Ramesh S Arunachalam
Rural Finance Practitioner
The recent budget announcement that Rs 100 crores of equity is to be channelized through SIDBI is an excellent proposal for which the Hon Finance Minister of India must be wholeheartedly congratulated. That said, there are several lessons and issues that need to be considered while/before setting up this fund and facilitating equity investment in the nascent and small MFIs through SIDBI. I hope that the concerned people ask the right questions and do the required home work before establishing this very important initiative. Again, the purpose here is not to be critical of any institution, but rather to learn valuable lessons from the past, which is perhaps a great teacher in some ways...Read On...
First, SIDBI's record in carrying out the obligations of being an equity investor is rather poor and the case of SKS Micro-Finance Ltd is an excellent example of where a senior SIDBI officer on the board of SKSML permitted the founder/promoter to lend a substantial sum of money to himself to enable him to buy shares of the same company (SKSML). This huge related party transaction can be viewed as the starting for the current problems in Indian micro-finance. A related aspect is the reckless and mindless growth of the Indian micro-finance sector between April 2007 and March 2009, for which SIDBI has to hold itself hugely, if not solely, responsible – as the following blog piece suggests and reveals with solid data, SIDBI played a no mean role in encouraging this burgeoning and irresponsible growth of Indian MFIs.
Second, the aspect of providing equity does not stop with merely making the investment and especially, when you talk of valuable Government of India money being challenelised. Along with it comes the solid obligation to ensure that the MFIs that are recipients of this ‘special’ equity investment are indeed worthy of the same and continue to stay worthy of the same – in terms of their practices in several areas including governance, management systems and the like – and are more importantly held accountable for their accessing these privileged funds.
Third, given the past experiences where related party transactions and other not-so-good practices were perhaps authorised by institutional nominee directors, it becomes important to strengthen and streamline the processes by which such nominee director’s report back to their parent organisations. It may be useful to ensure that they mandatorily write physical reports and submit the same as part of their obligation to serve on the boards of these MFIS and there must also be a process of vetting these reports and making the directors accountable. Such directors must also not sign minutes with regard to issues that have not been deliberated – this is a very common practice in the Indian micro-finance sector
Fourth, there is a tendency for such directors to encourage vast amounts of borrowing from the parent organisations and this again causes the devastating supply side growth. In short, these officer nominee directors appear to be more loyal to task of encouraging greater loan off take from their parent organisation by the concerned MFIs (and thereby causing huge supply led growth) rather than ensuring appropriate growth of the MFI commensurate with their systems and governance and actual client demand on the ground. This conflict of interest must be guarded against in some manner...
So these are some of the key issues that need the attention of the concerned people establishing this fund and I would be grateful for their kind attention to these matters as otherwise, we will again see the use of equity resulting in a lot of problems for the Indian micro-finance industry and its clients...
Other key lessons and issues relating to this can be found in the following posts...