Rural Finance Practitioner
Given today’s turmoil in micro-finance that started with the controversial SKS IPO and was followed by the serial suicides in Andhra Pradesh, the unearthing of multiple lending by MFIs to shared JLGs and clients, the promulgation of the AP ordinance and the after effects of all these, the situation in the Micro-Finance Industry does appear bleak – so much so that even stalwarts like Shri Vijay Mahajan are now openly talking of creative destruction of the current (growth and consumption loan oriented) MFI model in favour of livelihood financing (Economic Times, 12th November 2010).
While one appreciates the spirit behind the statement, let me assure you that it is easier said than done for three reasons: a) Completely throwing away of the current MFI model may not be feasible as it is rather widespread and deeply entrenched in India now; b) it may not (even) perhaps be a good idea to completely discard the current model as the present model does appear to have significant utility; and c) a radically different approach like livelihoods will call for significant investment in related expertise and infrastructure (including that of financial intermediaries) and may not be an appropriate strategy for all kinds of institutions. I will post separately on what I think are some the key lessons from livelihood financing for over two decades using examples from Agriculture, Fisheries and other sectors and it is very important to look into these lessons, before rushing to prescribe an out and out livelihood financing model.
That said, the present crisis is indeed a bad crisis in the sense that there is vigorous shaking up that is happening on the ground but that should not force us to throw in the towel as the fight to get “People Oriented and Client Led Micro-Finance” is still very much on. While the recent incidents may cause us to feel that MFIs may have already lost the battle, let me remind you that the War is still there to be won.
In my opinion, there are four crucial steps to WIN the War and these are listed below:
Credit Administration: First, MFIN and Sa-Dhan must take the lead and encourage their member institutions engaged in micro-finance to do the following ASAP: (1) Establish an appropriate credit risk environment; (2) operate under a sound credit granting process; (3) maintain an appropriate credit administration, measurement and monitoring process; and (4) ensure adequate (internal) controls over credit risk. Apart from this, a ground level agreement must be reached by the two associations with their member MFIs on how the issues of existent multiple lending, shared JLGS and clients are to be dealt with and also that there are adequate safeguards to prevent the occurrence of these in the future as well . And of course, this has to be expeditiously done!
Management Information Systems: Second, the two associations must ensure that the information from MIS of their member MFIs are:
· Relevant and timely. Information should be provided with sufficient frequency and timeliness to give a meaningful picture of the institution’s financial position and prospects on a regular basis, as appropriately decided
· Accurate. Information should reflect reality on the ground and also be reliable.
· Comparable. Information needs to be compared across institutions and over time. Hence, standardized procedures must be used in the MIS and standard definitions of indicators and standard methods for calculating the same must be rigorously followed. This does not imply loss of flexibility but rather suggests standard use of best practices oriented indicators and methods for portfolio quality measurement.
· Comprehensive. To enable users of information to make meaningful evaluations, information should be comprehensive. This often implies the aggregation, consolidation and assessment of information across a number of activities and legal entities.
Disclosures: Third, Sa-Dhan and MFIN must also ensure that their member MFIs also provide more detailed disclosures with regard to the following areas:
· Accounting policies and practices;
· Risk management including controls
· Exposures across regions/sectors
· Asset quality including methods for determining it and indicators
· Earnings in relation to effective interest rates.
While specific disclosures will vary in scope and content according to level and type of activities, all member MFIs should provide sufficient, timely and detailed information so as to allow stakeholders/regulators to develop a full and accurate picture of the true financial condition. Further, the disclosures should be consistent with the information that the MFI generates and uses internally to measure, manage and monitor its portfolio and other risks. As management information systems and management reporting continue to evolve and improve, the timeliness and extent of such disclosures should also correspondingly improve. Finally, all member MFIs should also transparently discuss the techniques they use to monitor and manage past due or impaired assets/credit relationships, including procedures for asset quality classifications and practices and procedures for evaluating the adequacy of credit loss provisions and credit loss allowances, especially, under the present crisis.
Governance: Fourth, the two associations must work expeditiously improve governance in their member MFIs. Among other things, they must ensure that their member MFIs have: (1) Adequate checks and balance over executive decision making and behavior; (2) Transparent reporting to the outside world; (3) Independent board nomination sub-committees and as a consequence, truly independent board directors; (4) Enhanced transparency about ownership/control, related-party transactions and the (group’s) overall financial position; (5) Relevant checks and balances so that promoter’s and their friends/families are not able to leverage themselves highly to acquire stake in order to maintain control over the MFIs; and (6) Policies that seek to eliminate conflicts of interest at various levels including board and senior management level
Let us sincerely hope that rather than looking for external help and/or blaming others, the Indian micro-finance industry, looks inwards and introspect with integrity...so that People Oriented and Client Led Micro-Finance wins the ultimate war...
Do watch out for the forthcomming posts!
Posting for 15th November: Zaheera Bee Case Study
Posting for 15th November (evening): A Study on Effective Interest Rates in AP, Done by a Reputed Organisation
Posting on 16th November: Governance in MFIs, PART I and Part II
Posting on 17th November: Agriculture and Financial Inclusion