Status of Indian Micro-Finance

Dear Colleagues

It is very sad to see the current Macro Mess in micro-finance.

In 2005, Dr Thorat and I, in a paper presented at the NABARD high level policy conference, had suggested that the burgeoning growth of micro-finance could result in a number of not-so-desirable practices being adopted. 5 years hence, this appears to be the case and there are many serious issues in the Indian micro-finance sector:

F     Corporate Governance in Indian MFIs is very weak and numerous incidents/examples are available - ranging from related party transactions (like loans to founder promoter) to sudden unexplained sacking of CEO to absolute silence of nominee/independent directors on such issues and several other aspects including tampering of board minutes, placing of items not discussed at the board meeting for approval with directors and the like

F     A new set of intermediaries called as 'broker agents' or 'micro-agents' exist in fast growing and urban areas and have apparently caused (are causing) havoc with the lives of poor women/men at the grass-roots - from using coercive methods to collect loans to even apparently encouraging delinquent clients to end their lives (please see study by DRDA in Warangal) so that insurance can payback the loan outstanding, to kidnapping daughters of clients to force them to repay and several such harsh measures

F     An integrated transparent MIS continues to strangely escape the attention of the Indian micro-finance sector - data and information is not easily and transparently available at the headquarters level. In fact, there is lack of integration of data/information across branches, products and geographies. For example, not all charges collected from clients are transparently available in the MIS, whose business rules are also not very clear and transparent

F     Client protection is at best, available as a lip service by Indian MFIs and at worst, it does not exist at. The recent spate of suicides in AP clearly suggests the role played by broker/micro agents and others in harassing poor clients

F     Defaults and delinquencies are burgeoning in the field and especially, over the last month. Given the lack of a transparent integrated MIS and also the fact that both, MFI corporate governance as well as MFI operations are like a black box, it becomes very difficult to believe the numbers and figures provided by Indian MFIs

I will be making a post later today on some of the crucial issues that call for immediate attention of the Indian micro-finance industry including the regulators

With Warm Regards

Ramesh S Arunachalam