Ramesh S Arunachalam
Rural Finance Practitioner
It is reliably learnt that MFIN, the association of for-profit micro-finance institutions in India, has sought the assistance of Shri O P Bhatt - the well known and highly respected Chairman of India’s largest commercial bank, The State Bank of India – in formulating a Comprehensive Package for the micro-finance sector. This is indeed a very welcome happening!
According to this letter written by Shri Vijay Mahajan, Chairman, MFIN, “In the past week, the situation on the ground in AP has not improved, and in many ways, only deteriorated even further. In this light, I am writing to you to seek your leadership and intervention to help put together a sensible, comprehensive package to help put the MFI industry on a stable footing, ensuring that the excesses that the sector has witnessed in the past few years are squeezed out, and that the sector moves to a new equilibrium where it can be a productive contributor to financial inclusion in the country.”
While the spirit of this letter is surely appreciated, we also need to look at some of the specific points, which are given as under:
As the letter notes (pages 1 and 2),
“The cornerstones of any comprehensive package for the MFI sector must include:
1. On the part of the MFIs
- A clear sizing of the multiple lending problem in AP, and the setting aside of sufficient funds from the MFIs in the state, to help in restructuring such multiple loans for distressed households. This needs to be done in a systematic, transparent and collaborative manner, so that the mechanics of this restructuring are visible to all stakeholders
- A reduction in interest rates, and changes in loan recovery practices, so that rates are neither usurious nor opaque to borrowers, and recovery methods are not coercive
2. On the part of the banks
- Given the enormous liquidity pressure that the current situation in AP has caused, there is a need for loans to selected MFIs to be restructured, to ensure that there is a recognition of the real problem being faced on the ground. This needs to be done in a judicious and selective manner, keeping in mind the points made in item 1 above
- Continuation of re-finance to the MFI sector, with additional with all the necessary checks and balances and due diligence, including items such as transparency, governance and other hygiene factors, including the essence of AP government's views on these matters. Stopping the credit flow at this time would be exactly the wrong thing to do, and will only exacerbate the crisis, and increase the ultimate exposure to the banking system itself. “
The following are comments with regard to the above and it would be interesting to see if the concerned stakeholders do accommodate some of the views/comments given below:
Multiple Lending (Point 1a, Highlighted in yellow above):
While the idea to size up the real extent of the ‘multiple lending’ phenomenon is appreciated, a caveat is in order: the exercise must not be limited to Andhra Pradesh (AP) alone. While one could start with AP, this exercise has to include other states as well. Not looking at the already prevalent (and perhaps significant?) multiple lending phenomenon in other states (especially in their saturated and rapidly growing areas) is surely akin to ignoring a time bomb fast ticking away – therefore, the stakeholders, who are to discuss and decide on this ‘Comprehensive Package’ must surely look towards ascertaining the extent of multiple lending, shared JLGs (Joint Liability Groups) and shared clients in so far as MFIs are concerned, both in AP as well as the rest of India. The need for a national exercise (AP first and other states later) also makes ample sense when one considers the fact that many of MFINs MFIs have pan Indian operations.
Further, the proposed exercise must also look at the root causes (rather than symptoms) for this multiple lending in complete earnest as only then can it be prevented in the future. Make no mistake, if this is not done, multiple lending will spread its tentacles again. Therefore, without the above, any package is doomed to fail as crisis will re-appear later (just as it did in AP) and one cannot be in fire fighting mode, every now and then...
Therefore, while the idea of sizing up the multiple loans to clients is long overdue, the exercise, if it is to be credible, must surely look at this phenomenon as per questions given below:
1. Multiple Loans: How widespread are these multiple loans to the same client by different MFIs and others, in Andhra Pradesh as well as other states? What is the average level of indebtedness of these micro-finance clients, with multiple loans from MFIs and others? Is it different in MFI saturated areas or fast growing areas or urban areas or coastal areas? Given the level of indebtedness and the livelihood options available to these clients, what assessment can be made with regard to the appropriateness of the multiple loans sanctioned (in terms of loan absorption capacity of the concerned client) by the different MFIs? How does the overall loan amount (for the multiple MFI loans) to a single (and same) client relate to any regulatory ceiling for classification as a micro-finance and/or priority sector loan? What are the regulatory implications for MFI and Banks, especially in terms of priority sector lending aspects? How can multiple lending be prevented in the future and what role can education/literacy of clients play in this regard?
2. Sharing of Clients and JLGs: How extensive is the sharing of JGL clients across MFIs? Is the reported trend of the same JLG being used by different MFIs on successive days true? If true, what are the implications of the same for the outreach data provided by MFIs and the priority sector lending data submitted by the banks to RBI?
3. Credit Policy and Loan Sanctioning/Repayment: How does this sanctioning of (additional) loans to a borrower with several other loans from several institutions, relate to credit policies of the various MFI’s concerned? Do these credit policies approve, disapprove, encourage and/or discourage of an additional loan to the borrower, who already has several loans outstanding to other institutions/people? How does the credit policy view a client with multiple loans – as a serious credit risk or as a good client to whom many loans can be provided? What was the overall process by which the various MFIs sanctioned additional loans to the same borrower(s)? Is there anything in the process that encourages multiple lending? How did these MFIs hope to recover the money from the same client who had several other loans with several institutions? Was there a genuine assessment of the source(s) of repayment for the client? Is there any evidence in support of the claim that ‘additional (multiple) loans are generally sanctioned (sometimes, in sequence) so as to enable the clients to repay prior loans’?
