Editor’s Note: The last two posts have focused on human resources issues faced by MFIs during the pandemic. Coincidentally, Kristina Czura, Florian Englmaier, Hoa Ho, Lisa Spantig have a new paper in World Development that focuses on the same issue. This was initially a research project on loan officer time use and behavior that, like so many other things, adapted to measure the impact of the pandemic. I asked Kristina and Lisa to summarize their paper for the Sentinel Project.
Academic insights into exactly how microfinance institutions (MFIs) and their personnel work are surprisingly scarce. In our recent study, we provide detailed quantitative insights into the job of loan officers, arguably the key microfinance personnel, in India. We document loan officers’ tasks, their time use and output, and describe how they adapted to the new challenges arising with Covid-19. There has been a lot of attention to how lockdowns and restrictions affected borrowers’ ability to repay, and on the mechanics of repayment, but much less on the impact on loan officers themselves and how they adapted to a sudden major change in their work. In this post, we’ll summarize a few of the key findings of our study that shed light on important issues for the MFI sector in planning for recovery.
For this study, we partnered with a large (more than 700,000 borrowers and more than 400 branches) Indian MFI to better understand the work environment of over 500 loan officers before and during the pandemic, both in terms of inputs and outputs. We combined survey data on tasks and work organization (inputs) collected in December 2019 and December 2020 with administrative records of monthly performance indicators (outputs). We also collected additional survey data on mental health and work issues throughout 2020.
We found evidence of demotivation as manifested in fewer planning activities and lower self-reported effort, but not a reduction in hours worked; only 56% of loan officers felt supported by their manager and colleagues, and 73% report a more stressful work environment.
Many MFIs will likely face significant human resource management challenges given, one, the likely difficult economics of MFIs in the continuing pandemic and aftermath, two, the amount of time loan officers spent in activities that may remain substantially constrained for the foreseeable future, and three, compensation structures (e.g. thresholds on loan originations and repayment rates triggering bonuses) that will have to be rebuilt. This is also consistent with what has been reported by the Sentinels. Soft factors such as policies focused on loan officers’ (see this post from Barbara Magnoni for some examples) holistic well-being may play an important role in MFIs ability to operationally recover.
Relevant pandemic policies in India
In India, the initial policy responses to the pandemic most relevant to the microfinance industry were 1) a restrictive nation-wide lockdown (March 25 - May 31) that prohibited leaving home such that large parts of the population could not work, implying a drastically reduced repayment capacity for microfinance borrowers, and 2) a debt moratorium (March 27 - August 31) that allowed all banks, including MFIs, to grant repayment breaks to their borrowers for installment payments of loans, to protect borrowers from unwilling default and debt traps. Many borrowers made use of this option and benefited from repayment breaks while their livelihoods were severely affected by Covid-related restrictions. However, the moratorium did not cover MFIs themselves and their loan-based re-financing such that it further increased liquidity concerns and uncertainty in the sector with MFIs facing pressure from several sides.
Loan officers juggle many different tasks and work long hours
Pre-pandemic, our surveys found that loan officers dedicated their work time to several tasks that can be broadly classified into three categories: 1) organization of loan disbursement (around 40% of time), 2) collection of repayments (around 45%), and 3) acquisition of new borrowers (16%). Loan disbursement includes the verification of loan applications, collecting information on borrowers and informing existing borrowers about other loan products. Collection of repayments entails preparing the weekly (in-person) group meetings, supporting borrowers, and reminding those who are behind their repayment schedule. Loan officers completed tasks pertaining to all three categories on a daily basis.
The lockdown and restrictions to social gatherings put severe limitations on the usual microfinance operations--both in how work could be done and how difficult existing tasks were. With the start of the pandemic, most loan officers had to work from home, relying on contacting borrowers over phone. In addition, new tasks were introduced. For example, loan officers were responsible for educating borrowers about Covid-19 in general, and explaining the moratorium in particular. The difficult working conditions and changes in tasks are reflected in how often certain tasks were done: Fewer loan officers reported verifying loan applications (-5%), collecting borrowers' information (-4%), informing borrowers about other loans (-5%), preparing group meetings (-7%), or supporting borrowers (-5%). They also engaged less in monitoring of borrowers' businesses and loan usage, and in encouraging repayment or emphasizing the negative consequences of default. Most notable, however, is the large increase in allowing borrowers who did not repay at the meeting to repay later in the evening--loan officers were an important channel for delivering flexibility to borrowers.
In December 2019 and a year after, in December 2020, we ask loan officers how many hours they worked and how they organized their work. In 2019, loan officers reported average work days of 10.8 hours. This includes commuting times from the branch to remote villages and reflects the generally exhausting nature of the job. Before the onset of the pandemic, the vast majority of surveyed loan officers engaged in various planning activities to cope with the workload. Ninety-one percent of loan officers planned their everyday working life and they used a variety of tools: checklists (88%), reminders (83%), and performance targets (91%). overall planning decreased by 3.5%, while work hours were similar, hinting at the more challenging and less structured work environment.
