CMF Study on Access to Finance in Andhra Pradesh: Some Observations for The RBI and Other Stakeholders…

Ramesh S Arunachalam

Rural Finance Practitioner

The CMF study on access to finance is a very interesting one and I would like to congratulate the CMF team for its hard work. That said, there appear to be some interesting findings from the study and I discuss these with other relevant issues about the study, its context, methodology etc - especially because the study is being increasingly relied on by policy makers and other stakeholders and therefore, it becomes very important to provide a fair and objective assessment of the study and its methodology and findings...that is the sole objective here and again, I would like to state that the work of CMF and IFMR require full appreciation because there is hardly any serious research of the kind they do, at least in Indian micro-finance...

Having set the context, here are some observations...

Mr. Justin Oliver writes in his post blog...on the CGAP blog...on November 11^th 2010

Who’s the Culprit? Accessing Finance in Andhra Pradesh

“More than six months before these problems came up, the Centre for Micro Finance at IFMR Research, with funding from the Banker’s Institute for Rural Development at NABARD, conducted a household survey of 1,920 households in rural Andhra Pradesh to understand their access to and use of financial services.  Led by Doug Johnson and Sushmita Meka, this was a representative survey of the state’s entire rural population, rich and poor, and collected detailed information on household savings and borrowing from SHGs, MFIs, banks, moneylenders, friends and family, and other sources.  What we found is startling, and challenges many of the assumptions people have about microfinance in Andhra Pradesh.”

Two aspects in the above statement require clarification: a) The timing of the study, its posting on the CGAP blog and its overall positioning; and b) Its claim on being a “representative survey of the state’s entire population, rich and poor and borrowing from SHGs, MFIs, banks, moneylenders, friends and family, and other sources.”

First let us look at timing and related aspects. The study was conducted in June – Oct 2009 according to one the authors, who has said this in response to my query on the CGAP blog post.

I am not sure whether a study conducted between June – Oct 2009 or thereabouts (as admitted by IFMR) and almost 12 – 16 months before the present AP Crisis (that came into being around October 2010), can be passed off as a (fresh) study providing information related to the present Andhra Crisis, even indirectly. The study caption, Who’s the Culprit? Accessing Finance in Andhra Pradesh - is therefore perhaps somewhat misleading...

Also, the timing of the post in the 2^nd week of November is very peculiar and I do not understand CGAP’s introduction of this post by Mr. Justin Oliver…as well…

Home > CGAP Microfinance Blog

Who’s the Culprit? Accessing Finance in Andhra Pradesh

by Justin Oliver: Thursday, November 11, 2010

This post kicks off a special blog series on the microfinance crisis in Andhra Pradesh, India. Over the coming weeks we’ll be featuring a variety of voices on the issues raised by this crisis and what it means for the future direction of microfinance.

Let us set the record straight…the AP crisis unfolded more than one year after the CMF study was conducted and therefore, presenting it as a fresh study throwing light on access to finance in the present crisis ridden AP situation (either on the CGAP blog or at the CMF/CAB 2011 conference) seems rather inappropriate…

As Mr N Srinivasan, Author of the State of Sector Report (2010) has said, “It is a limited survey coming from a sample of about 2000. It was carried out a few months back when there was no problem with the sector in AP. It cannot provide answers for the current problems. With the kind of inter and intra-district variations within AP, its results are not ideal for extrapolation over the entire state.”

The second issue is one of representativeness…to the State of Andhra Pradesh (AP). As far as I am aware, the study does not cover urban areas and this is a (huge) drawback to claim of its representativeness - the fact that the study has focused exclusively on rural areas limits its generalisable validity. This is especially a valid assertion who one considers the fact that, the growth of MFIs in the last few years has burgeoned in urban/peri urban areas and small shanty towns – which have, in turn, witnessed severe competition, multiple lending, ghost lending, agent lending and other related aspects. In fact the past Krishna district crisis started in and around Guntur town, where two of the largest MFIs in AP literally mopped all available low income borrowers and engaged in not-so-good practices to out compete each other – the consequences of which turned out to the larger Krishna crisis…

Therefore, the above assertion that, the study is a representative one should be viewed with caution. It should also be noted that while Mr. Oliver calls it a representative study in his post at CGAP, the authors (perhaps correctly) do not… therefore it is a bit confusing for me to see these seemingly contradictory statements…

A third issue is that the study does not clearly identify the districts that were sampled. Footnote 23 on page 13 of the study is the only place where we get see some information on the districts (in fine print, Pun not intended):

“The following districts in Andhra Pradesh have claimed to have achieved 100% financial inclusion under the drive: Srikakulam, Nizamabad, Rangareddy, Chittoor, Warangal, Kadapa, Nellore, Prakasam, Kurnool and Ananthapur. Out of these districts, three (Nizamabad, Kadapa and Prakasam) were included in this survey.”

