Where Angels Prey

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

Friday, December 31, 2010

Is An Andhra Pradesh Like Micro-Finance Situation Brewing in Tamilnadu As Well?

Ramesh S Arunachalam
Rural Finance Practitioner

I woke up in the morning yesterday to see MFIs back to front page news in my home state of Tamilnadu for some alleged MFI excesses in Vellore district (which, incidentally, abuts the Chitoor district of Andhra Pradesh). When I spoke to a close friend and colleague, he said that the MFIs were already in the news even a couple of weeks ago - in Salem district of Tamilnadu for coercive repayment collection.

The news items (see images[i] at end of this section) about the Vellore district incident pertained to staff of two specific AP headquartered MFIs, who were supposedly beaten up by the public because they used coercive tactics in loan recovery. The Police were also called and the matter is said to be under investigation.

Let me at the outset state that it is not my intention to malign any of the institutions but it looks like that some of our MFIs have not learnt their lessons despite the AP experience. When several men approach a single woman or set of women clients to collect a loan repayment installment, irrespective whether or not coercive tactics are used, the whole process will itself APPEAR coercive. I hope MFI leaders and CEOs understand this sensitive issue and the fact that it has the potential to get blown up – especially, in small shanty towns and rural areas in India. And unlike in Andhra Pradesh, there appears to be no political support (whet-so-ever) to this issue in Tamilnadu as yet and from what I have heard, the reactions of the public were spontaneous. So, the argument of the public or people acting, because of encouragement by the Government or politicians is neither valid nor appropriate, in the case of the Tamilnadu problem…In fact, when I first started posting in the DFN e group in September, the Andhra Problem had not become political and if the MFIs had handled issues appropriately, I am sure that the present day crisis would not exist…

I really hope that the Tamilnadu headquartered MFIs and their associations (please note that the word is plural as we indeed have many of them today) and state chapters act swiftly to ensure that the problem is nipped (right) in the bud…Some generic suggestions in this regard are given hereafter…for what they are worth and what they are not…

Use of Women Staff For Collections: First, I know that it can be very difficult when several men approach a woman client or a set of clients to collect repayment and that is something that MFIs should avoid at all costs. Even if a larger group is to visit the women clients (either singularly or together), please make sure that there at least a couple of women staff. That should cool the tempers if any and also help in redressing the perceptions about coercive recovery tactics used by MFIs

Plan with Delinquent Clients: A second aspect that can be done is for the concerned MFI(s) to sit down with the client and facilitate them to plan on how to manage their (own) delinquency. A lot of explaining (please see this as part of enhancing financial literacy of clients) will have to be done and clients must be made to realize that there cannot be compromises in loan repayment for financial institutions – otherwise, financial institutions will simply die. I have seen older MFIs, especially the women led MFIs of the 1970s/1980s, engage in such delinquency planning with clients – whereby a delinquent client, is helped to look and analyse her/his cash flows and come up with an assessment of when and how she/he will make the payment. The present day MFIs would do well to deal with delinquency in such a manner…

De-Emphasize Growth and Expansion: A third aspect is that MFIs must not lend indiscriminately and make loose statements about their growth and expansion plans. Even recently, an AP headquartered MFI was seen on Television in Tamilnadu stating that they have already disbursed RS Y000 Crores and that would be disbursing RS X000 crores in the future within a specified time period. The same MFI had talked of adding atleast 5 million clients over a year for the next three year (1.5 million clients in all) and had also stated that equity of RS 1500 crores would be required in addition to loan fund of Rs 40,000 crores. In my opinion, this is the most inappropriate time for an MFI to talk (or rather boast) about its past disbursement and expansion achievements and future disbursement and expansion plan – given today’s problems this is tantamount to Hara-kiri. The MFIs must genuinely focus on clients and would be better off in highlighting REAL measures (not just superficial social performance management issues) related to client welfare that they may be implementing, as part of their operations.

Reach Out to Affected Clients: A fourth issue is that MFIs must show real compassion for their clients, who have been affected by over lending (or multiple lending) and try and reach out to them. It would be a great gesture if the MF industry contributes even contributes a fraction of its earnings to creating a debt redemption fund and/or relief package fund – for those families affected by high levels of indebtedness. Something which I have been advocating for a long time and something that has sadly not happened, despite repeated requests to MFIs bosses, post Andhra Pradesh

Be Sensitive to Genuine Client Delinquency: Another related issue is the aspect of being sensitive to genuine situations that may cause client level delinquency. I was having a conversation with an expert, often called the father of Indian micro-finance – a man who has contributed significant time to building up the Indian MF industry. He gave me an excellent example of sensitiveness to client situations and I appreciated what he said and the organization that is supposedly doing this…there are three unique features according to him… a) If a client is genuinely unable to pay a specific week’s installment, when she comes the next week, make her pay only one week’s installment (although two installments would be due) and instead extend the loan term automatically by one week; b) For a week’s extension in loan term, make sure that there is no commensurate penal interest; and c) Ensure that the staff do not have incentives based on disbursement or repayment or any other such aspect and therefore, reduce/eliminate motivation to over sell or over lend

So what practical steps can be taken by MFIs in Other Places to prevent the crisis from spreading?

As a first step, sit down as a group of MFIs and identify POTENTIAL areas where trouble could erupt – a) areas where there are many MFIs operating and multiple lending and indebtedness are high; b) areas where there is significant sharing of JLGs and clients among MFIs; and c) areas where client livelihoods are very weak and vulnerable and MFIs have been making multiple loans to get back past loans.

