Where Angels Prey

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

Monday, April 4, 2011

Micro-Finance Agents in Tamilnadu: A New Class of Local Financial Intermediaries at the Grass-Roots?

Ramesh S Arunachalam
Rural Finance Practitioner
I have been travelling in my home state of Tamilnadu and of course, apart from doing my work, I have also been interacting with micro-finance clients, MFIs and staff, agents, bankers, SHGs, JLGs and other stakeholders involved in micro-finance. Here is what I found…Read on…and much of this is on record…
Micro-finance agents, created by MFIs are still active in many districts in Tamilnadu and I, in fact, met a few agents in the last 10 days, who were using repayments collected from clients (and not paid back to MFIs) for further intermediation amongst the people at fairly high rates of interest (excess of 30% in many cases). Some of these agents have also formed themselves into small NGOs/trusts/societies and are trying to access funds for financial intermediation from various sources including MFI funds, politicians, banks funds…and other sources…They are clearly becoming a new class of financial intermediaries at the local level but with no institutional and/or individual accountability…
An interesting incident was mentioned by one stakeholder and confirmed by women in the field…Three Andhra MFIs operating in Tamilnadu apparently had not paid staff their salary for some months after the MFI crisis in AP and some of the key staff along with agents collected money from clients (without giving receipts) and were now using the same money (running into several crores of Rupees, 1 Crore Rs = 10 Million Rs and 46 Rs = 1 US $) as capital for financial intermediation at the local level. The same is being rotated at the local level at much higher rates of interest. The same stakeholder confirmed that as many of the MFIs are not aware of several of their last mile clients (end user clients), they also could not directly collect the repayments from the clients. This also has very serious implications for KYC norms and the traceability of the money at the grass-roots…some thing that I have been crying hoarse for some time now…
Several clients also claimed to have paid a huge fee to agents in anticipation of a future loan from MFIs – which agents had said that they would disburse after the elections (scheduled for April 13th 2011 in Tamilnadu) got over. In fact, one group of clients stated that nearly 800 people had paid between Rs 700 – Rs 1000 as fees to an agent (Kamala) in Salem district to get loans of Rs 25000 – Rs 40000 each from various MFIs, after the elections. Assuming an average fee of Rs 850, this works out to more than 1/2 a million rupees in upfront fees paid to the agent
Coercive repayment is also said to continue and a middle aged client said that staff of one MFI took away her child in the morning in Feb 2011 and returned the child only after she was able to make the weekly instalment payment at night by pledging her ration card (for a fee and for use by another client to get a loan from another MFI) and also selling her rice/rations at a distress price. Still others confirmed that staff have now started sleeping in the villages (and sometimes outside the homes of clients) at night, if they could not collect money from the clients during the day.
I also met a few centre leaders who said that they are breaking up old JLGs and forming new ones at the instance of one MFI, so that loans could be provided to these so called newly acquired clients and not old older clients in other JLGs. Overall, the practices at the ground level do not seem desirable with regard to client acquisition, client preparation and the like and this is such a fundamental and critical issue…
Very interestingly, the micro-finance agents also claimed to be working with the SHG – Bank Linkage model, by taking groups to banks for the 1st linkage. One of them said that they received no commission from the banks but received between 7 – 10% from group members for getting the group a first loan of Rs 50000
Agents also confirmed that bankers are now actively calling them in to help them meet their various targets, including those pertaining to financial inclusion. To reconfirm some of these aspects, I met several bank managers in the same areas and two managers candidly said that since they lacked sufficient staff and were being pushed on targets, they started relying on the agents for bringing in the groups to meet the various targets
One of them even had an interesting observation…the groups brought in by agents typically paid off their first loan within 1 year whereas the loan term was around three years and then, they took the 2nd loan of 4 times the savings – many of these groups accumulate as much as between Rs 30000 – Rs 40000 and therefore receive a 2nd loan of Rs between Rs 120000 – Rs 160000 (46 Rs = 1 US Approximately). Managers also confirmed that several groups do not repay the 2nd loans and that, many of the members migrate to other areas and are not traceable. One manager even said that Rs 40 Lakhs (Rs 4 million) is likely to be written off in the future as the members are not traceable