On page 34, the study remarks…

“Nalgonda and Mahbubnagar, two districts bordering Hyderabad, the capital of Andhra Pradesh, led in MFI memberships. Prakasam, which borders the saturated Guntur district, followed closely behind. Unsurprisingly, Vishakapatnam and Vizianagarm districts, both with large populations of Scheduled Tribe and Scheduled Caste populations, had the lowest outreach.”

On page 39, the study remarks

“In the course of surveying, the surveying team encountered significant difficulties in conducting surveys in one of the districts selected, Krishna district. In the weeks before the surveyors arrived there had been a spate of robberies perpetrated by thieves fraudulently posing as surveyors. After several encounters with angry villagers, the survey team decided to abandon all attempts to survey in Krishna district and instead randomly selected another district from the same district strata to conduct surveys in. Due to the omission of surveying in Krishna district, the data collected as a result of the survey is not representative of the rural areas of the entire state but rather the rural areas of the entire state excluding Krishna district. Often in this report, the authors use the phrase “rural households in Andhra Pradesh” in place of the more accurate but less concise “rural households in Andhra Pradesh excluding Krishna district.” Readers should note that all estimates presented here in this report are strictly valid for rural households in Andhra Pradesh excluding Krishna.”

From the above, I can perhaps guess where the study was carried out...although it was difficult to compile this information[i]...

That said, let us look at the substantive issues and findings:

Friends Who Lend Are The New Alternative to The Big BAD Moneylender: The biggest takeaway from the CMF study is the fact that the money lender is no longer the “alternative” to the MFI – as the study clearly shows, the largest source that clients turned to were informal sources (Friends with interest). This is indeed very heartening…and must be noted by all stakeholders who believe that any attempt to criticize MFIs may result in pushing the poor into the open arms of the money lender…that does not seem to be the case, at least based on this CMF study…

What is The Source of Money For Peers?: Now an interested and curious reader may ask - where did the “friends” get the money to lend to their friends for interest? I cannot answer this but I hope that the CMF team may shed some light on this crucial issue. Mr. N Srinivasan, in the State of the Sector report (2010) notes that, “The Centre for Microfinance (CMF)[ii]…study… that looked at access to finance in Andhra Pradesh brought out significant findings on the nature of multiple borrowing by the customers as also the clear thinking on use of these loans for different purposes. The emergence of money lending by the poor people as an enterprise activity came to the fore from the findings of the study.”[iii]

He further remarks, that it could be that SHG members who received bank loans were lending this money to their friends as an enterprise activity.  The same argument applies equally well to the assertion that clients with access to multiple loans from MFIs could in fact, have been engaging in lending to their friends as a ‘money lending’ enterprise activity. These alternative explanations need to be explored… in detail undoubtedly…as also other aspects…

The larger point here is whether members of JLGs or SHGs were individually lending their borrowed money and if this was happening, then we surely have a new class of money lenders…the MFI (center leader) agent has proved to be a channeliser of MFI money as a forthcoming post suggests…Clearly we also need to understand the extent to which supply led growth has resulted in this situation…And finally, we also must get to know the practices and operational aspects (including interest rates) of such lending by friends (for interest) to their peers…

What Were The Effective Rates of Interest?: In fact, I was recently discussing the CMF study finding that friends (lending for interest) have become the largest source of money supply in rural areas. My friend, a naturally curious sort, wanted to know the range of interest rates at which friends lent to their peers…Something that I could not get from the IFMR study…for any of the sources…

As Mr. Ajay Tankha in his comments to the IFMR study posted on the CGAP blog notes,

“A gap in the CMF study is, in fact, its failure to shed some light on the effective rates of interest paid by the households under borrowing arrangements from the different sources; and whether the rates of interest on loans from informal sources are much higher than MFI rates. It can be inferred, nevertheless, that all those borrowing from friends without interest and a fair proportion of those borrowing from friends with interest (possibly even some borrowing from moneylenders) would be doing so at sub-MFI rates. Clearly, borrowing from the big bad moneylender at 120% p.a. is not the only alternative!” 

