Rural Finance Practitioner
Recently, Microfinance Focus circulated a document[i], supposedly from SERP and Mr Vikash Kumar of Microfinance Focus, the editor, in an e mail to the author, confirmed that this document is indeed from SERP. Irrespective of the source of the document, it is an interesting one as it lists around 123 cases of ‘people’ supposedly affected by MFI loans. A close look at the document suggests that there are at least 46 cases of supposed multiple loans having been provided to clients by MFIs (mainly). And in a little less than 50% of these 46 cases, the respondents are said to have committed suicides and in the rest of cases, harassment by MFIs for repayment is cited a major issue.
At the outset, I would like to make it clear that I am not implying any CAUSALITY what-so-ever - pending a scientific study and/or the proposed independent enquiry (as mentioned in the Microfinance Focus Item) or even judicial enquiry (as supposedly told by Mr Aloke Prasad of MFIN to the media) – between MFIs loans and clients suicides. That said, I however have several fundamental questions pertaining to MFI processes in the granting of multiple loans (which I am not stating as necessarily a bad thing prima facie) to the same client. In fact, I stayed away from debate on whether multiple financing of same client by different MFIs is good or bad practice. I am also not sure how widespread it is but available data seems to suggest that it could be significant (there are several studies, reports and field assessments available).
Therefore, it is imperative that the RBI sub-committee and/or regulators try to obtain answers (through independent and objective sources) to questions such as (but not limited to) the following:
1. Multiple Loans: How widespread[ii] are these multiple loans to the same client by different MFIs and others, especially in Andhra Pradesh? What is the average level of indebtedness of these micro-finance clients, with multiple loans from MFIs and others? Is it as high as many recent reports seem to indicate – in ranges of Rs 1,50,000 to Rs 2,00,000 or even more? Is it higher 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?
2. Sharing of Clients and JLGs: How extensive is the sharing of JGL clients across MFIs[iii]? 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. Loan sanctioning process: What was the overall process by which the various MFIs sanctioned additional loans to the same borrower(s)? Who made the actual decisions of loan sanctioning and disbursement? Was the sanctioning authority aware of other loans that had to be paid back by the borrowers? If yes, what rationale was used to sanction the (additional) loan? If not, what does it say about the due diligence process at the concerned MFIs?
4. Purpose of loans: For what purposes were the additional loans supposedly (and as per records) sanctioned by different MFIs to the same client (s)? Was there any utilisation check to determine if the loans sanctioned for ‘Y’ purposes were indeed used for the same purpose? This has significant priority sector implications as well.
5. Credit policy aspects: 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? If credit policy was not followed, were there internal audits and did they reveal the same? If credit policy was followed, what does the policy say in terms of additional loans being sanctioned to clients who already have multiple loans from other institutions? Does it 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?
6. Loan repayment and sources: 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? Based on this, was it possible for the client to repay all outstanding loans from that source (livelihood or total household income or whatever be the source etc)? For source of repayment indicated, how did it fare in reality? Was the source used for repayment in reality? Is there enough 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’?
7. Recovery processes: As per the credit policies of the various MFIs, what were the processes to be followed for recovering the loan from clients? Were these followed in reality? What about issues of recovery harassment by concerned MFIs that has been widely reported? Do the concerned MFIs follow the commonly adopted Zero PAR policy? If yes, was this applied to the present cases and what was the resultant impact on the clients?
8. Overall Impact on Client: 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?
9. 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?
10. Implications for Micro-Finance: 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?
11. Implications for Priority Sector Lending: 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?
I think it would be healthy to know facts as per questions above and it would also be useful to understand the process by which multiple financing takes place, before arguing its merits/demerits. Therefore, it is imperative that the RBI sub-committee and Regulators understand the actual situation behind these multiple loans as I see this as the fundamental cause of the present problems in Andhra Pradesh – in fact, in my opinion, the present Micro-finance crisis in Andhra Pradesh and India cannot be solved, until and unless the issues of the supposed (excessive) multiple lending and resultant (high) level of indebtedness and (large) scale of sharing of JLGs/clients is practically sorted out...
[ii] It would be very useful for the RBI sub-committee to look into the spread of this phenomenon and provide some estimates of its real extent, through appropriate sampling.
[iii] Same as ii above