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?
· 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!