Where Angels Prey

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

Friday, April 22, 2011

Effective Interest Rates and Other Practices in Indian Micro-Finance: It Is About Time That RBI Conducted A Nationwide Study

Ramesh S Arunachalam

Rural Finance Practitioner

The issue of interest rates has always been hotly debated and I, for one, am not for capping interest rates of MFIs as servicing the last mile in micro-finance is indeed costly. That said, we however need to be absolutely transparent about interest rates in micro-finance and here is where I really appreciate the work of MF Transparency. However, as I travel through the field, my sense has been that there is a huge difference between intended and realized interest rates (both for nominal and effective interest rates). Part of the issue has been the use of the agent led model but even otherwise, I believe that there are huge differences between the intended and realized interest rates and please also recall that the media (in AP) had reported huge effective interest rates for some MFIs, after they had submitted data to the AP government, which were later explained away using the classic data error/data conversion concept.

Please recall that the RPCD division of the RBI did a great study on interest rates and the MFI model in Orissa in 2006. Therefore, I would like the RBI to do a national study on interest rates, agent models, shared JLGs/clients, on-going/prevalent multiple lending and the like – unless, it is done by the RBI, establishing their prevalence would be impossible and without that, corrective action cannot be taken. I would also urge RBI to video record the data and documents so that, there is absolute transparency and clarity on the ground situation. Otherwise, the MF industry, will continue to be in a denial mode which is okay but will not help us tackle the problems at hand.

Please read the tables on interest rates at the end of this post, taken directly from the e mail sent by APMAS and being used with their permission. I did not put up the individual calculations earlier but am doing so now (after randomly verifying some of the data which have been correct) and I have the exact file sent by APMAS via its e mail for proof. While I am no expert on calculating interest rates, I have cross-checked the calculations and they seem correct prima facie, to the best of my knowledge. Experts globally can use the same data set and come to their own conclusions. As always, I have protected the individual identity of the MFIs as well as their clients but that is also available for verification by RBI or MoF if required

Before, I sign off, I would like to relate a story from the Wizard of The Id

There was a king who was at battle with the enemies and one day, he was sitting in his chamber, when a soldier walked in and said:

“Your highness, Sir Rodney has come in with the Battle Report”

The kind told the soldier:

“Send him inside”

Sir Rodney walked into the Kings Chamber and as he was doing so, the King told him:

“Before you start sniveling you mush face, let me remind you of an old Roman custom. Bearers of Good News were rewarded with Wine and Wealth. Bad News brought unmentionable suffering to the bearer. So what is the Battle Report”

Sir Rodney to The King:

“Your Highness, I am tickled pink to tell you that your worthless fiefdom, mucky swamplands and unruly peasants are now the Responsibility of the Enemy”

I hope that the moral of the story is clear and the Indian micro-finance industry and its stakeholders begin to act to rectify the fast eroding ground situation…

Have a Great Week End!


  1. 83 MFIs in India have published their current prices at www.mftransparency.org. Thus, we do have current data to study, not just data from five years ago. The data at MFTransparency is also very carefully separated by type of expense, and the prices are systematically calculated for all products of all MFIs based on actual repayments schedules of loans going to real clients. We encourage all to visit our website and review this data, and to read the 60-page analytical report we published on India to learn more about India pricing.

    Chuck Waterfield
    CEO, MFTransparency.org

  2. Dear Chuck

    Thanks for this and the data used in the post above is from the APMAS study which I have personally also verified in the field and the study was done in later part of 2010

    Please note that there is a huge difference from the reported prices to actual prices on the ground and I have video taped the documents and also collection receipts and that is why I am asking RBI to conduct a national study because as the Central Bank in India, they have the wherewithal to do it nationally and say it.

    The APMAS study is somewhere in later part of 2010 and the RBI orissa study was 2006. I have not used data from the RBI Orissa study as it is outdated.

    Also, My field level data is just 6 months old and ongoing and I have even video taped the conversations.

    Let me make it clear that I am not casting any aspersions on your work, In fact, I think that what MF transparency is doing is excellent but let me also tell you that, what is happening on the ground is very different. Make no mistake about that and pricing cannot even be verified in many MFIs that use agents in a big way.


    Warm Regards


  3. Dear Chuck

    Where can I find the exact steps followed in collecting and validating the pricing data from the website. Is there a diagram and/or series of sequential steps with descriptions? I am sorry but kindly guide me to this. Also, would be grateful if you can tell me whether field level validations of reported data were undertaken as there are serious differences between what is stated and intended to be charged and what is actually collected as interest etc. Please visit Mr Al Fernandez's post on the CGAP blog a few weeks ago and he makes the same point as do several others and I have personally seen this on the ground


    Warm Regards


  4. hi ramesh, i have been involved in the MFT work in India and know that the data put up there is correct. i also get lot of field level information of the interest rates and other charges charged by the MFIs and atleast as far as most of the NBFC-MFIs are concerned i can say that the data in the MFT is correct. please note that the MFT data is the interest rates as being charged by these NBFC-MFIs as on date and not the past rates.

    hence if you have any information of any NBFC-MFI whose rates displayed on the MFT is wrong vis a vis the information from the field, then please do bring it to our notice and we will study the same. but if you are unable to come back with any specific cases, we would have to assume that the MFT data pertaining to the NBFC-MFIs is accurate. again to re-iterate, the MFT data is the rates charged currently by these NBFC-MFIs and hence pl do not compare it with old loans but only with current loans.

    i wont be able to comment on non-NBFC MFIs whose data is reflected on the MFT as i am not aware of the same.

