The Broker Agent in Indian Micro-Finance: A Frankenstein's Monster Created by MFIs?

Ramesh S Arunachalam

Rural Finance Practitioner

The issue of broker agents driving microfinance has been brought up by many people (including this blog writer) and all the (provided) information seems to have fallen on deaf years…The Malegam Committee has not even taken cognizance of this (serious) agent phenomenon. And every time, industry experts describe any such aspect bought up JUST as an aberration…They are however sadly mistaken…as agents seem to be becoming more of the RULE than the exception…as I have been finding out since 2005/6…

Read on…the attached e-mail (Dated Jan 2011) in circulation among MFIs inadvertently reached the MAIL BOX of this blog writer…and it clearly articulates what I have been saying all along…about the increasingly widespread use of agents in micro-finance…perhaps to turbo charge growth, create efficiencies, increase profits etc…

I reproduce the e mail as an Exhitbit below and as the email suggests, this seems to be the story of (agent/ring leader) Ms Eshwari of Kulithalai in Tamil Nadu…While the e mail seems to explain the context under which Ms Eshwari operated, in the meantime, she has actually complained to the district administration that she is being coerced (by MFIs) into making repayments…she also appears to have carefully launched a media campaign as well and please see a related article…at end of this blog post

That said, irrespective of her complaint where she portrays herself as an innocent victim of the “MFIs”, the e mail in circulation among CEO of few top MFIs suggests that MFIs created this monster, who was - holding groups and functioning like a ring leader - making benami loans, providing commissions for use of a clients name for loan disbursement, making repayments on their behalf and the like. Please recall that I had, some time ago, posted in Dev Finance and MFP (Micro-finance practice) e groups about two such cases: (a) A woman agent who received a Rs 25 Lakh loan in Vizagapattinam Andhra Pradesh; and (b) Another ring leader who had received several lakhs of rupees to build a multi-storied complex in Bhopal

Ok, time now to allow you to read the e mail being circulated and the sender/receiver names have been withheld to protect the identity of the MFIs (as the objective is not to malign MFIs/Their CEOs but rather to solve the recurring agent problem) but I have the original e mails and can produce them, if required…

I keep hearing of other notorious members in Vellore District in Tamilnadu (where the MFIs have had a lot of problems recently) - Jayalakshmi and Nagalaksmi - who also double up as agents. I can provide similar stories from other states as well…and other stakeholders like Mr N Srinivasan (Author of State of The Sector Report) and Microfinance Focus (MF) have also written about these agents…

Mr Srinivasan notes in the State of the Sector[i] report (2010),

“ As in the example from Karnataka, MFIs in other states too have tended to concentrate around the same towns and peripheries, serving the same set of households. The deluge of availability of loans from several institutions has led to multiple borrowing and, in some cases, excessive debt. The pressure to achieve performance targets and breakeven within a short period of time has pushed the relatively new staff of MFIs to look to centre leaders who are in the know of MFI operations.

These centre leaders have become a critical rallying point and are today termed as 'ring leaders: In state after state (Madhya Pradesh, Rajasthan, Orissa, West Bengal, Andhra Pradesh, Karnataka and Tamil Nadu), stories abound of how ring leaders informally register new customers promising loans for a fee. Most new MFIs setting up operations in such areas approach these centre leaders as an easy and natural entry point. This provides the necessary influence to the ring leaders to deliver on the promise made to several registrants for loans. 

The centre leaders are also in a position to obtain loans in the name of others, advantageously using the relative unfamiliarity of new field staff and new MFIs. The resultant ghost loans (please see earlier post http://microfinance-in-india.blogspot.com/2010/11/has-burgeoning-growth-caused-increasing.html have a tendency towards default. The clients that pay the registration fee in order to get a loan feel justified in holding up repayments. This behaviour has an adverse effect on repayment rates and necessitates stronger recovery efforts. Some MFIs (including those in the list of top 10) had to wind down operations in some pockets of states such as West Bengal, Chhattisgarh, Rajasthan and Maharashtra without making an attempt to consolidate.”

