Where Angels Prey

Where Angels Prey is a novel by Ramesh S Arunachalam. Please refer to www.whereangelsprey.com for more information

Friday, December 24, 2010

DFIs and Their Role in The Burgeoning Growth of The Indian Micro-Finance Industry: Some Critical Issues for Self-Introspection…

Ramesh S Arunachalam
Rural Finance Practitioner

While we looked the role of equity in detail, here are some statistics that I have put together on DFIs (and banks) who supported this growth during the period 2007 – 2010 in Andhra Pradesh and other states of India. Please see tables below

As you can see the SIDBI, has led the group and has consistently been ranked 1st among all DFIs/bankers in terms of loans disbursed (for last 2 years) and loans outstanding, in the last 3 years. As Mr Srinivasan (2010) argues in the State of The Sector Report[1], “ SIDBI almost doubled its exposure to Rs. 3808 crores during the year. At this level SIDBI had a share of more than 25 per cent of the market. “

This post is devoted to SIDBI and a companion post looks at the role of banks in the burgeoning growth of micro-finance. At the outset, let me clarify that the objective of this analysis is not to malign any stakeholder (s) – as I have repeatedly said, SIDBI and banks, have been very well intentioned in their support to the micro-finance industry and it is very unfortunate their well intentioned supported has been taken for granted by some MFIs. That said, it is however important that we learn crucial lessons from the happenings so that adequate safeguards can be built, going forward…that is the primary motivation in making this post…

While year on year, SIDBI has increased its outstanding portfolio and disbursement, what is interesting to note is that the growth in year 2008-09 has been phenomenal for SIDBI, both in terms of loans disbursed as well as loans outstanding. What makes SIDBI’s loans even more powerful is that it is real long term funding!

While SIDBI, has indeed played a fantastic role in the development of the Indian micro-finance sector – yet, at the same time, it was always a conservative DFI and that is why it is somewhat surprising to see that SIDBI experienced such growth. It would be therefore good for SIDBI management to introspect and understand the motivations for such unbridled growth during the last few years – especially, because of the consequences of huge indebtedness of the further onward lending by MFIs. They would certainly need to look into their processes and methods of sanctioning and disbursement and also their due diligence checks with regard to end use of loans – that SIDBI has not able to spot the on-going (multiple) lending spree in the Indian micro-finance industry and the associated indebtedness is indeed something to introspect about…

Another issue relevant here is that SIDBI is investing as a social equity investor in many MFIs and the impact of SIDBI’s investments is such it gives tremendous legitimacy to the concerned MFI. In other words, apart from the quantum of investments, the real additionality of SIDBI’s equity investments in MFIs lies in it associating its well established and highly regarded BRAND name with the concerned MFIs. Therefore, its nominee directors are under serious obligation to diligently perform their roles - as independent directors - in a professional and objective manner.

That SIDBI’s nominee director remained a mute spectator when the founder promoter MD of a large MFI gave himself a huge loan to buy shares in the same MFI is indeed a cause for some concern. That action is certainly not acceptable in any financial institution and is unquestionably an act of not-so-good governance. That the SIDBI nominee director again remained a mute spectator to the hurriedly convened board meeting of a large MFI - that too on a Sunday - to sack an immensely successful CEO who led the MFI through a spectacular IPO – is something that is again worrisome. Without question, as a social investor, SIDBI is expected to ensure appropriate and good governance of the MFIs and more so, among the ones where it has invested (its funds as well as its BRAND name) and has a nominee director on board. The above happenings clearly call for a serious review of the process by which: a) SIDBI makes equity investments into MFIs; b) it appoints nominee directors to MFIs; and c) it ensures accountability of these directors. This is another issue that requires deep introspection by SIDBI’s management.

Going forward, it would be very important to ensure that SIDBI provides the right kind of leadership for responsible (micro) finance – a recent world bank collaborated project - that SIDBI is currently implementing under its aegis.  The mechanism of the lenders forum envisaged in this project is welcome but it needs to be operationalised carefully, after incorporating lessons from the present AP micro-finance crisis and building necessary safeguards against any real and/or potential conflicts of interests.

Without question, SIDBI is legitimately one of the pioneers of the micro-finance (especially, the MFI model) movement in India and it has produced several wonderful innovations and contributed significantly to the development of the micro-finance industry – its staff have their heart and soul in micro-finance and they are among the most sensitive and experienced with regard to micro-finance and micro-enterprises. It is up to SIDBI and its staff to develop necessary safeguards to ensure that the micro-finance industry that they helped create does not collapse…under the weight of well intentioned and perhaps sometimes, over enthusiastic support for MFIs…This is something that SIDBI definitely owes this great nation…

[1] State of Sector Report is an annual report brought out by Access Development Services (New Delhi) and Published by Sage Publications (India)…


  1. The kind of due-diligence done by SIDBI leaves much to be desired. Can any financial pro imagine that for making any equity investment there is no financial valuation of the MFIs?

    It seems that SIDBI was making hay while the sun shone!

  2. Great blog - good coverage of the "Microfinance behind the curtains". Congratulations on being the first to say - the microfinance emperor has no clothes.... Keep it coming. Deep down inside, we all want the truth to prevail. Satyamev Jayate....