Yet another startling fact was brought up the managers and they said that Rs 50000 first loan taken is not used towards any income generating activity and that this money sans the commission paid to the agents was used as the corpus for a local chit run by the group members, who divided the interest profit amongst themselves…
Clearly, as far as I can see the burgeoning growth of micro-finance and financial inclusion initiatives, have indeed led to the development of an entire new set of intermediaries – agents – who are best described as a new class of money lenders, especially because of their overall coercive behaviour, the harsh terms that they offer and the strong arm strategies that they employ for collection…I can see some parallels with agents used for personal loans in India, that turned out to be disastrous for many banks
Therefore, it is about time that we as practitioners, begin to introspect with integrity, on what is working on the ground, why or why not and what can be done to salvage the various micro-finance and financial inclusion innovations in India…Otherwise, much of our efforts of several decades could be sadly lost…
I know that many of the proponents of the models may become defensive and try to argue Y versus X and so on. My humble plea to them is to refrain from doing that and rather, take practical steps to enable a serious Nation-wide reality check (conducted by a neutral set of people from Civil Society, with no vested interest or stake) with regard to the micro-finance (MFIs and SHGBLP Models), financial inclusion and other initiatives and the extent to which the ground situation is rapidly deteriorating. In my opinion, I have no hesitation in saying that the current growth, practices and direction of the various micro-finance, financial inclusion and related initiatives is not as was originally desired/planned and if unchecked, these could result in serious damage to the low income economy in India in terms of credit culture, economic transformation and the like…So there is a lot at stake indeed
Make no mistake, the cancer is spreading and spreading very fast and before, it consumes much of the low income economy in urban and peri urban and completely destroys the credit culture, let us do something to salvage the situation. People at the grass-roots need and have a right to access finance and other basic services and therefore, throwing out these initiatives is not the solution. We as a country, need to get the delivery of financial and other services to low income people right and for that, we need to introspect with integrity and not be defensive…
Among other things, this immediately calls for a national strategy and policy on access to finance for low income people, a single supervisory micro-finance authority (created by an Act of Parliament) which understands the nuances and has the wherewithal for SUPEVISING micro-finance and such initiatives, and the creation of a larger ecosystem with enabling services that will help low income people to start, nurture and scale up urban and rural enterprises and livelihoods in a sustainable manner…so that inclusive growth becomes a reality as envisaged by the Government of India
I hope the senior practitioners and all other stakeholders will start on this in full earnest…
Have a Nice Day!


  1. I am happy to note that u have almost exposed naked truth of what is going on under the garb of intermediation for inclusive growth. I have been stressing for decades that PPP model and project based funding institutions would only ameliorate poverty and empower poor to live with dignity.But who cares when exploitation is permissible both by the state and society.DR.S.N.GHOSAL

  2. I am happy to note that u have dared to bring out naked truth about intermediation and inclusive growth. I have been stressing for PPP model of funding institution with cluster and project based funding for empowering poor and amelioration of poverty. But who cares when society and state both join hands to exploit gullible poor.

  3. Ramesh

    This is the state of Mfis operating in Tamilnadu.we need to blame three players, first Government who didnot do their intervention role, politicians and greedy Mfis.

    so smart poor women also will behave like this.

    What happend to Regulator who are silent for many years.

    This is happened due to agressive lending of Banks and Mfis in turn.
    your message is clear but who will correct such worst behaviour of Agent. I think Agent manythings from the MFI staff who go around for job to many mfis who need ethics and morality.

    If you go closely you will see how SHG bank linkage commission are shared by various players, Bankers, Ngos Government officers (Mahalir titam)

    Do study indepth in this matter before the cancer spread to other parts of this country

    e of ee