Ramesh S Arunachalam
Rural Finance Practitioner
There are several types of micro-finance agents who are operating and they can be classified as follows:
Type I Agent: The Local Grass-Roots Politician as The Micro-Finance Agent
Type II Agent: The Centre Leader as The Micro-Finance Agent
Type III Agent: The Group Leader as The Micro-Finance Agent
Type IV Agent: The Local Community Member as The Micro-Finance Agent
In a series of posts, I look at each of these agents, their characteristics and roles and also describe their salient features.
This first post looks at “Type I Agent: The Local Grass-Roots Politician as The Micro-Finance Agent”
Characteristics and Roles of Agent
1. Agent’s Background: Is typically a member of a political party or organizer/agent for local politicians. I have even know dynamic centre leaders graduating to this kind of an agent
2. Clout: Is derived mainly from local organizing of people for Political and related work and this person has extreme familiarity with the local political/social milieu. He/she has tremendous local contacts with the powers that be and an excellent and well entrenched local network
3. Type of Model: The agent model is totally decentralized and the MFI only knows the agent as the last mile. End user clients are rarely known and records may not even exist, let alone be inspected. A lot of KYC violations would occur here and the agent assumes responsibility for completing this, using local educated people, often youth. There is very little control that the MFI has over this kind of agent. Under this model, a lump sum amount is given to the agent and in return, names and ID proofs and other required documentation are collected.
4. Roles: Loan disbursement and collections are done mainly to agents own clientele, using agents own staff/helpers (Read = Toughies). Such agents initially started to work with MFIs but have also started working with the SHGBLP & other government programs. The agent is also a good conduit for channeling local money into micro-finance. The agent Kamala mentioned a few days ago is this kind of an agent who collected upfront commissions promising disbursement of loans after elections in Tamilnadu
5. Compensation: This agent mark ups on interest as well as charges a flat. Additionally, they have as their return the money gained by deploying/rotating (MF) funds in their own business
6. Credit Risk: The credit risk is huge as the agent carries enormous power and there is very little that the MFI can do to tackle the agent, in case of the agent reneging on their implicit and/or informal contractual obligations
A diagrammatic representation of these agents operations is given in figure below. Please note that the last mile is a black box.
As noted by one of the commenter’s to a previous blog posting of mine on agents and I quote, “this is a more predatory model. Here, a local grass-roots political agent steps in as the financial intermediary. In this case, he becomes the local agent with the intent of converting the loans into political capital. Says an ex-employee of both SKS Microfinance and Spandana: “"In most of the slums, there is usually one gang lord whose permission you need to work in that area."" And this toughie becomes an agent of the MFI overtime.
Several issues are critical here and must be noted from a regulatory/supervisory perspective:
· The balance of power here is almost always in the agent’s favour and he/she controls the local activity.
· Often times, the agent claims to disburse at a very fast pace and this burgeoning growth of portfolio could result in failures of established systems at higher levels of the MFI. Also, the complete decentralization in this model often causes deviation from prescribed credit policy and results in fraud, error or manipulation – and much of it is unknown to the MFI. Also, weak integration of information systems at the MFI level may not even permit MFIs to recognize such delinquency
· Also, there is great difficulty in maintaining portfolio information when the agent is of this kind and having complete control. So, much of the data is what is provided by the agent who have helpers/assistants (including former group/centre leaders) that help them fabricate this data
· The mandate of efficiency and the desire for lesser controls, procedures, information and supervision to reduce costs and thereby interest rates, seem to have prompted MFIs to go in for this model initially and this is proving to be a bane for many of them today.
· The last mile is the agent and the MFI will not know who the actual clients are and any attempt to do so will be taken as a serious loss of face for the local political agent – the end result being loss of money for the MFI and an effective ban on its working in the area
· If the agent absconds, the MFI will not know who its final clients were. Nor would the clients know who the MFI is – because, as noted above, if the MFI tries to promote itself in the village/locality, it will alienate its agent.
· Also, if other MFIs come in, the agent will usually play one against each other and/or even start representing the other MFIs as well. The branch staff of the first MFI will rarely be in a position to object and they may not even know of it.
· Also, if the agent is not able to keep the repayments coming, the branch staff is likely to advance him/her a fresh loan to avoid a default which would expose the distortion. Thus, restructuring (rescheduling and refinancing) of delinquent amounts is an often-used strategy to camouflage portfolio quality
· Finally, this agent plays a huge role in transferring money during electioneering – something that the election commission in India has woken up to in the last month. It may be worthy to note that huge consignments of cash were confiscated from two major MFIs in Tamilnadu in the last two days – While some of it could be genuine micro-finance money, much of it is money used by the political agent for distribution to political parties
The next posts will provide a similar overview of other kinds of agents in micro-finance…
Have a Nice Day!