borrowers. For such services, MFIs charge interest of 30% annually. In reality, this could be considered very high but many poor people are borrowing from private lenders who will not maintain transparency and are known to charge well over 100% annually. Still demand is plenty and available MFIs across the nation are not adequate to cater the needs of many poor people in this direction. Contrary to what majority of people believe, bad loans or bad debts in micro credit are

2 very rare as compared to the organized sector. Here only 2% of the total loan disbursement has shown bad so far. Till a couple of years ago, an MFI was just another non-profit activity for the cause of social change. Predominantly, the sector was mostly dominated by NGOs, donor-driven organizations and few individuals in rural markets. Surprisingly, investments in the microfinance sector are on the rise because of the involvement of the capital market and several other private players and investors. At present, major international finance institutions and banks like Deutsche Bank, Citibank, HDFC and ICICI Bank are entering this segment as well. Based on a research recently conducted by Deutsche Bank, the volume of total microfinance loans increased from $4.5 billion in 2005 to approximately $25.5 billion in SCOPE AND OPPORTUNITY FOR MFIS The microfinance business practice movement in India is in limelight according to various national and international business and commerce survey analysis reports and is seen as an attractive market with high potential investment opportunities. Hence this trend definitely attracts many more business experts to find more space to invest into MFIs arena. According to Arjun Muralidharan, CEEO, ASA-GV, (The Activist for Social Alternatives Grama Vidiyal) the situation may not be as simple as before, but the field is certainly growing and anyone entering into the sector should arrange alternate source of funds now. ASA-GV is in the process of developing special schemes related to social security for its members by offering the benefit of life insurance, accident insurance and old age annuity similar to pension scheme offered by the organized sectors like SBI, HDFC, etc. IMPORTANCE OF HR DEPARTMENT IN MANAGING MFIS GROWTH Pinnacle Research Journals 42 Building a solid and long-lasting institution is very challenging and multifaceted task for the top level management as well as for the HR department. But HR is most neglected function in the Indian microfinance sector and HR planning is usually run on ad-hoc basis though quantitative in nature and used mostly for determining new recruitments of promotion to estimate the salary expenses. The most critical issue in HR planning is finding the right people for different MFI functions and their willingness to compensate adequately for people with relevant experience. There are very few people available with relevant experience because, microfinance sector has scaled up recently and there are very limited training institutes or business schools to churn out the people with required attitude and skill sets. According to a survey reported by an MFI Sa-Dhan, nearly 25 institutions in India have exclusive courses in microfinance, which is totally inadequate in the light of the demand in the sector. According to the research paper by Craig Churchill, Managing Growth: The Organizational Architecture of Microfinance Institutions clearly outlines the interplay of three important elements i.e. Organizational Structure, Human Resource Development and Institutional Culture, that will go into making successful and long-lasting MFI as shown in the Figure1.

3 FIGURE1: USING ORGANIZATIONAL ARCHITECTURE TO MANAGE GROWTH Human Resource Development Organization al Structure Institutional Culture HRD AND INSTITUTIONAL CULTURE Pinnacle Research Journals 43 Human resource development plays a vital role in building institutional culture and organizational structure. Essentially, any MFI should be very strong in the three areas as mentioned in the Figure 1 to meet the requirement of business growth. Each institution will have its own unique culture. The core values, vision, mission and code of conduct form the basis of this culture, heavily influenced by the Chairman and Executive Director of the company and senior management team. Generally, any institutional culture is difficult to identify because it is not something which is readily visible on the organizational chart. Moreover, culture is mainly reflected in the informal procedures like staff interactions, working environment, institution s day-to-day operations and so on. Effective Human Resource Management (HRM) is the most important department in any organization to institutionalize the culture. Following are the most considerable HRM tools and practices that shape institutional culture. Alignment of the firm s code and conduct, value streams, guiding principles and HR must be based on MFIs vision and mission. The advertisements, well-designed application forms and recruitment process etc. must create an impression and portray the reputation of the MFI. The standards of performance appraisal system existing in the MFI to assess their employees performance must be transparent in approach.

