Ramesh S Arunachalam
Rural Finance Practitioner
While there are several cases of agents, the most common one is where the center leaders become (informal) agents for the MFIs. This is a very logical and easy extension of the decentralized micro-finance model. I describe this model as I have seen it evolve in some MFIs over the years and there could be other ways in which agents function…
The Centre Leader as The Agent: This often happens when the loan officers, branch managers and others in a typical Grameen operation are pushed to pursue higher growth[i] and deliver quicker outputs in terms of client acquisition, loan disbursals and the like. These loan officers and branch managers start to rely on local support to do the same and often times, the hard working center leader becomes the automatic choice. Initially, it is a win win situation for all - the center leader, the branch staff (loan officer/ manager) and the MFI. The targets are easily met, new clients added, fresh loans disbursed and recoveries happen on time and slowly, the branch staff get to a point where they feel that the center leader can function in a state called as “auto pilot” – smooth operations, increasing at a good pace. The branch staff then tune off from this auto pilot center leader and start to look at other potential center or local leaders with a view to getting them to function as agents. This is when the problem starts – the auto pilot center leader starts to run her fiefdom and most of the initial rules of the game are given a go by. Meanwhile, with more and more branches following the center leader agent model, this model gets legitimized and rationalized within the MFI.
Characteristics and Roles of The Agent: When the agent is a center leader, she typically comes with significant experience. She has come through the system working with the loan officer and is well aware of the workings of the MFI including its weakness. Sometimes, she may have been a party to some of the frauds conducted by field workers and therefore knows that the chances of getting caught red handed are pretty low given that the internal audit function/equivalent is rather poor in MFIs.
The center leader generally has good skills in disbursement and maintenance of accounts, attendance and passbooks and the like and therefore can easily function as a proper outsourced micro-finance operation at the village level. In the last stages of their evolution, with one/two educated youth in her team, the center leader is even able to take care of KYC documentation – some of which would be falsely done
Among other things, the center leaders, as agents, perform the following key functions:
· They act as catalysts in the JLG acquisition.
· Sometimes, they assist loan officers in new JLG formation by pulling out clients from SHGs or competitor JLGs. Much of the Guntur problem in 2005/6 happened because two large MFIs were involved in breaking each other’s JLGs and taking over their clients. Centre leaders, as agents, played no small role in this. They also assist in the formation of green field JLGs
· Many of them supervise the working of the JLGs and maintain tight control over these JLGs and their members through loyal group leaders (who function as associates) – often guarding them from takeover by other center leaders and agents. Therefore, constantly servicing clients with loans becomes an absolute imperative
· They organize (informal) meetings for disbursement and recovery of loans and meet with their clients on a weekly basis (at least)
· In several cases, large center leaders who may be involved with several MFIs play the most important role in negotiating and scheduling meetings with the various MFIs. Please recall the Zaherea Bee case that I had posted earlier. Also, please take a look at Dr Swami’s speech at a Washington event (with David Roodman in december 2010) where he talks of MFIs, that try to go to new areas, getting to hear that – oh, Monday and Tuesday are with MFI and MFI II, so we can give you Wednesday or Thursday for weekly centre meetings”. Now, all of this negotiation and schedule finalisation is typically done by center leaders, functioning as agents
· Many of them maintain records and facilitate the MFI with regard to the KYC documentation, to the best extent possible
Agent Compensation: Initially, the center leader (agent) gets the incentive of a higher or additional loan – with passage of time, the center leader slowly begins to understand the importance of the crucial role she plays and is slowly able to extract more monetary payment – which also includes larger loans for some of her colleagues, out of which she takes a straight cut. As she gets more clients and disburses more loans, she begins to talk a new language – payment per loan (irrespective of size). Over time this gets converted to a commission per loan (which makes her payment proportionate to loan size). At this stage, the agent does everything – from KYC documentation to recovery and remittance at the branch. The agents also take a cut/fee on loans disbursed from clients. Therefore, in reality, they get monetary payments from MFIs as well as clients (by servicing both of them) and hence, are best called as broker agents in the micro-finance contract. When center leaders take an agents cut from the loan to the client, the effective interest rate to the client just shoots up. Sometimes, they also mark up the interest rate and this is one of the major reasons as to why there could be a difference in the nominal and effective interest rates stated by MFIs on paper and those on the ground – a remark that Al Fernandez made in his CGAP post…
Support Structures: The center leader, usually, has tremendous local support in her village and is an opinion leader locally, who has been involved in extra curricular activities in the village. She also perhaps has good support in the surrounding cluster of villages. Her operation could range from 7 – 8 groups (or 1/2 centres, depending on the grameen adapter model) initially to even as high as 35/40 JLGs or even a higher number of groups and several centers in a span of few years – at which point she handles a case load much greater than the normal case load of a loan officer and I will post on this crucial aspect separately. Of course, her ability to grow depends on her experience, age, clout and also capacity to position key support staff in the neighboring villages in the same/adjacent cluster. Often times, group leaders working under her graduate to become agent associates, supervising the operations in one village each where as, she, as the main agent, covers the entire cluster of villages. One further point – in some of the cases that I have seen, the agents tend to have a local support group comprising of their husbands or younger brothers or sons or other male relatives etc – basically, a male brigade, in the 20 – 55 years age bracket, that can talk tough with any stakeholder, including clients and/or MFI staff, as and when required
As Sekhar remarks in a comment to this blog, “The centre leader, usually a more affluent woman, uses her position to hold on to some of the borrowers’ loans. If she oversees, say, 8-10 groups (about 40-50 women), she retains and uses a part of the overall loan portfolio -- for consumption, or to put into her own business. While the loans continue to be in the names of the members, the centre leader makes the repayments. For this to happen, the field executive and the branch manager have to outsource the responsibility for disbursing and collecting money to the centre leader. She then decides whom to lend to...”
