Where Angels Prey

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

Tuesday, April 12, 2011

Permitting For Profit Companies (Corporates) As Business Correspondents: Lessons for The RBI and Other Stakeholders From The Indian Micro-Finance Crisis…

Ramesh S Arunachalam

Rural Finance Practitioner

The last few months have shown what HAVOC the inability to regulate and/or supervise can do in a field like micro-finance and/or financial inclusion

The proliferation of the decentralized MFI model using different kinds of agents[1] through informal outsourcing arrangements is perhaps responsible for much of the micro-finance mess in India currently. That said, therefore, the RBI must be very careful in pushing through initiatives {like using Corporates as Business Correspondents (BCs)} that it perhaps does not have the wherewithal to supervise and/or monitor[2], especially on the ground.  And for the record, DFIs and banks including SIDBI and others have miserably failed in their due diligence of NBFC MFIs and expecting them to do this with regard to the BC model (especially, after the recent and on-going Indian micro-finance crisis) is somewhat naïve.

The lessons from the present (field level) failure of micro-finance NBFC supervision in India continues to loom large and the RBI must really ponder on (if and) whether such new initiatives are indeed required and worth it for furthering financial inclusion. What I am arguing for here is an unbiased and objective evaluation of the pros and cons in “having Corporates as BCs”, especially in the light of the present micro-finance and financial inclusion field experiences. Everything seems okay on paper including PROs and CONs but when you visit the field and look at grass-roots realities, the problems and risks are totally different and I sincerely hope that the RBI does initiate such an exercise before facilitating large-scale implementation of these and other new initiatives for financial inclusion

While proponents of the model may claim many advantages with using Corporates as BCs, the risks are many and plenty too and I attempt to outline some of these here[3]:

First of all, there are huge conflicts of interest because a strong “Corporate BC - Bank Tie Up” could push unnecessary products onto the (vulnerable) people in garb of financial inclusion. Cross-selling of products is a huge aspect that cannot and should not be discounted and I can provide numerous examples from the India experience with regard to financial services

Second, Corporates tend to adopt models similar to the decentralized model that many NBFC MFIs are currently using and that is fraught with problems as has been pointed out with clear evidence in many of my previous posts – If anyone from RBI were to travel with me deep into Tamilnadu, AP, Karnataka, West Bengal and Orissa, I can VISIBLY show them what havoc “informal” outsourced micro-finance agents, solely focused on growth and profit, have (are) caused (causing) on the ground. I am not sure that there is a GOOD case for a Corporate BC category as that could result in formalizing these informal micro-finance agents – who are sure to picked up by the Corporates, who lack the last mile connectivity and familiarity with financial inclusion, in the event of them (corporates) being allowed to function as BCs. That could prove disastrous and I hope the RBI looks into this risk carefully

Third, with any initiative, we need to ask, what is the purpose and I am not sure that the outlook on BCs is all that clear. Financial inclusion is a must and a fundamental right but the methods used to achieve financial inclusion also need to be carefully considered as otherwise, the efforts may turn out to be counter productive. The crisis in AP and the unfolding problems in few other states are a great reminder of what can happen when the methods go wrong

Fourth, and here in lies the primary risk with Corporates – if to include some one, I provide them access to a loan but with the rider that they also buy my (group companies’) fertilizer or any other product, then, I am not sure that this is fair financial inclusion. This is one simple example and I can provide numerous examples from the financial inclusion space with regard to extremely literate (but vulnerable) people who have been forced to buy products that did not need in the first place. Many of them even considered approaching the Banking Ombudsman but did not do so because of the high perceived transactions cost in doing this. And if this is the case for literate and knowledgeable people, who are used to reading fine print, imagine what can happen to real vulnerable people at the grass-roots.

Fifth, the lessons from the personal loan saga of 2005/6/7 are still fresh in memory where many customers did not even receive their agreements and were not in the knowledge of the loan terms and conditions (usually in fine print and/or filled in subsequent to getting the signatures and sent much later to the customer etc). This happened primarily because (Corporate) agents of banks for personal loans were solely focused on fast and indiscriminate selling personal loans to people to make huge profits – today banks have almost withdrawn from the personal loan market due to the high levels of delinquency

I really hope that the RBI learns lessons from the on-going micro-finance crisis involving NBFCs, the past personal loan saga of 2005/6/7 involving (corporate) agents of banks and other such failures in the larger financial sector in India.

The case for financial inclusion is always a sound one but the risks in methods employed for financial inclusion must also be carefully weighed and addressed as otherwise, all our efforts could turn out counter productive…

Have a great day!

[2] This is a genuine concern and the intention is not to offend any stakeholder including The Central Bank. I hope my views are taken in the right spirit! Thanks
[3] While the Bill and Melinda Gates Foundation paper cites some of the serious risks in Chapter 9, I am unable to understand the easy manner in which they explain away some of these very serious risks. I am also deeply concerned that the risks have been more mentioned, rather than dealt with in a comprehensive fashion.

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