4 The process of managing employment contract, induction and orientation for new employees must reveal the strength of MFIs value statement. Generally, it is very critical to understand the complete HRM systems and processes by all employees thus it is very important to formally communicate to the employees of the respective organization. ORGANIZATIONAL STRUCTURE In the present management context, flat and simple organizational structure is the best model for any growing organization. Team-based work approach is only considered as the best procedure in every organization to increase the productivity, efficiency and responsiveness. All staff members must be organized in teams based on different branches, products and region types of clients. At the same time, employees also prefer to work in smaller business teams because they find it more challenging and see a better chance of getting their ideas adopted. Smaller teams also help to foster more sense of responsibility and accomplishment. Organizational structure should facilitate an environment conducive for increased team work to experience success and growth potential. During expansion, MFIs should build a lively and decentralized organizational structure to give confidence even in various branch offices. In the beginning, decentralization process may create some challenges in the form of administrative issues and managing growth for some period of time. Therefore, communication must remain an important tool for effective management. HUMAN RESOURCE INTENSIVE Pinnacle Research Journals 44 The quality of service delivery in the microfinance industry depends on person to person contact and relationship. Due to various challenging circumstances in business, MFIs competitive positions will keep changing constantly. Hence, it is more human resource-intensive and sourcing of skilled and quality human resources will play a crucial role of sustaining the growth of this industry. For the HR department to play an effective role at any MFI, the importance lies in integration of several important components of organizational architecture. HR CHALLENGES AT MFIS There are several HR challenges faced by the most of practicing HR professionals in this sector. As it is just an emerging sector and the availability of workforce with relevant experience is very limited. An online survey by Microfinance Insights on Human Resources Challenges and Solutions highlighted some important HR issues like more employee turnover, staff retention and recruitment and training as the biggest challenge. The existing supply of human resources is more from the NGO sector and naturally they will have more of an NGO orientation rather than microfinance orientation. Hence professionalism in the microfinance sector is very much limited. Moreover, there are no educational institutions offering relevant programs in the area with relevance to microfinance.

5 HR challenges in MFIs can be broadly classified into three levels: (1) Sectoral Level Challenges: As a sector, microfinance has an extra ordinary growth potential. But it is recognized by only few players who are involved in this business and few strategies who know the potential. Other people are largely unaware and sceptic about opportunities that lie before them. Microfinance being employee-intensive industry, their interpersonal relationship and service quality to customers will make a large difference in developing the organizational wealth. Otherwise, it will affect the shrinking margins on business and discourage the spending on human resources and finally both the quality and quantity of human resources will suffer. (2) Organizational Level Challenges: When organizations are growing rapidly the human resources are not increasing accordingly. It leads to improper ratio of clients per officer to deep costs down. Finally, it will lead to low morale, beginning of turnover, MIS backlogs and decline in portfolio quality. Sometimes, to scale up operations and portfolio, it demands recruitments of new staff in large numbers. Usually in the most the MFIs, the hiring process is not happening in a professional ways. The process is being carried out through cost in mind only and thus hires less qualified people. With this practice, organizations face the growth crisis and may become unbalanced over a period of time. (3) Individual Level Changes: Most of the talent particularly youngsters are reluctant to work in remote areas. Initially, few may work with small MFIs at rural places function with limited requirements and the lack of induction, training and skill enhancement remains a challenge. Employees may struggle for growth and increments, and have limited exposure as compared to city environment. HR CHALLENGES PERTAINING TO HUMAN CAPITAL ISSUES Pinnacle Research Journals 45 HRM department should ensure to provide and effective workforce to meet the vision and mission of the organization. HR professionals should formulate ideal HR policies and procedures to bring the right number of people with the right attitude and skills in the right place at the right time. In order to do this, most of the HR professionals of MFIs will face classic challenges like: Recruitment of qualified staff, Training and capacity building, Managing turnover, Designing incentives, Financial constraints, etc.

6 Arth Prabhand: A Journal of Economics and Management Today, most of the head hunters are facing tough problems to provide qualified staff for managingg microfinance institutions. It is a critical issue for every MFI in India and abroad as well. Concurrently, it has been proven by several important research report findings also. According to the Microfinance Banana Skins Report, the most pressing task for microfinance institutions is Managing Quality. By echoing this finding, the respondents of microfinance insight survey rated human capital issues as the most challenging to deal with. The study revealed as 51% of MFIs are facing challenges pertaining to human capital issues as compared to financial (29%) and technical issues (15%) as shown in Figure2. Surprisingly, financial issues are not rated highly as everyone expects to be so in the present microfinance market situation, which is becoming very competitive and demand more specialized knowledge and faster scaling than ever before. The report also highlighted that recruiting qualified staff, offering relevant training and capacity building and controlling employeee turnover are the most difficult issues because of its distinctive nature of business. Figure2: Challenging Issuess in MFIs Pinnacle Research Journals Human Capital Issues Financial Issues Technical Issues Most challengingg Fairly challenging Least challenging CHALLENGES IN RECRUITING RIGHT PEOPLEE At present, MFIs are competing more with commercial banks and NGOs for finding appropriate talent. For effectivee functioning of any MFI today, it is necessary to lead in search of targeted recruitment for specialized talent. The study has clearly revealed the requirement of talent in three major areas of importance. (1) Strategic thinkers with relevant experiencee in microfinance sector require 63% talent, which is the most challenging area of concern, (2) Staff for basic operations need 21% and (3) Strategic thinkers with the experience of capital markets require talent of 16% as shown in Figure3.