  5. Dear Vasu

    As usual, thanks for your comments and appreciate what you have said. Let me correct your factual misrepresentations – I have never said MFT data is incorrect. I would urge you to re-look at my post. On the contrary I have appreciated them for their efforts. I hope you stand corrected on that.

    My basic points were:

    There is a lot of data to contrary that I have found from field as far as interest rates are concerned and apart from my own observations, field data from AP (APMAS study with original excel sheet) done in the later half of 2010 clearly show higher interest rates on the ground and in variance with what has been published at the MFT website.

    Now, you say that MFT data is applicable to current loans and I am not sure what that means? You also mentioned on the telephone that the current loans would be loans disbursed from Feb 2011 but this would not apply to past loans being repaid in the same period – meaning that all loans disbursed before Feb 2011 would have higher interest rates.

    I would like to tell you that, I have higher interest rate data for loan repayments made in Jan, Feb and March 2011(and while I need to check their disbursement, I think many must have been disbursed in 2010, some in early 2011 and some even in 2009 for loans with longer tenure). Now, I may accept your explanation of MFT data being applicable to loans disbursed from Feb 2011 at face value but would like to point out there are no qualifiers (with regard to this) clearly discernible from the MFT website. I may have missed it as well. Also, these loan repayments would have started only in march 2011 and that makes your assertion rather weak…

    Further, the above assertion by you is also a rather confusing argument - assuming it is true, most MFIs would have almost a very large proportion of their loans having much higher interest rates as they may have been disbursed before Feb 2011 (and many of them in 2010, some in 2011 and some in 2009 for longer term loans). If that is true, then, I would state that, these MFIs are still charging interest rates that are different and higher in a majority of the cases from that published in the MFTY website

    That said, let me make it clear that the MFT data is just the first step towards transparency and it needs to be validated (by a neutral authority in India) at the field level where there are huge problems of agents, frauds, ghost loans (all in the official financial statements of MFIs) and the like. That is what I wanted and I specifically requested RBI to do so as they are the best positioned to do that. I am sure you and MFT would have no objection towards that. And pending that, and given the happenings in the field that I keep seeing and recording, I would be reluctant to accept your arguments.

    Finally, two other issues: a) as a policy, it is my job to highlight honestly issues seen in the field and as I have always maintained, I will provide/highlight specific cases only to the RBI, if and when required and requested by them. I am committed to doing that and will provide this data to the regulator if required and if requested by them. This is an open public commitment. Indeed, that is why I am asking them to study the matter…in proper detail; and b) Also, I would like the whole process of collecting the interest data as per the MFT exercise to be transparently described as a step by step process so that people like me can better understand the process

    Warm Regards


  6. Dear Vasu

    As a follow-up to my comments above, I have a request. Can you share for everyone's benefit, the process that you as equitas followed for providing data to MFT. That would in fact, clarify much of the issues and serve to educate people like me better

    Look forward to learning from you about the process. Apart from my comments above to Chuck where I request this, I have also sent him two mails specifically requesting this information but am yet to hear from him. In the meantime, it would be good to hear from you, as a supplier of information to MFT about the process and I am sure that Chuck will send me the MFT version as well. This should help all of us understand the process better and I am sure that many of my own apprehensions may be removed when I get to understand the process better

    Thanks and look forward to hearing from you

    Warm regards


  7. hi Ramesh, the process we follow for submitting data to mft is foll:

    1. we provide details of our vairous loan products including the 'current' lending rate, various charges, security deposit if any etc to mft
    2. along with this, we also give the number of clients who are covered by each of the above products
    3. along with this we also send scanned copies and courier physical copies of pass books of a few sample clients who have availed the above different type of loans, for MFT to verify our information with the copy of passbook of the clients
    4. post this, MFT calculates the APR (annual principle rate) which is the equivalent of our IRR i.e the reducing balance interest rate and commuicates the same to us with the calculations.
    5. we verify the calculation and if it looks correct we confirm back to mft and post this they publish it on their website
    6. if we make any changes in our lending rates for any of the products, then we are required to inform MFT immediately (within atleast 30 days) and follow the same process as above to get the new rate published on the website of mft.

    the question can be asked, what happens if an MFI increases their lending rate but fails to inform mft. it would of course mean a violaiton of the agreement we sign with MFT where we commit to inform rate changes immediately. also all the mfis who operate in the market know each others' rates thro MFT site and if any of us find other MFIs offering higher rates but nto reflecting in mft website, we would naturally raise it with mft who wouldl then take it up with the mfi concerned and correct the data

    thus it works on each m fi being truthful in submission of data on timely basis to mft as well as the competitive spirit amongst mfis acting as a check against mal practices of any mfi.

    as u know there are no statutory requirement as on date for publishing true lending rates and this mft represents the best possible process as on date. someday if there comes into existence a statutory body with statutory powers replacing mft then natureally it would shift to them from that time onwards