Likewise, microfinance focus writes (Dec 22, 2010),   

“Moulding business models to meet their growth targets, some of the largest microfinance institutions are using group leaders as interface agents between borrowers and loan officers. Popularly called as ‘Ring Leaders’, these agents are responsible for conducting meetings in their premises and collecting weekly repayments from the borrowers. 

Microfinance focus gained insight on this emerging trend during a recent field visit to some of the towns that are hardest hit by the microfinance backlash in Andhra Pradesh. Borrowers of Microfinance Institutions in township of Mehndipatnam, Begumpet and Dilkhushnagar of Hyderabad (Capital of Andhra Pradesh) told microfinance focus team that now these ring leaders have become a major cause of distress for them.

The principle of ‘Know Your Customer’ is one of the keystones around which microfinance practices have been evolved. However, with the introduction of the ‘ring leaders’ into the process, it seems that this essential requirement of lending is being compromised. The end borrowers interact with the ring leaders who maintain their passbooks and repayments. The loan officers, in turn, collect these from the ring leaders, reducing the amount of their interaction with the borrowers to almost neglible levels. In fact, as MF learnt, the interactions between the borrowers and the loan officers have reduced to such alarming levels that the borrowers are not even aware of which microfinance institutions they have taken the loan from!

Another disturbing practice which came to light was the charging of ‘membership fees’ by the ring leaders from the borrowers to join a MFI group. Ranging in the amounts of Rs.300 – 500 this membership fees is over and above the interest paid to service the loan….This fees was pocketed entirely by the ring leaders and is their ‘commission’ for allowing a prospective borrower to be part of the group. “Ring leaders have become a major cause of distress for us but as we need money and don’t have any better sources, we give in to their demands”, one of the borrowers said.

As microfinance focus further writes, in the last few years of unbridled growth, the MFIs have been guilty of compromising on processes to achieve their targets. However, given the current circumstances where the entire microfinance sector is being subjected to a minute regulatory examination, it is high time that the MFIs undertake a thorough introspection and attempt to correct the flaws which have crept into their processes.”[ii]

Some food for thought…Please recall that the CMF study talked of friends lending for interest as the biggest source of finance for people in the their access to finance survey in Andhra Pradesh. I believe that these friends lending for interest could actually have been agents or ring leaders lending their (benami) money…

Ok, so, where does all of this lead us?

As we go along, we are bound see the agent problem crop up in more places and states…Therefore, it is about time that we stop pretending that there are no agents…there are large numbers of agents, who have been (and are being) used to turbo charge the growth of micro-finance and they are turning out to be Frankenstein monsters created by the MFIs…and they need to get access to more and more loans to make their existing repayments…it is much like the famous Eagles song, “Hotel California”, where you can check out but never leave…the same applies to most MFIs today…and that is why you are seeing the micro-finance crisis in states (other than Andhra Pradesh) like Tamilnadu, as the e mail above alludes to…

So, it is about time that all key stakeholders including MFIs sit down and chalk out a pragmatic approach for dealing with these opportunistic agents and the shared JLGs/clients that they bring to the party…failure to do this is likely to result in an AP like crisis unfolding itself in many more places and states…and of course, the Malegam committee recommendation of MFIs ensuring that their clients are members of only 1 SHG/JLG will still remain a distant dream…

Therefore, it is high time the RBI takes a close look at the agent phenomenon and basically, there are 2 options for dealing with such agents: a) Either regularize them (agents) as per RBI outsourcing guidelines and outsourcing suggestions given earlier this blog (http://microfinance-in-india.blogspot.com/2010/12/outsourcing-and-use-of-agents-in-indian.html); or b) Create a regulatory environment to ensure that these (illegal) agents can no longer function, even clandestinely.

Therefore, taking a hands off approach to the rapidly prevalent agent problem…is not a serious option at all…and it is perhaps akin….to waiting for a time bomb to explode…and I hope that it is something that the RBI will not permit…

  

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[i] Source: N Srinivasan, “State of The Sector Report” (2010), Sage Publications.

[ii] Source: Quoted with Adaptation from http://www.microfinancefocus.com/content/big-league-microfinance-institutions-using-group-leaders-agents