Where Angels Prey

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

Monday, April 18, 2011

First Credit Rating, Then Social Performance and Now Seal of Excellence: Time For All of Us To Focus on Ground Realities…

Ramesh S Arunachalam
Rural Finance Practitioner

A friend altered me to a paper being presented at the forthcoming micro-credit summit on a seal of excellence for micro-finance.  I am simply appalled at the number of instruments that key stakeholders in the Indian micro-finance industry seem to be pulling out of their hat to justify the existence and good work done by MFIs...

Surely, it is about time to set the record straight...Read on...

Credit rating has failed to provide an accurate picture of what has been happening on the ground for various reasons – during the period, 2006 – 2009, two of India’s major credit rating agencies gave the highest governance, management and systems rating to an MFI that subsequently got listed. The also argued that the presence of a board comprising of eminent people surely translated to good governance. They were sadly mistaken as it was during this period, that several not so good practices occurred in the same MFI including the granting of a loan by the MFI to its founder MD of Rs 1.6 crores to buy shares in the same company, multiple lending by the MFI and several other aspects. That a nominee director of SIDBI on the board of the company permitted the granting of a related party transaction (above loan) silently is also worthy of mention and the fact of the matter is that most credit rating assignments at that point in time were sponsored (and/or requested) by SIDBI. It must also be mentioned that apparently, the same company, offered ESOPs to several independent directors including nominee directors and again, this practice was neither pointed out nor seriously questioned by the credit rating reports. In fact, there were a huge number of apparent not-so-good practices in the above company – Prof Sriram highlights much of this in his paper in EPW, June 2010 and I have also written about it in detail. That the credit rating reports did not point out these critical aspects surely undermines their objectivity and utility.

The larger point I want to make is that the incentives for credit rating agencies were inappropriate – they were so structured as to keep recommending increased amounts of loans to MFIs and this can be seen in several prominent cases as I have analysed over the last 10 years. Also, at least in India, there was a huge conflict of interest in terms of staff/boards of directors in the credit rating agencies having close relationships with many of the MFIs being rated. Yet another aspect was that, the major credit rating agencies had sister organizations or institutions/divisions in the same Corporate group that were involved with capacity building in micro-finance and therefore, it suited them to recommend higher loans with capacity building. I have done an analysis of several credit rating reports and also followed up who actually did the capacity building – the results are rather startling. And last but not the least, that credit rating could not point out the prevalence of many bad practices including use of agents, ghost clients, frauds and the like (when the MFI annual reports themselves acknowledged these) is a clear vindication of what I have been saying above

Likewise, social performance is a great concept on paper but sadly does not exist on the ground. It is a wonderful to talk about in a workshop in Mumbai or Delhi or Barcelona or Washington but let us get the facts clear – there is nothing like that in operation in India and make no mistake, the ground situation in several of India’s populous micro-finance states including AP, Tamilnadu, Karnataka, Orissa and West Bengal is far from that…

Therefore, using so called tools of social performance or seals of excellence - merely to justify the existence of such (and especially, For-Profit) MFIs - that sound GREAT on paper but are rarely implemented (or visible) on the ground, certainly does not befit the status of a great industry like micro-finance. And it is about time that we start asking the question as to why, many so called great concepts (like social performance or even principles of Corporate Governance etc) are not implemented on the ground and in the field rather than creating newer and newer tools that may have lesser and lesser relevance to field realities…

And before I sign off, my humble plea is as follows: “The micro-finance industry needs to tackle issues head on and ensure that low-income people get access to a wide range of appropriately designed and delivered high quality financial services at affordable costs. And this does not have to come from MFIs (and For-profit MFIs) alone – and this is a point that needs to be noted carefully and appreciated by various stakeholders like CGAP, MCS and others. Therefore, let us stop creating tools to justify existence of MFIs and rather focus on building a REALLY transparent client oriented micro-finance industry on the ground…that alone will help bring back glory to the beleaguered micro-finance industry...in places like India as well as globally...

Have A Nice Day!


