Ramesh S Arunachalam
Rural Finance Practitioner
As I have been traveling in the field and seeing first hand for myself, the HAVOC caused by the agent led micro-finance model in India and especially, in the near micro-finance saturated states, I was always confronted by some basic questions:
ð Where did the MFIs get the funds to grow as fast they did?
ð How did wholesale financiers (DFIs and Banks) provide so much funds to MFIs and yet allow the kind of not-so-good practices that are currently prevalent on the ground?
ð Are they in some ways responsible for the kind of (not-so-good) practices (like use of agents), which we currently find in Indian Micro-Finance?
The idea is neither to blame anyone nor find fault with any institution. The objective solely is to learn from past experiences and ensure that similar things do not happen on the ground again in the future. This is especially critical because the same wholesalers and banks may be involved in implementing important micro-finance projects (like the Responsible Micro-Finance Project with The World Bank) and large scale projects with a huge micro-finance component (like DFID’s Poorest States Inclusive Growth Program)
I have already written a lot about equity investors and banks in Indian micro-finance and while equity investments may have enhanced the confidence of lenders, there is no doubt that MFIs were able to leverage their enhanced equity to a great extent – thanks to the generosity and enthusiasm of Banks and DFI lenders like SIDBI, which was one of the real stars in the Indian micro-finance growth story of the last few years.
Without doubt, in my analysis, the single largest financier of the MFIs was/is SIDBI and the data given below are very revealing. A close look at this data suggests that SIDBI had abandoned its slow growth trajectory somewhere in 2007 and in fact, turbo charged the growth of the Indian micro-finance industry by 2008. The data given below are self-explanatory…
At this juncture, let me clarify that SIDBI’s work in the Indian micro-finance industry is phenomenal and I have greatest regard for their contribution to the micro-finance industry and the development sector prior to 2007. I would also rate them as one of the most responsible institutions prior to 2007. However, their role from 2008 onwards raises a lot of discomfort and I hope that the New Chairman of SIDBI (who has just taken charge recently) does a dispassionate and objective analysis of - what happened and why in - the SIDBI Micro-Finance Saga. The idea is not blame or penalize any of the officers, many of whom are very committed and have great talent and knowledge – however, the time is surely ripe for SIDBI as an institution to introspect and learn from its past experiences. This is something that I would to reiterate again
And accordingly, with all humility and utmost sincerity, I provide some starter questions (not exhaustive) for the New Chairman, so that he can initiate the task of learning from the past experiences at SIDBI/SFMC:
1. Fast Growth Strategy: Why did SIDBI’s micro-finance portfolio grow at the frantic pace at which it grew? Who (Senior Management or Board or Who Else) authorized this strategic change and especially, given SIDBI’s very conservative approach prior to 2007 and Why? How did SIDBI hope to manage its very fast growing SFMC (SIDBI Foundation for Micro-Credit) portfolio? What mechanisms were in place at SFMC and were they adequate? Was there a proper risk analysis of the above fast growth strategy and were the PROS and CONS evaluated?
2. Due Diligence At SFMC: What due diligence was employed at various levels to expand the SFMC micro-finance portfolio several fold, both cumulatively as well as individually? How were credit decisions made (at SFMC) on an individual case by case basis for the larger loans sanctioned to MFIs? What was the lead time for such sanctions and what due diligence was followed and was it sufficient?
3. Process Adopetd For Higher Loans: Given that SIDBI was not used to sanctioning loans in excess of Rs 100 crores to individual MFIs (at least until 2004), what process was adopted in the subsequent years when loans worth or in excess of Rs 300 crores were sanctioned to individual MFIs? Were they sufficient? Were there any conflicts of interest? On what basis were such higher loans sanctioned by SIDBI to the MFIs?
4. Monitoring By SIDBI/SFMC: How did SIDBI monitor the end use of its loans? If so, did it not sense the early warning signals with regard to huge and rising indebtedness, rampant multiple lending, ghost clients and the like at the field level? Was it aware about the use of agents in the Indian micro-finance market and the prevalent decentralized micro-finance model? Were the monitoring mechanisms adequate and what do field level reports indicate with regard to the above practices? Were any lessons learnt from the crisis in Krishna (2006), Kolar (2009) and other places and were they applied in practice to the credit program at SFMC in reality? In the wake of its rapidly burgeoning portfolio, how did SIDBI/SFMC assure itself of the deployment of its funds in REAL micro-finance assets?
5. Equity Investments and SIDBI Nominee Directors: Given that SIDBI has made equity investments in several MFIs, what did SIDBI’s nominee directors do on the board of MFIs and what mechanism was in place at SFMC/SIDBI to monitor their roles/work on the MFI boards? Did they not alert SIDBI to the various not-so-good practices prevalent on the ground? Were there any conflicts of interest in terms of nominee directors being offered/granted ESOPs and the like, by the concerned MFIs?
6. Implications for Future Projects: Given what has happened on the ground and especially in Andhra Pradesh, Tamilnadu and other states, what are the implications for the responsible micro-finance project of SIDBI to be conducted in cooperation with the World Bank? What is the guarantee that things will indeed be responsible on the ground, this time around? What safeguards are there in this SIDBI-World Bank project and what safeguards need to be built into it to ensure that enthusiastic senior management does not derail the natural and responsible course of the so-called responsible micro-finance project?
These and other questions become very relevant as institutions like SIDBI intermediate public funds and having seen the HAVOC that micro-finance agents have created on the ground, I cannot help but ask the above questions. I hope SIDBI’s management takes these in the right spirit[i] and introspects with integrity…And that alone should be able to provide practical guidance to the perfectly timed SIDBI-World Bank “Responsible Micro-Finance Project in India”…
Have a Nice Day!
[i] The idea is neither to blame anyone nor find fault with any institution. The objective solely is to learn from past experiences and ensure that similar things do not happen on the ground again in the future.