4. Role of Banks: What is the role of the concerned banks in this whole aspect of multiple lending to same clients? Were concerned banks aware of the same? Did they approve it and/or encourage it or were they completely negligent/indifferent? What does this say about the due diligence process at banks and their responsibility towards priority sector lending as per RBI norms and circulars?
5. Implications for Micro-Finance/Priority Sector Lending and Impact on Clients: What implications does multiple financing of same clients by different MFIs have for the growth (achievements) of MFIs in the recent years? What implications does it have for the outreach and other data provided by MFIs to regulators and/or other agencies? What implications does this multiple financing of same clients by different MFIs have for priority sector lending and the statistics provided therein by the commercial banks to RBI? What implications does it have given the fact that most bank loans to MFIs are indeed public deposits? What has been the overall impact of these simultaneous multiple loans to clients (and their families)? What has been the resultant impact in the respective villages and rural economy?
That said, let us look at the 2nd part of the same point in the letter which says that, “This needs to be done in a systematic, transparent and collaborative manner, so that the mechanics of this restructuring are visible to all stakeholders”.
This point is very well taken and Shri Vijay Mahajan needs to be congratulated on taking leadership as far as this is concerned. However, there are several genuine questions here:
1. Can MFIs alone be expected to do this sizing of multiple loans in an objective manner through the self-regulatory mode? This is especially relevant given the past track record of MFIN and Sa-Dhan, both of whom, despite being well intentioned, have been unable to enforce their respective codes of conduct (which in fact did refer to the multiple lending problems) with regard to their respective members.
2. If MFIs cannot do it alone, then, which stakeholders should be involved and why? This is the most critical aspect here
3. Should there not be a role for The RBI in all of this as they are the main regulators for the NBFC MFIs (i.e., MFIN members)? What about roles for the Ministry of Finance and/or other regulators/supervisors including State Governments, who are also concerned stakeholders? What about participation of DFIs (like NABARD AND SIDBI), commercial banks, donors and investors? What about Sa-Dhan and its member MFIs including those in AP? And most importantly, what about client interest groups?
Interest Rates and Loan Recovery Practices (Regarding Point 1b):
As many MFIs provide door step service, the idea of reducing interest rates seems therefore rather inappropriate, especially because the nascent and smaller MFIs may not be able to do so and may even get competed ‘out’ by the larger ones. The key for MFIs would be to look inward and see where and how they can reduce costs (through efficient processes) and pass this on genuinely to the customer, so that the rates are affordable and reasonable for the client as well as sustainable for the institution. The more important point here is transparency in communicating the (effective) interest rates and this is where the aspect of client education and literacy again comes in – as many clients have said that they do not understand it, for example, when a field worker says that, their (MFI) loan costs 15% interest (on flat basis). Sometimes, clients also just read into the number and assume that 15% flat is lower than say, 20% reducing balance.
There is however very little that is mentioned about the changes to be made to loan recovery practices (so that they are not coercive)...one would need to wait and watch the specific details of this aspect before commenting further. Indeed, this issue of coercive recovery is perhaps also closely linked to the multiple lending phenomenon (given above) and the process by which it happens
Loan Re-Structuring for MFIs (Point 2a):
This is a very valid point and needs to be selectively and judiciously done, on a case by case basis, as the letter argues.
Re-financing of MFIs (Point 2b):
The letter talks of the need to continue “re-finance to the MFI sector, with all the necessary checks and balances and due diligence, including items such as transparency, governance and other hygiene factors, including the essence of AP government's views on these matters. Stopping the credit flow at this time would be exactly the wrong thing to do, and will only exacerbate the crisis, and increase the ultimate exposure to the banking system itself. “
Again, the specifics need to be spelt out and the implementation/enforcement mechanisms for the above checks and balances must be clearly elucidated. Otherwise, we would be back to square one as has happened in Andhra Pradesh, when after the 2005/6 crisis, several promises (including in writing) were made, only to be broken later...
Three final comments are in order with regard to the proposed package. First, while I see a lot for the MFIs in this comprehensive package, I see very little for the clients including their (very difficult) situations. That seems rather strange because MFIs always talk of the potential impact of loss of access to (MFI) financial services for clients and this has been a major argument at every policy forum. That being the case, it is indeed strange that the proposed MFI package treats the very clients, on which the MFIs subsist, in a rather indifferent manner. Second, I still do not get to understand as to why MFIN and Sa-Dhan are doing different things for the same problem and doing these independent of one another – this really perplexes and confuses me. Finally, the most important player for MFIN and its MFI’s is The Reserve Bank of India – that the RBI’s name does not even figure in the letter seems rather strange...
 The 2010 AP crisis was preceded by a crisis in AP in 2005/6 and strikingly similar issues came up then and were to be addressed by MFIs but in reality, that did not happen and that is why we have the 2010 crisis.