Ramesh S Arunachalam
Rural Finance and MSME Practitioner
For all those who believe that the bill would be better without the intervention of the State government, here are a list of ground level issues from Andhra and other states and I would like practitioners to ask the question as to whether the proposed bill would solve any of these problems and if so, how?
1. Incorrect or misleading information (e.g., of interest rates on loans) provided as part of the sale strategy so as to influence sale positively for the MFI/institution. The MFIs have usually done this by specifying “flat rates” and thereby made clients to feel that the loans come at a low cost. Even when the intended strategy is to talk of reducing balance interest, at point of sale, this is most often mentioned as a flat rate.
2. Other (insurance) charges are usually not mentioned.
3. All terms and conditions not clearly mentioned to the client including loan installment delayed payment penalties etc
4. Use of inappropriate sales techniques (e.g., hard selling through multiple home visitation, promise to ‘green’ (refinance) subsequent loans, door-to-door solicitations, limited-time offers and even intimidation)
5. Request for kickback (bakshish) as a percentage/flat fee made by the field staff/agents/others
6. Fraudulent loan policy with part payment to client and part payment to field staff, as a result of which many problems occur at time of repayment. Please see increasing frauds in MFIs and this year the frauds in SKS have become larger and please see http://microfinance-in-india.blogspot.com/search/label/Microfinance%20Frauds
7. Loan contracts have inappropriate wording regarding client obligations that they (clients) may not understand
8. Written documents do not reflect the terms and conditions agreed before transaction was made
9. Clients not given copies of contracts, policies, records or other documents
10. Forced terms and conditions - e.g., client’s ability to repay or to amortize not considered
11. Contracts do not provide full disclosure of costs and other terms
12. MFI Process is reckless - e.g., without due reference to the borrower’s ability to repay or the clients ability to meet subsequent insurance obligations – resulting in over indebtedness and multiple lending
13. Giving false expectations on interest on loans
14. Products cost higher than disclosed because of hidden charges
15. MFI Products cost higher than disclosed because of difference between intended and realized pricing – stated versus implemented due to several aspects
16. Inaccurate recording of client’s transactions with a view to collect more money from clients – loan repayments with wrong balances in terms of loan outstanding and/or other aspects
17. Illegal and abusive behavior in the conduct of transactions such as harassment to force clients to pay; imposition of unnecessary fees or surcharges & consolidation of debts at a higher rate; provision of loan to pay insurance premiums and the like etc
18. Use of illegal/fraudulent methods of payment and collection – showing full payments as delinquent and pre-payments as regular payments and thereby taking away the clients’ money. Similarly using clients insurance payments towards loan repayments
19. Hard intimidatory actions (Zero PAR to other aspects) against a client who has no legal recourse or defense – in case of their being delinquent
20. Physically abusive behavior in the payment (loan repayment) collection process on a regular basis
21. Collateral like ration card or house patta (title deeds) are physically taken even though the contract specifies non-collateral lending. This is especially true for delinquent clients
22. Sharing of client information with other entities to enable cross selling
Aspects like the above cannot be monitored and set right by the Central Bank, associations, SROs etc. This can be done perhaps by the state and state alone. Make no mistake, if problems such as the above are brushed aside, the AP crisis will reappear again and I will in a series of posts highlight various ground level problems.
Have a Nice Day!