Agent related Issues: The kind of issues that the agent model throws could include the following:
a) Ghost/benami clients with money taken entirely by the center leader and used for various purposes including money lending. They same money could be relent as a separate money lending operation and I have seen center leaders separate out the two for strategic reasons
b) Real clients with some amount of their loan used by the center leader for various purposes ranging from money lending to own consumption as well as working capital for other businesses that the center leader could be running locally. The extra money could also be got by enhancing the loan amount and giving the correct amount to the clients and using the balance for other purposes
c) A third possibility is to provide larger loans to clients, using names of several small clients and this something that can happen despite the Malegam report recommending a loan ceiling size of Rs 25,000 and/or loan outstanding of Rs 25,000
d) I have seen cases where the center leader and staff collude and take a much high loan and disburse the required amount to the client and divide the balance amount amongst themselves
Let me reiterate that center leaders, as agents, are engaged in activities similar to what they were originally doing along with branch staff. However, there appears to be one major difference – when pushed to doing it independently, there have been no check and balances on them and that is where the problem started.
As an aside, internal audit departments are very weak in many MFIs and they often report to senior management, who have very little incentive to hear about systemic flaws in operations that they manage and oversee – this the classic conflict of interest problem. Rarely, have I seen internal audit departments report to the board as they should and this conflict of interest in reporting to the CEO or COO has prevented the effective functioning of such departments. I know of an internal auditor who quit a growing MFI then (and one of the largest MFIs today) when he came to know that the very mistakes that he uncovered in the field were indeed sanctioned by his seniors…This is a real incident that happened in 2005/6 in Andhra Pradesh
Therefore, with very little real time internal audits, many of the MFIs took a more withdrawn approach to grassroots functioning in their quest for growth and greater efficiencies - this can be seen from the fact that case loads for MFIs loan officers increased very significantly from the 200/300 clients range per loan officer to sometimes as high as 600/900 clients - and the center leader agents took the decentralized model to its extreme and with this several problems. The major issues were: lack of knowledge about ultimate end user for MFI, multiple lending, over lending, ghost lending, coercive repayments, diversion of funds and the like and this has essentially snowballed in the last few years as the following e mail quote clearly suggests...
When cash flow (read bank loans) are flowing fully, the kind of control that these agents wield over the clients as well as the MFI is phenomenal and if either of them misbehave, the agent does not wait to take action – which could, among other things, include shifting entire groups to other MFIs, telling the concerned MFI that repayments will not be made henceforth, repossessing assets from clients who do not fall in line, coercing and harassing clients (who refuse to pay fees) for closure of the full loan at one shot and the like.
Without question, there is increasing evidence about the (I would even say widespread) use of agents in Indian micro-finance (Rozas and Krishnaswamy 2011; Micro-Finance Focus 2011; Srinivasan 2010; Thorat and Arunachalam 2005b and several others) but the industry and key stakeholders continue to be in Denial mode, often pretending that there is nothing wrong at all…As the email extract above suggests and as per other evidence available with regard to agents, it is now clear that they are the real problem in Indian micro-finance.
I do sincerely hope that the micro-finance industry in India and the regulators including the Malegam committee take notice and together tackle this Frankenstein monster – either by bringing them under a robust legal framework or by ensuring that they just cannot operate - as otherwise, financial inclusion (let alone poverty reduction/alleviation) in India will just remain a mirage and never become reality…
[i] Much of the growth that happened between April 2007 to March 2009 for which I have already provided data, is perhaps due to the agent model.