The work outputs appear to be driven by the debt moratorium
The considerable responsibility that loan officers carry is reflected in several administrative measures: Pre-Covid, they handled on average 556 borrowers with an average total outstanding portfolio of 11.26 million INR (about 125,000 EUR at the time of writing). Each month, they managed to ensure timely repayment of over 90% of the repayment installments due, and the average share of the loan portfolio that was overdue for more than 30 days, i.e. the portfolio at risk (PAR), was 11%.
Figure 1: Administrative Indicators: October 2019 - December 2020
Note: The sample covers 592 LOs who participated in our baseline survey and for whom we have data for the entire time span. The vertical dashed line indicates March 2020 as the first month in which Covid-related policies were in place.
Figure 1 presents descriptive statistics of the evolution of monthly performance indicators over time from October 2019 to December 2020 with the vertical lines indicating March 2020, in which both the lockdown and the moratorium were introduced. Performance indicators, which were a large part of loan officer incentive pay structures, became meaningless. Collection percentage dropped by 88%, and PAR increased by 74%. In the period after the moratorium, PAR slightly improved compared to before the pandemic (but given rescheduling the metric is nearly impossible to interpret), but the collection percentage remained 24% lower. While these outcome measures were important performance indicators before the pandemic, they did not accurately reflect loan officers' performance during the lockdown and debt moratorium period.
Increased stress and lower motivation, and ongoing work challenges
The periods of the lockdown and the debt moratorium were especially difficult for loan officers. Mental health indicators covary with the challenges in the work environment: During the time of deteriorating performance indicators in June and July, we find a significant increase in perceived stress levels: 59% of loan officers had a hard time concentrating on their tasks or found their work more stressful; 62% felt demotivated and 51% feared that the MFI might close. Only 45% felt properly technically equipped to complete their work.
Toward the end of the year, perceived stress declined and subjective well-being improved compared to summer 2020. Loan officers felt more motivated, and felt they could support and help their borrowers. This likely reflects their perception of the efforts of the MFI: loan officers also felt better supported by the organization and the measures it took, and were less afraid of the bankruptcy of the MFI towards the end of the year. Stress also decreased as compared to mid-year.
While these measures improved, the overall story remains concerning. Even though stress was decreasing, the reported ease of working continued to deteriorate after the moratorium until the end of our data collection. The decline is related to how much the loan officer job changed. Loan officers report that they have many new tasks to perform, an increase in workload, and the work itself being more difficult including new difficulties in interacting with borrowers.
Implications for recovery: bonus schemes, digital lending, and personnel policies
As the MFI sector as a whole, including MFIs, regulators, and funders, contemplate recovery, our findings suggest that there are important underappreciated factors that could affect MFI operations substantially. While there is much discussion of “digitalization” of MFI operations, these discussions can easily elide how profound the changes are to an industry that was built on personal, highly structured interactions undertaken by loan officers. Our paper highlights the importance of personal interactions and physical mobility in providing financial services to the poor, reinforcing the importance of face-to-face contact.
The consequences of loan officers operating under mobility restrictions and with limited personal interactions are clear. Several loan officers reported that borrowers were difficult to reach via phone and the majority acknowledged that interactions with borrowers became more difficult. Reaching borrowers remotely may not only increase workloads for loan officers but may also exacerbate moral hazard problems if defaulting borrowers decide not to be reachable (making the loan officer job even harder). Regarding possible future developments, substantial technological investments and training by the MFIs will be necessary before a transition to a digital microlending model can take place. In our sample, only around half of the loan officers felt properly equipped technically to complete their work.
While stories such as those gathered by the Sentinel Project indicate that many MFIs immediately recognized the need to change pay and incentive structures, our data suggest that these changes may not be temporary. If the actual daily job of loan officers continues to change, pay and bonus schemes need to be re-designed.
Going forward, loan officers as the direct link between lender and borrowers are likely to continue to be of crucial importance for MFIs' operations and hence merit more attention. With tight budgets that limit the scope for bonus payments, soft factors such as well-being can play an important role for retention. We find that only 56% of loan officers who remained in our sample feel supported by their manager and colleagues, and 73% reporting a more stressful work environment during the pandemic. Given that the health impact of the current pandemic will also be related to mental health, this should also be reflected in MFIs' personnel policies.
Further reading
Kristina Czura, Florian Englmaier, Hoa Ho, Lisa Spantig (2022): "Microfinance loan officers before and during Covid-19: Evidence from India", World Development, 152: 105812.
Published version: https://doi.org/10.1016/j.worlddev.2022.105812
Pre-print version: https://lisaspantig.com/wp-content/uploads/LoanOfficers.pdf