Engage with clients in these areas on a regular basis and attempt to ease the situation through various means. This could include MFI consortium based collection, use of larger number of women field workers to collect loans, some loan restructuring on a case by case basis and the like. Of course, while this would be short term in orientation, for the medium and long term, the concerned MFIs must address the crucial issue of how they would apportion the shared JLGs and clients – so that multiple lending and indebtedness are minimized in the future. The state chapters of the concerned associations should take the lead in this regard

Second, the MFIs must also start orientation meetings with civil society at the grass-roots in the various field areas…to clear up perceptions…Where necessary, they must own up past mistakes (without being defensive) and provide a credible assurance (backed by action) that the same will not be repeated in the future…the MFIs could also start to win back the community by engaging in (or at least supporting) activities for the welfare of the community (including clients) and general people in these areas.

Third, the MFIs must refrain from making irresponsible and boastful statements to the media and this is a very critical aspect. Much of what they have said has come back to haunt them and I just did an exercise of compiling statements by MFI and MFI association leaders on the Andhra Pradesh crisis (both Krishna and that of 2010) and I was astonished by what I saw…will post on that separately…

Fourth, for MFIs that are found to be using coercive recovery tactics and engaging in other unsound practices that affect the well being of clients, the associations concerned must take up the matter and ascertain the facts immediately. And then, the associations should take swift action against member MFIs who have violated and/or are violating the agreed codes of conduct. Please note that the 2010 Andhra Pradesh micro-finance crisis happened because the associations concerned did not take any action against the errant MFIs (both in Kolar and Post Krishna in Andhra Pradesh), despite knowing that there were some of their members who were not following the agreed codes of conduct. Therefore, acting against the black sheep in their flock is a must for these associations – that will restore some crediability for them and beleaguered Indian micro-finance industry…

Fifth, reacting to the above post, Mr Hugh Allen (taken from his comments) notes, “The prescriptions for resolving this (Tamilnadu) crisis must take into account two fundamental elements: 1. The importance of savings; and 2. Structuring loan products around flexible repayment schedules. Poor people are better served by savings services because they protect and build assets and reduce vulnerability and risk. Offering loan products that are matched to seasonal household cash flows instead of matched to risk policies determined by an MIS would also be helpful. This is because the latter recognises and adapts to irregular household cash flows (instead of simplistic risk assessment determined by a formula)."

While the above points are well taken and agreed, savings is not mentioned explicitly because currently, there is a regulatory barrier to tap savings. Also, much of what I have suggested above are actions that can be immediately taken to prevent the crisis. Savings is a long-term issue and the central bank needs to convinced first and from my own understanding of the Indian context, the internal control and other systems in MFIs need a serious overhaul before they are permitted to access savings. The idea of flexible re-payment is sort of indicated in my post above (when I talk of delinquency planning and sensitivity to client needs) but I agree that cash flow based products and business cycle loan products would be very appropriate…indeed...and I will post on that separately...

Wishing All of You A Wonderful and Happy New Year!

Please See Relevant News Items...

[i] The news came in the Vernacular press and has been reproduced as is…apologies for readers who do not know Tamil but much of the issues stated there have been covered in this post…


  1. It's unfortunate to observe that all of the prescriptions for resolving the potential crisis in Tamilnadu do not take into account two of the most important elements in pro-poor client services: promoting savings and structuring loans around flexible repayment schedules. Poor people are better served by savings services because they protect and build assets and reduce vulnerability and risk. Offering loan products that are matched to seasonal household cash flows instead of matched to risk policies determined by an MIS would also be helpful.

  2. Dear Hugh
    Thanks and your points are well taken and agreed. Thanks once again

    Savings is not mentioned because there is a regulatory barrier to tap savings and much of what I suggested had an immediate and short term orientation as a way to prevent the crisis. Savings is a long term issue and needs sufficient lobbying but then, from my understanding, the internal control and other systems in MFIs need a serious overhaul before that can happen.

    The idea of flexible re-payment is sort of indicated but I agree that cash flow based products and business cycle loan products would be very appropriate and thanks for pointing out that serious omission...Thanks again and I will factor these in appropriately

    Cheers and have a great new year

    Warm Regards


  3. I would like to bring to light my organisations" policiy on gender. My organisation Shri Kshetra Dharmasthala Rural Development Project(R),SKDRDP, (web skdrdpindia.org) is the 5th largest mfi in the country and the biggest outside of NBFcs and the biggest in karnataka with a credit portfolio of rs 850crores as at 15.12.10 is having 40% women emplyees in field, managing loan protfolios independantly. we encourage promotions to women in the supervisory cadre. Some of our best workers are from this category. I am really aghast at the attitude of the mfis who prefer men employees to predominently deal with women. Some of the strategies adopted by us in effecting recoveries are worth a look.

    Manjunath L H

    Executive Director, SKDRDP, Dharmasthala.

  4. At Equitas, we do have some women field workers but i am afraid it is a small percentage. while we never had a policy of not recruiting women, probably a policy insisting on women employees might have helped i guess ... we will seriously study this gender issue and roll out appropriate action internally.

    on the rest of the points raised by the author, i guess he has hit the bull in its eyes. we do have a State level chapter of Sadhan of MFIs and we are abrest of the happenings and using the learning from the AP scene to manage this better here. some of the suggestions in this connection are useful and we will take it up at our next meeting in the coming week.

    it would also be great if the author is also available for the meetings of the TN forum sothat we can benefit from his vast experience in the sector and hopefully then, end up doing more rights than wrongs!