Ramesh S Arunachalam
Rural Finance Practitioner
At almost every press conference, one can hear the CEO of MFIN (Mr Alok Prasad) saying that once the credit bureau is operational, the problems of multiple lending will simply vanish…This perhaps prompted, the popular micro-finance website, www.indiamicrofinance.com to put up a new year cartoon – titled The Slumdog Microfinance Cartoon[i].
I have also heard other microfinance practitioners like Mr Vasudevan, CEO of Equitas (one of the fastest growing and top 10 Indian MFIs) who argues that the credit bureau will completely take care of multiple lending
Let us look at whether this possible…
First, I would like to set the record straight with regard to my views on the credit bureau. I have not spurned the suggestion of a credit bureau at any time. In fact, if one would read my previous (joint) post (with Mr Bhalchander) on the credit bureau (http://microfinance-in-india.blogspot.com/2010/11/proposed-credit-bureau-for-micro.html), it will be clear that all we are saying is that a credit bureau is a good thing but let us not put so much pressure on it as it may then fail. We also said that a credit bureau is not a guarantee against multiple lending and will not eliminate it and there are many good reasons as to why it may not work at all.
That said, and I emphasise that again – as long as client acquisition is through agents, brokers, take over/breaking of SHGs and other not-so-good means and as long JLGs and clients are OPERATIONALLY shared by MFIs and as long as MFIs hold meetings and disburse loans on successive days to shared JLG and clients, the problem of multiple lending will not go away.
Make no mistake about that.
The credit bureau is a data solution but there has to be a physical solution on the ground…Also, a credit bureau gives you data based on what you feed in and there are lots of issues with regard to the credibility of MIS in MFIs and please see an earlier post related to MIS… http://microfinance-in-india.blogspot.com/2010/11/understanding-state-of-management.html
Okay, what then can perhaps make a credit bureau work? In my opinion, there are several things that need to happen and I hope that the RBI sub-committee and the micro-finance industry work together in ensuring that these happen on the ground…
First, for the credit bureau to work ‘The Boards of MFIs’ must be able to re-orient their organizational vision to one of responsible finance - this means they will have to move away from their desire for ‘Super Fast’ unnatural growth and high profits (to gain better valuations in investment and go for an IPO etc) to balanced natural growth and normal profits. Much of the motivation for multiple lending appears to be related to the above and unless that vision is altered, no amount of technology can perhaps prevent multiple lending. Technology was touted as the solution in 2005/6 after the Krishna crisis and you can judge for your self what it has achieved so far…You may want to read the post on MIS given above as well…which clearly shows that even the most basic issues with regard to an MIS still need significant attention in Indian micro-finance…
That said, further, even when the boards take the call, the MFI’s senior management must be able to translate the above vision in action by bringing about changes in systems, policies, procedures, processes, staff attitudes etc. This is very critical as otherwise, ‘intended strategies’ will remain on paper and realized strategies will be very different. It is like what Jack Welch, the famous CEO, commenting on the new breed of strategic planners in the 1980s, once said, “There is no point in developing great plans with lot of effort when you are going to do something else on the ground. Often times, organizations put these well prepared plans in the shelf and lock them up and get around to doing what they are anyway doing”.
Therefore, once the MFI board and senior management have done what they have to do, then it may be possible to check multiple lending provided:
a. Internal control systems have sufficient checks/balances to do so;
b. Internal audits spot multiple lending exceptions, as and when they occur and recommend/ensure immediate corrective action
c. MIS provides accurate branch/field level data both from the perspective of the credit bureau (CB) and also in terms of portraying ground level reality, so that multiple lending can be tracked and dealt with – this is a very critical aspect
d. Field level frontline are NOT incentivised on disbursements and they are also made to believe in and work towards responsible finance - where multiple and reckless lending is viewed as a bane rather than boon for the organisation
e. A related issue here is that MFIs must wholeheartedly decide to adopt green field client acquisition processes and do not indulge in other types of (not-so-desirable and fast tracked) client acquisition methods
f. Bankers exercise appropriate due diligence with regard to multiple lending, as part of their (notional) supervisory role in discharging their priority sector obligations
g. The Central Bank ensures appropriate supervision on the ground, with regard to practices of its (NBFC) MFIs including multiple lending, as part of its on-site and off-site supervision obligations stemming from its non-bank supervision duties
This and much more - all with a view to put Clients and their Situations/Needs FIRST - would have to be done to ensure stop page of multiple lending. Therefore, the idea of thinking that a credit bureau alone could eliminate multiple lending seem very naïve - like the experiences with the previous codes of conduct (which were not implemented on the ground), such a view could result in the credit bureau becoming a red herring rather than actual solution, because, as of now it seems to be distracting the micro-finance industry and its stakeholders from the real problems at hand…
[i] I am merely reproducing a Cartoon found on the web at www.indiamicrofinance.com as an illustration of how the credit bureau idea is being used by the microfinance industry as The Solution to the problem of multiple lending... Under no circumstances, am I trying to belittle any one for that matter.