Who Are The ‘Rogue MFIs’ That Have Supposedly Caused The Andhra Pradesh Micro-Finance Crisis???

Ramesh S Arunachalam

Rural Finance Practitioner

Many stakeholders in the Indian micro-finance industry have talked of ‘Rogue MFIs’ and some of their statements are given below

“Dr Akula admitted there were “rogue” elements operating in the microfinance market and they needed to be checked. “Do not destroy the entire industry because of the actions of a few rogue players,” he said[i].

“Mr Alok Prasad,CEO,MFIN,pointed to some fly-by-night, small-time moneylenders who are working under the garb of MFIs and giving the sector a bad name. These are unregistered players who are not RBI-regulated NBFCs. The government should go after them rather than come after registered MFIs, Prasad said”[ii].

“On the harassment allegedly caused to the public by MFIs, Mr Mahajan said that there are many other companies which are pretending to be MFI, but are not registered”[iii].

Commenting on the phenomenon of ‘Rogue MFIs’ in Andhra Pradesh, I wrote in early November that:

“It has become very commonplace to argue that ‘Rogue MFIs’ or ‘Fly by Night Operators’ are the ones who are responsible for the present micro-finance crisis in Andhra Pradesh. This statement is certainly worthy of serious investigation and the RBI and other regulators must attempt to get to the root of this statement as soon as possible.  Further, all the industry associations must transparently share all information on their members so that any black sheep (hiding within) are immediately identified and dealt with.  It is also imperative that the names of the so-called Rogue MFIs are publicized through various forums such that donors, investors and lenders boycott them in totality. But there is one problem however – where do we begin to search for these so called ‘Rogue MFIs’? I guess the logical point would be to start with the people who made the statements in the first place. The onus is now on them to help identify the ‘Rogues’ or ‘Fly by Night Operators’ from among and/or outside their saintly flock. “

However, it has almost been 3 to 4 weeks and nothing has been forthcoming from those raised the ‘Rogue MFI’ issue in the first place or even the regulators. On the contrary, the chorus on rogue MFIs has become louder and louder...and of late, we have been getting some indications of about their possible legal form (s), association membership and the like. Read on…

Recently, at a public micro-finance gathering in India, I heard that there were lots of stories going around about these ‘Rogue MFIs’ supposedly operating in AP – some people were heard mentioning that it is these ‘Rogue MFIs’, through their reckless and mindless growth in the last 4/5 years (backed by coercive collection practices and the like), who had managed to drive the micro-finance industry to real crisis in Andhra Pradesh. Apparently, some industry veterans pointed out that these so called ‘Rogue MFIs’ are primarily are not registered with the RBI. Still others stated that these so called ‘name spoiler MFIs’ are non-MFIN members. And the stories have now begun to spin out of control…Curious as a cat, I was keen to get to the bottom of this...

Therefore, I decided to look at existing market data on MFIs (from Mix Market) and determine who are the MFIs operating in AP, how fast have they grown, what is their legal form, how many of them are MFIN member’s and so on and so forth. Here is what I found…and prime facie…the data appears to refute many of the above arguments about the ‘Rogue MFIs’…I leave it to the reader to reach a judgment for themselves…

According to the Mix Market data, there are 20 MFIs headquartered in AP. These can be broken into 4 distinct categories:

(a)  The Top 6 NBFC MFIs (Big 6) – which include SKS, Spandana, Share, BASIX, Asmitha and Trident. In 2009, they accounted for 94.7% of the total active borrowers (equals 14.45 million clients) of all AP Headquartered MFIs (equals 15.25 million clients), which is OVERWHELMING by any standards. These 6 MFIs have added 12.20 million clients since 1^st April 2005 until 31^st March 2009. Of this, nearly as much as 9.76 million clients were added (by the Big Six) from 1^st April 2007 until 31^st March 2009 and just about 2.44 million clients were added during the period 1^st April 2005 – 31^st March 2007. Therefore, it goes without saying that the Big Six NBFC MFIs are dominant, fast growing and large scale institutions (one of them is medium size but growing very fast). Incidentally, the BIG 6 operate under the RBI regulatory framework.

