Ramesh S Arunachalam
Rural Finance Practitioner
As I continue my field visits and learning in the crisis ridden micro-finance industry, I fondly remember what Prof Malcolm Harper has always said to me – failures and crisis teach you a lot as well and I am determined to make the most of the learning from the present crisis. And of course, I am trying my best to share it with all of you!
As I have been interacting with various types of agents and especially, center leader/group leader turned agents, I think I have begun to understand the evolutionary process with regard to use of agents and I attempt to describe these below. Read on…
Desire of Many MFIs To Rapidly Build Scale: First, at least initially, the desire to use center or group leaders as agents seems to have emanated from the desire of MFIs to build scale quickly in delivery of micro-finance services to low income people. And many MFIs did get carried away without thinking about the kind of impact that these agents could have in the long run. As one MFI staff put it, “We wanted to disburse several crores[i] of rupees on a daily basis and there was a lot of pressure from the senior management and also bankers/equity investors. We were told that if we show exponentially increasing disbursements, we would be able to attract more equity capital and also go in for a large IPO. Of course, stock options had by then become the standard way of compensating staff and this skewed the incentives all the more…”
Consistent Pressure on MFIs to Reduce Interest Rates: A second reason seems to be the pressure to reduce interest rates and this is something that I have always been saying – ‘servicing the last mile is costly in micro-finance and any attempts to force interest rate reductions will cut out important controls and may even force MFIs to adopt short cuts’. And that is exactly what seems to have happened. The drive for artificial interest rate reductions and the constant pressure on MFIs to achieve this seems to have resulted in several things: a) omission of important client level and other controls at the last mile; b) the proliferation and use of the decentralized model in its ultimate form – the agent led model of micro-finance; c) further reduction of engagement with client (which was a significant one even in the original Grameen adapted to use in India); and several other aspects that favoured decentralization of micro-finance operations.
Adoption of The Profit/Value Maximization Syndrome by Many MFIs: A third reason appears to be the preoccupation of MFIs with the efficiency and value maximization syndrome - as part of the commercial micro-finance movement over the last 4 years – where cost leadership (at scale), profit maximization and shareholder value enhancement became the order of the day, courtesy equity investors and others including bankers. According to one senior manager at an MFI, “We started to look at ways to increase case load of staff significantly and this meant that we reduced the duration of center meetings, where we conducted these directly. Then, we realized that we could do better by outsourcing it with some quality checks and that is how the center/group leader agent came in. As these efforts expanded, in some cases we faced serious delinquency problems and to counter that in an effective manner, we used local opinion leaders and these strong men/women later became agents themselves. And then, there was no real exit and loan after loan had to be made and as long as the problems did not show up, we were not bothered. The use of agents soon was picked by many MFIs and in fact, that used to be the strongest and fastest way to the rapid burgeoning growth that the micro-finance sector in India wanted. Multiple lending and high indebtedness became natural phenomenon in the agent led model of Indian micro-finance.”
Thus, while there could be other reasons for use of agents, the above aspects of “building scale quickly”, the “pressure to reduce interest rates” and the “desire to be a cost leader and maximize profits and value to shareholders” look like the major ones that seem to have pushed the Indian micro-finance industry to – using agents in a decentralized model – the brink.
While the question of whether and how the Indian micro-finance industry can be rescued from its present use of (notorious?) agents[ii] always remains, it is also very clear that the industry is currently on a pathway towards long term disaster…And let us hope that the concerned stakeholders begin to introspect with integrity and quickly attend to rapidly spreading agent related problems on the ground. And the eternal optimist that I am, I do believe that the Indian micro-finance industry has the innate character to change its current course and rise like the phoenix…will the so called industry leaders stand up to this issue please, to be counted…
Have A Nice Day!
[i] 1 US $ = 46 Rupees and 10 Million Rupees = 1 Crore
[ii] I really hope that the RBI conducts a national study in several states to actually determine the scale and size of the agent problem, which appears to be growing in size, with each passing day…. I have personally met over 100 agents in small geographies during the last few months.