Where Angels Prey

Where Angels Prey is a novel by Ramesh S Arunachalam. Please refer to www.whereangelsprey.com for more information

Friday, March 25, 2011

Legal Notices to Delinquent Clients and Insolvency Petitions by Delinquent Clients: Where is The Indian Micro-Finance Sector Really Headed?

Ramesh S Arunachalam
Rural Finance Practitioner

It is raining (legal) notices in the Indian micro-finance industry. Please see the enclosed attachment below (Exhibit B) and it is the notice issued by one MFI to a client who owes it Rs 810 (about 16 US $). While I am not sure of the number of clients who have been issued such notices (authoritative sources however put it at around 15000 clients at least), I am really appalled by the behaviour of MFI field staff as evident from this e mail conversation between two fieldworkers of MFI 1 and MFI 2. Read on…Exhibit A…below
 As the e mail (in Exhibit A) suggests, clearly, what is happening on the ground is neither financial inclusion nor poverty alleviation. It is organized money lending as Dr Y V Reddy has remarked.
From the above attachment (I have the originals), it is very clear that codes of conduct don’t work on the ground – much to the chagrin of MFIN and/or Sa-Dhan. Please see adjoining piece, which enumerates some of the reasons for this. The above attachment (Exhibit A) even talks of scars on the face of the clients husband and police complaints and I am not sure that this is the type of financial inclusion that we all wanted in the first place…I leave it to you all to judge for yourselves…
And I do have some unanswered questions here:
a)      Why did the 7 MFIs lend to the same client?
b)      Where was their due diligence? What about the correct lending processes and methodologies that many of them claim?
c)      What about SIDBI and/or banks? Did they not spot this in their field visits?
d)      What about the rating agencies? Did they not spot this and note it in their reports?
e)      Where are the SROs and many of the MFIs are members of either Sa-Dhan or MFIN? What are these associations doing? Why has self regulation not worked?
f)        Is this the inclusive finance we want?
g)      And finally, this is not AP? There is supposedly no govt interference in Tamilnadu in terms of a law or bill. So, how come this is happening? 
h)      Will someone help me find the answers please?

Please also see the legal notice sent by an MFI to a client who owes it Rs 810 – Exhibit B and over 15000 such notices are supposed to have been sent to clients. The notice is in Tamil but the contents are simple: Please pay up or we will take legal action to recover Rs 810 from you...Juxtaposed with Exhibit A above, it is clear that Micro-Finance is now becomming organised and registered money lending.

·         When I went through the 1st CGAP ToT course on Delinquency in 1998 (With Mr Sanjay Sinha, Mr Ron Chua, Mr Jith was there as an observer and several others), I remember Ms Brigette Helms, Ms Janet and Ms Joyita Mukherjee of CGAP telling us regularly, there are no bad clients, there are only bad loans and institutions alone are responsible for delinquency
·         I would like all of you to remember this…and going by the number of notices and tough measures employed for collection, there seem to be a lot of bad loans that have been made in the Indian micro-finance sector. That is the REAL growth story of Indian Micro-Finance folks. Read on…

From the 2nd attachment (Exhibit B), it is clear that MFIs are facing serious collection problems in places other than Andhra Pradesh (and the letter alludes to the member neither attending meetings nor paying back properly) and I really hope that people are listening…I have already put out several e mails in this regard and have many more in possession that can stand scrutiny in a court of law.

Very interestingly, I also came across a legal notice by a client’s lawyer to 13 MFIs stating that the borrower YYYYY had filed for insolvency and was unable to pay back the 13 MFIs – Exhibit C

The above raises several issues:
a)      How did these 13 MFIs lend to the same client?
b)      Is this the real method of larger outreach in Indian micro-finance?
c)      What were the banks and SIDBI doing? What were their officers doing?
d)      What were the associations doing?
e)      What were credit rating agencies doing?
f)        Is this what we want in inclusive finance?
g)      Given that many clients are in the process of doing this, where is the Indian MF sector headed?

From the 3rd attachment (Exhibit C), it is clear that the inclusive finance paradigm used micro-credit to multiple lend to same person several times. The attached notice is to 13 institutions and again, I want people to tune in please. There is strong evidence that clients are starting to do this more and more…
Honestly speaking, the growth story of Indian micro-finance will soon be known as one of multiple lending to shared clients in (same) JLGs, who lack the income sources to repay multiple loans. Now, is that not a sub-prime like situation? Was not Dr Y V Reddy, former RBI Governor, correct in stating that MFIs are registered money lenders and micro-finance is India’s sub-prime?
I leave you to judge things for yourself…
Have a Nice Day!