(b)  The Small 5 NBFC MFIs (Small 5) – which include CreSa, FFSL (Future Financial Services Limited), GTFS (Gram Tarang Financial Services Pvt Ltd), Nano Financial Services Pvt Ltd and SWAWS (Sharada Women’s Association for Weaker Sections). In 2009, they accounted for JUST 2.78% of the total active borrowers (equals 0.43 million clients) of all AP Headquartered MFIs (equals 15.25 million clients), which is MINISCULE by any standards. These 5 MFIs have added just 0.37 million clients since 1^st April 2005 until 31^st March 2009. Of this, as much as 0.33 million clients were added (by the Small Five) from 1^st April 2007 until 31^st March 2009 and just about 0.04 million clients were added during the period 1^st April 2005 – 31^st March 2007. Therefore, it goes without saying that the Small Five NBFC MFIs are small, moderately growing and nascent institutions. The small five also operate under the RBI regulatory architecture.

(c)  The Local Area Bank (Lone Ranger LAB) – which comprises of the Krishna Bhima Samruddhi Local Area Bank Limited (KBSLAB). In 2009 the LAB accounted for a rather miniscule 0.40% of the total active borrowers (equals 0.062 million clients) of all AP Headquartered MFIs (equals 15.25 million clients), which is VERY SMALL by any standards. The LAB has added just 0.039 million clients since 1^st April 2005 until 31^st March 2009. Of this, as much as 0.016 million clients were added (by the Small Five) from 1^st April 2007 until 31^st March 2009 and just about 0.022 million clients were added during the period 1^st April 2005 – 31^st March 2007. Therefore, it goes without saying that the LAB is a very small player, with local and very moderate outreach. The license for the LAB has been provided by The RBI and it operates as per the relevant RBI guidelines.

(d)  The Non-Profiteers and Mutual Benefit MFIs (The Micro 8) – which comprises of 4 NGOs (Non-profits) and 4 Mutually Aided Cooperative Societies (MACs). In 2009, they accounted for only 2.11% of the total active borrowers (equals 0.322 million clients) of all AP Headquartered MFIs (equals 15.25 million clients), which is rather SMALL by any standards. These 8 MFIs have added just 0.26 million clients since 1^st April 2005 until 31^st March 2009. Of this, just 0.14 million clients were added (by them) from 1^st April 2007 until 31^st March 2009 and about 0.12 million clients were added during the period 1^st April 2005 – 31^st March 2007. Therefore, it goes without saying that the 8 Non-NBFC (4 Not-For-Profit and 4 Mutual Benefit) MFIs are very small and moderately growing institutions. None of the aforementioned 8 MFIs operate under the RBI regulatory architecture and that should be noted with (added) emphasis.

 

The relevant data are also provided in Tables given below

Therefore, the key questions that need immediate attention are:

1)    Are the ‘Rogue MFIs’ who caused the Andhra Pradesh crisis in the above group of MFIs?

2)    If yes, who are they and why are they being called ‘Rogue MFIs’? What evidence exists to prove that they are indeed the ‘Rogue MFIs’?

3)    If not, where are the ‘Rogue MFIs’ and how to identify them?

I really hope that the industry associations (MFIN, Sa-Dhan, INAFI and others), banks, regulators and other stakeholders get to the bottom of this and let the world know who the real ‘Rogue MFIs’ are and how they caused the micro-finance crisis in Andhra Pradesh. It is about time that specific names of ‘Rogue MFIs’ are provided…otherwise, it seems like a mere exercise in transferring the blame…to perhaps non-existent MFIs…

Tomorrow: Governance Lessons from Indian Micro-Finance: A Birds Eye View

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[i] http://64.74.118.102/2010/11/16224132/Akula-defends-SKS-MFI-industr.html?d=2

[ii] http://www.karmayog.org/microfinance/microfinance_31240.htm

[iii] http://www.deccanchronicle.com/business/mfis-tweak-loan-duration-665