Commenting on other aspects of the study, Mr. Ajay Tankha further notes,

“The post on the CGAP blog presenting the complex situation revealed by the fresh data from Centre for Microfinance, CMF’s study on Access to Finance in Andhra Pradesh is not without interest, particularly the use to which the findings have been put by the authors and the commentators. By showing that multiple loaning (just one of the many questionable features of MFI lending) is also indulged in by SHG members, and that there are many diverse sources of borrowing by the sample households, an impression is sought to be created that there was nothing culpable in MFI lending practices.

Some other relevant findings of the study have attracted no comment. Only 17.2% of sample households had loans from moneylenders. As against this 57.3% of households had loans from friends (with interest) and 9.3% from friends (without interest). Further, only a little over 20% of households borrowing from informal sources of various types had loans from moneylenders.

This pattern, also observed elsewhere, gives the lie to recent assertions by leading MFIs and MFI ASSOICIATION that any restraint on the activities of MFIs will send rural borrowers straight into the arms of usurious moneylenders with their three- and four-figure rates of interest.

Another (not unrelated) finding of the study pertains to usage of loans by the sample households for different purposes. It is pertinent to note that only 6% of MFI loans (and an even lower percentage from other sources) is used for purchase of livestock. In 2006, around the time of the first Andhra crisis, one of the founders of the Centre of Microfinance at IFMR sought to make a case for the provision of financial services for activities such as buffalo rearing to leverage economic opportunities available for the poor in the form of public goods such as common grazing lands and “in-home under-employment”.[iv] Almost 40% of ICICI Bank’s 3 million clients were then reported by him to be engaged in dairying. It would appear that the rural borrowers of A.P. have since learned a lesson on the true costs and returns to dairying undertaken with high-cost loans from MFIs.” 

To summarize, the CMF study, while it is a useful study, especially for an overview of happenings in some districts of rural Andhra Pradesh and also the new finding it provides with regard to ‘friends’ being an alternative to the moneylender, it needs to interpreted with SIGNIFIGANT caution for the following reasons and this should be carefully noted by all stakeholders including the RBI and the Malegam committee which appears to have used this report:

First, it is not representative of the AP context as it does NOT cover urban settings in AP, where a large number of micro-finance clients reside and where MFIs have experienced burgeoning growth in the last few years

Second, the extent to which the study can be generalized to rural AP itself is also questionable from the perspective of the 8 districts chosen - as some one who has worked in every district in AP, I can assure you that there are significant inter-district and intra-district differences that the study should have taken cognizance of…

Third, it provides no serious information on the effective interest rates for different sources of finance. As long on that remains uncovered, the study will continue to have limited utility. As all of you would agree, the real key to understanding access to finance are interest rates…otherwise, moneylenders and similar local informal financiers always exist...

Fourth, there is little clarity on how clients made their repayments in terms of sources of income/cash. As long as this remains unknown, the crucial aspect of whether or not clients use (d) a fresh loan to repay another loan would not be known.

Last but not the least, the timing of study is rather peculiar. I am not sure whether a study conducted between June – Oct 2009 or thereabouts (as admitted by IFMR), can be passed off as a fresh study providing information related to the present Andhra Crisis, even indirectly. As noted earlier, the AP crisis unfolded exactly one year after the study was conducted and therefore, presenting it as a fresh study throwing light on access to finance in the AP situation (either on the CGAP blog or at the CMF/CAB 2011 conference) seems rather inappropriate…

Therefore, I would urge the various stakeholders to interpret the study as per its real context – of simply being an access to finance study in some districts of rural Andhra Pradesh, when the bonhomie was on between the MFIs and the State in Andhra Pradesh. I have presented you with some of the (hard) facts and as usual, leave you to make your own informed judgment…about the study and its findings…

---

[i] I do remember that Mr C S Reddy asked for this information on the CGAP blog but I do not recollect it being specifically answered…

[ii] Centre for Microfinance, an academic and research institution, is from the IFMR group, based in Chennai

[iii] Microfinance in India State of the Sector Report 2010 by N. Srinivasan

[iv] Nachiket Mor, “Some Thoughts on Access to Markets as a Strategy to Address Poverty”, Institute for Financial Management and Research, Centre for Development Finance, Working Paper Series, October 2006.