  1. hi Ramesh, you have a point when u say what is the point in creating more and more standards of measurement when the ground level realities are bad. but your blog leaves one question unanswered.

    let us assume there is an MFI which is doing exactly what u conclude your blog with viz: "really transparent client oriented micro-finance company on the ground". let us say that all the policies and practices of this MFI are absolutley in tune with the above statement and the MFI feels completely justified that it really is very good in all aspects.

    the question is, how would anyone else other than this MFI know this? what should the MFI do to make everyone else understand that this is a really good MFI? in the absence of a standards against which this MFI is rated and graded by an independent agency, how is this MFI to get everyone else to realise its goodness?

    would request your suggestion

  2. Dear Vasu

    Thanks for your comments and appreciate it.

    It seems that you are missing my point still and let me try to reiterate

    I am not against measurements per se but rather against flawed and unreliable measurements.

    The proliferation of the decentralised model has meant that many MFIs do not even know their clients. This being the case, they are in no position to provide data on so called social performance or seal of excellence measures…

    Whether it is Agent Jayalaskhmi of Vellore or Agent Kamala of Salem or other Agents in Karur/Namakkal including Agent Amulu and several hundreds of agents, they have complete control of the field areas. The problem is fast spreading and in my opinion, MFIs have/are losing control and many of them have no touch with reality…That being the case, no measure would be meaningful as the data would have to be simply made up then. Tell me, when MFIs do not know the last mile end user clients, how can they report on social performance. When their KYC data is all wrong, then how can they report on this? I have so many video clips of these agents and that is why I am repeatedly saying that ground level problems – presence of agents, multiple lending, ghost clients etc - have to be first sorted out. I have been requesting the RBI to conduct a large national study in this regard…

    Second, I have no faith what-so-ever in measures brought up by many credit rating agencies and industry insiders, especially in India. When you compare the rating reports of 2005/6/7/8 with the problems on the ground for the same MFIs and also with their published annual reports, you will clearly see the huge conflicts of interests. You will also see the same when you look at who worked on capacity building at the rated MFIs, post rating and my study on that is very revealing. In a significant number of cases, the rating agency proposes a higher loan and also recommends capacity building and guess what, one of the group and/or related companies of the rating agency have been involved in the capacity building. No coincidence by any means.

    Third, when the staff or directors in rating agencies and sponsors have had a close relationship with the MFI being rated, it has always reflected in the rating grade. So, there again, there are huge conflicts of interests that need to be dealt with first

    Thanks and I will post separately on the measures that can be used to gauge transparency in a separate post

    Thanks Vasu and appreciate your comments

    Warm Regards


  3. good outcome focusing on credit rating agencies for their survival.

    In fact the lenders are more responsible for the crisis

    Let all can come to field and learn than preaching to mfis

  4. i take the point that when many MFIs have no ground level reality measuremnets are the last concern. agreed. but this is not giving any suggestion for going forward but rather merely reiterating a problem over and over again. we need to move on and focus on solutions rather than highlighting problems which are present. the seal of excellence or such other measures seek to address this by listing out various parameters on which MFIs need to be measured and the final measure reflected in a score which then tells the world the status of that MFI. if it is not the seal of excellence or credit rating or anything else, then what is it that we need to have to distinguish between good and bad MFIs? in the absence of any such rating model, all MFIs are tarnished with the same brush. suggestions on the existing measures to improve them is welcome otherwise a new measure is also welcome but merely reiterating the problem without a constructive way forward does not lead the sector forward

  5. Dear Vasu

    Thanks and your points are well taken and as usual, I appreciate your time and efforts.

    Before any measure is meaningfully applied, we need to be sure that the data is from the real client and not presented by the agent. That safeguard has to be built in first

    For this, the Indian MF industry must come clean on the use of agents and use of shared JLGs/clients and the multiple lending to them. Only then can solutions be evolved and as of now, I see the present crisis deepening because of the denial attitude in many MFIs. For many MFIs that deny the same, I sure can show them documentary evidence and I have refrained from putting out names of individual MFIs.

    That said, I have suggested some solutions with regard to credit rating, credit bureau etc but all of this can be meaningfully done only when the base is SOUND and TRANSPARENT. Please look at the solutions given here...

    I would also like you to take a look at the following and tell me how can one assume correctness of data in agent led models. I have documentary proof of dead people being used in KYC documentation to provide loans to others in Tamilnadu and many things like this, agents are doing...and I have highlight the same already

    Read on...



    Warm Regards