7 Arth Praband : A Journal of oeconomics and Management Figure3: Challenging Positions to Recruit for MFIs Staff for basic operations 21% 16% 63% Strategic thinkers with experiencee in MFI Strategic thinkers with capital markets experience CHALLENGES IN RECRUITMENT CRITERIA: Many research findings revealed the important criteria in recruitment is about the awareness of local knowledge. It is ranked higher than having the knowledge of capital markets, management degrees and international experience for all levels of staff members. Pinnacle Research Journals 47 CRITERIA FOR TOP-LEVE EL RECRUITMENT: Filling top-leveof the complex skills required for every positions like that of CEO, CFO and COOO can be difficult for MFIs because position and the leadership team has to know about the regions of operations as it is for lower level staff. This decisive factor overshadows the need for management degree, capital markets experience and international experience. CRITERIA FOR DIRECTORR LEVEL RECRUITMENT: Recruitment for the post of Directors also has similar findings as that of top level recruitments of MFIs. After the prerequisite of local knowledge and international experience is rated as very important followed by capital market experience and having management degree. CRITERIA FOR STAFF LEVEL RECRUITMENT: For staff-level recruitments like for the position of branch managers and credit managers, the need for locall knowledgee (55%) and local language proficiency (54%) are very essential prerequisites followed by English language proficiency rate very high (52%) and years experience (43%) as shown in figure4.

8 Arth Prabhand: A Journal of Economics and Management Figure4: Criteria for Staff Level Recruitment Local Language Local Language Proficiency Years of Experience English Language Proficiency Very Important Little Important Neutral ISSUES AND CHALLENGES IN EMPLOYEE MOTIVATION AND RETENTION Pinnacle Research Journals 48 Incentives are one means to motivate the employees and reduce high turnover rates in organizations. Majority of microfinance institutions are using monetary-based incentives and are using non-monetary based incentives like public recognition for achievements, sponsoring holidays and increase vacation days. Only very few percentage of the MFIs are offering Employee Stock Option Plans (ESOPs) as incentive schemes to their employees due to their complexity and nature of business as well as because of lack of knowledge on the part of MFIs in administering such plans. Since employee turnover is a major issue at MFIs, an extensive study was conducted to measure the perception on turnover vs. incentive schemes. Based on the respondents, they are considered into three categories as (a) Employees turnover as major concern, (b) Employee turnover as minor concern and (c) Employeee turnover as not a concern at all. CAPACITY BUILDING THROUGH TRAINING PROGRAMS On goingg training programs are very important for employees to build required skill setss and keep them engaged. Most of the MFIs offer training at least once or twice a year and nearly 39% of them offer it more than four times per year. Currently, many MFIs prefer to offer basic in- and required product knowledge. This basically covers classroom training program mixed with house training programs for new recruits to provide the general information of the organization field work training to provide the knowledge of various delivery methodologies of the microfinance company. Later, more in-depth knowledge will be provided in the areas of

9 Arth Praband h: A Journal of Economics and Management Management Information Systems (MIS), field monitoring, accounting basics for the branch managers, needs assessment, regular office monitoring and market monitoring methodologies, HR and finance resource management for managerial level staff, etc. Few MFIs also arrange professional visits to established MFIs as part of their training programs for gaining more practical exposure in real-time environment. CONCLUSION At present, building a strong and long-lasting microfinance institution is a challenging task for the management as well as for human resource department. Most of the essentials and challenging HR functions like recruitment and selection, training and development, compensation and reward management, performance appraisal system are being carried out on adhoc basis. In order to streamline and strengthen the human resource systems and policies in microfinance institutions, HR department requires strong support form the board as well as senior management. By taking into consideration the size, needs stage of growth and institutional strategy of these institutions, the board and HR managers have to formulate the ideal and employee friendly policies in HR framework to motivate the employees in MFIs. Then it is no longer a challenge for the business leaders to achieve excellence in organizational architecture of microfinance institutions. Although right people with right attitude are selected by MFIs, certain strategy may be adopted for the achievement of their business such as, providing compulsory training in the financial field to tackle the monetary activities smoothly in relation with variety of borrowers in the society. The human resources being recognized and utilized in the positive manner will establish HR function to overcome the challenges and to enhance amicable performance of microfinance industry. REFERENCES 1) Biswajeet Pattanayak, Human Resource Management, PHI Learning Private Ltd., 2009 Pinnacle Research Journals 49 2) Craig Churchill, Managing Growth: The Organizational Architecture of Microfinance Institutions, ) Mirza S Saiyadain, Organizational Behaviour, Tata McGraw-Hill Pub.Ltd., ) Fred Luthans, Organizational Behaviour, Tata McGraw-Hill Pub.Com.Ltd., ) Dipak Kumar Bhattacharyya, Human Resource Management, Excel Books Ltd., ) 7) 8) 9) 10)