  1. WHAT DOES a LENDER DO to recover the loan? The small lender does'nt have so much funds that it can write off the loans.Yes financing one borrower by 6-7 MFIs is absurd and I dont know who taught them to do so; may be the target orientation and the competition.This has to stop forthwith.In banking the borrower is made to collect NO DUES certificate from all bankers in the area and his shoes cry for replacement. But the MFIs are conveniently financing the same borrower without bothering about his credit absorption and the loan repayment capacity.But once having given loan I dont think any MFI can afford non recovery of the same.The best way of recovery is to contact the borrower on given time.In case of some problem a 3-4 days time can always be given in Indian context(I hope BASEL commitee is not listening). However it is very essential to judge the credt absorption and repaying capacity of the borrower before lending in order to smothen the recovery process-S.S.Sangra

  2. Dear Sir

    Point well taken and a legal notice is perhaps better than forcing repayment. But let us get to the fundamentals. Why did 7 or 13 MFIs lend to the same client? That is the sole genesis of the problem and that needs to be tacked head on.

    Also, large numbers of legal notice to recover small amounts may also adversely affect the MFI bottom line and I am not sure that this route will yield results


    Warm Regards


    Warm Regards


  3. And from the same place SALEM, women members of a Self-Help Group found our organisation (thanks to internet ) and had been calling us to provide microfinance...

    C.Peter Rex Charly
    New Life

  4. Dear Mr Peter Charly

    That is fine but pls make sure how many loans people have before you also give them a loan as otherwise, you may land loosing money. I know of an MFI that could not pay a wholesaler Rs 1.2 crores because they gave everyone who approached them a loan and without due diligence. Thanks

    Warm regards


  5. Ramesh, you know very well that the group was supposed to underwrite the loan and not the FO/MFI. It is a group failure which allowed someone to be a member who had so many loans. Perhaps part responsibility could be attributed to the MFI of not forming right kind of group. Having said that, we cannot expect the FOs with current profile to underwrite low income households or expect MFI's to recruit researchers to understand the complex cashflows of these households to underwrite. Even credit bureau's have limited usefulness in group lending methodology. Formation of robust groups is the part solution but then it is a motherhood statement !

  6. Dear Colleague

    I agree and that is why client acquisition is very important. Please see my views on the same and related issues




    Warm regards


  7. Dear Mr. Ramesh,

    My first reaction to the news of an MFI sending legal notices to 15,000 clients is that this is not true. I hope you have done the necessary due diligence before posting this article.

    From a client perspective, most of the clients are barely literate and I think most would panic when they get a legal notice. I think many will promptly pay the delinquent loan by some means or the other. So in a multiple lending/borrowing situation this tactic may actually help the MFI that sent out legal notices recover its money before other MFIs. So in the short term it seems to be a brilliant tactic by the MFI.

    While the MFI is within its legal limits to send legal notices, but mass mailing 15,000 notices has risks and could lead to unintended consequences.
    Many people may see sending legal notices to poor women as an affront on the dignity of women(that is core to microfinance) and also to traditional Indian values. Thus this move may get attacked from the left and the right.

    What if some women resort to desperate measures and they/their families take this matter with local politicians or government officials? This may bring in huge amounts of adverse publicity and trigger strong action by the authorities.

    Overall this move may increase the reputation risk of microfinance endangering the whole sector.

    Thus I think it would be wise on the part of the MFI to quickly recall the notices before things go out of hand. At the same time they should work with other MFIs in jointly restructuring the loans to the clients who are delinquent. The path is not easy, but knee jerk actions by individual MFIs threaten the whole sector.

    As we have seen in the middle east, an act of desperation by one individual has sparked of a whole revolution across countries.

    I hope you will pass on details of these legal notices to the MFI Networks so that they can also recommend appropriate action keeping the sector's long term interests in mind.

    Bhalchander Vishwanath

    The sector could be attacked from the left and the right.

  8. I agree with your point of view that there had been blind lending by MFIs. There were many instances of "Social Mission" been hijacked? However not all can be blamed on MFIs. In case you find one case of forced repayment been reported across all forms of media, there are thousand cases where clients have praised MFIs and worship MFIs but alas such cases do not get glorified. Can you please come out with some article in support of MFIs? Accusing MFIs is easy and also correct to an extent but there are Lakhs who have benefitted too. But alas no one brings out those positive aspects and only accuses MFIs in current scenario. It would be loss of poor who would have to again rely on money lenders. Ultimately it would be banks that would lose money due to heavy defaults. Sector looks up to seniors’ like you for restructuring the sector in positive manner.