Where Angels Prey

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

Saturday, January 29, 2011

A Day In The Life of An MFI Loan Officer: Some Insights From The Adapted Grameen Replicators in India…

Ramesh S Arunachalam
Rural Finance Practitioner

The loan officer, by a large margin, has always been a “he” (it is a ‘her”, rarely), at least in the adapted grameen replicators in India - a commonly used metaphor for some of India’s largest MFIs.

The loan officer may simply be called as a loan officer or project assistant or field coordinator etc. The loan officer, typically, as I have seen him over the years, starts his day at around 5.30 AM in the morning, getting up and readying himself to go to the field and meet micro-finance clients. Among other things, the collection sheet and disbursement schedule are critical documents and the loan officer goes through these before setting off on the day’s journey.

In a typical adapted grameen replicator, the branch is located at a central place and the loan officers cover a radius of 25 kms around the branch. They, by and large, stay in the branch in a back room – 3 or 4 or sometimes even 5 of them huddled together. Often, the living conditions are woefully inadequate by any standards. They cook their own food in this small room and also use it to house their things as well as sleep.

The loan officer starts from the branch at around 6 AM and reaches the venue of the centre (a commonplace in a village) typically by 6.30 AM in the morning for the centre meeting. The traditional model, which was by and large followed by many of the adapted grameen replicators in India - starts with a roll call (group attendance) followed by various activities such as loan repayment, loan disbursement, pledge/oath taking and the like. Generally speaking, given that loan officer has various records (including receipts) to update (both for the client/MFI) and also given that discussions may be held amongst the members with regard to which of them will get the loans in subsequent weeks, it should be safe to assume that a center meeting will last at least an hour, if not more.

Box 1: Some Time Consuming Tasks at The Centre Meeting


There is good reason to believe that a center meeting, conducted as per the traditional model, would last more than an hour…The grameen model and the Indian replicators have always prided themselves about the fact that the repayments would be collected first and kept separately and then, any loans would be disbursed, often using the 2:2:1 formula, where the JLG leader receives the loan the last and other 4 members receive the loan in batches of two each, in an interval space of few weeks. The same happens for the remaining 7 JLGs and that is the way the center generates peer pressure, as at any time, there are always some members at the center who require a loan and it is believed that they would exert sufficient pressure on the rest of the members (who have taken a loan) to make prompt and regular repayments. Therefore, the task of choosing members who will receive loans in the subsequent weeks is one that could take significant time - as I have seen members within a JLG and center, argue out competing demands.



Therefore, while nascent field workers (loan officers) may be able to only take care of 1 centre meeting in a day, experienced loan officers can perhaps handle 2 centre meetings daily. Such experienced loan officers, after the 1st meeting, would typically go to a 2nd centre meeting at a nearby village/hamlet/slum and get back to branch by 10.30 to 11 AM. Here, they hand over the cash and reconcile the balances. After eating their breakfast, they sit down and complete all the accounting and portfolio entries (either manually or in the computer) in the branch records, pertaining to the centers they visited.

This usually takes up to 1.30 PM or latest, 2PM or so after which they take lunch and rest until 4/4.30 PM. Then, at 5 PM, they leave for the villages to have contact meetings, to form new JLGs/centers and they come back to their room by 9/9.30 PM and eat/sleep so that they can start the next day afresh. This routine is normally followed for the five-week days and on Saturday, the loan officers do work at the branch, either updating records or planning activities with the branch manager. As an aside, actually, the life of a micro-finance loan officer is rather tough and I must confess that, if some one like the ILO would look into it, they would find the living and working conditions very stressful and inadequate…In fact, I came across a complaint (by a loan officer perhaps and I am not sure) on the web and I attach the link[i] of the same here: http://www.complaints-india.com/complaints/3570/EMPLOYEE-TORTURE.html

Okay, back to the topic at hand, there are two points that deserve mention here:
·    Given the efficiency that may have been built into the process and the learning curve experience, at best, experienced loan officers, may be able to handle, not more than 2 center meetings or 16 JLGs in a day – this is equivalent to a maximum 400 clients per week (assuming a five day work week and leaving the weekends for office work) and this is perhaps an outer limit and a very optimistic estimate….of loan officer caseload…
·    Likewise, a nascent loan officer can perhaps manage 1 center meeting per day and this translates to 8 JLGs per day, which makes their caseload in clients/week as 200.

Thus, the above are caseloads that are theoretically possible for nascent and experienced loan officers as I have seen it and I am sure there could be some (marginal) variations to these depending on the context, model and other aspects. In reality, given the adjustments for the terrain/context and other unexpected work, the most optimistic caseload, in my opinion, seems to be 250 - 300 clients for experienced loan officers and 150 – 180 clients for nascent loan officers…

That said, let us now look at some of the case loads based on real time data for 6 MFIs that were the equity leaders in Indian Micro-Finance (because they were the favourites of equity investors) and this data is calculated[ii] from the published data sources like MFI Annual Reports and Mix Market data…



The above table provides some very interesting trends

There was only one MFI (MFI 4) that had a caseload of over 650 in 2006 – around the time of the Krishna crisis and they were, in my opinion, using an agent type methodology, as far as back then.

The other MFIs, barring one (MFI 5), learnt from this MFI 4 on the advantage of using an agent type methodology and that is why, for the rest, we see the caseload increasing over the years – and especially in the years ending 2007 and 2008 the case load is rather heavy. In 2009, the caseloads increased for 4 of the 6 MFIs and the argument here being that the higher case loads were perhaps being managed by using the invisible (hand of) agents.

Specifically, for MFI 3, that had had a very high caseload the earlier year (720 clients per loan officer), there was some corrective (503) in 2009 because, in my opinion that MFI had already started experiencing delinquency in its portfolio due to this and trouble from its agents – as it perhaps went overboard in increasing its field officer caseload from 376 to 760, which is more than double the caseload…again, the flow of equity at a premium to other MFIs and the carrot of (potential) huge equity investments in the future perhaps attracted many of these MFIs to wealth hitherto unseen by them thus far…

These specific numbers aside, the larger point is that whatever be the context, when you have case loads of over 400, I think you must ask questions on how the staff are managing these (unrealistic and heavy) caseloads, especially when using a similar Grameen type methodology…that is the critical aspect…

It is also interesting to note that all of these 6 MFIs grew at a frantic pace between April 2007 and March 2009 when the case loads went up dramatically. Let us look at growth in terms of active clients first and then, by gross loan portfolio:

Growth by Number of Active Borrowers For 6 Equity Leader MFIs:

·    The 6 Equity Leader MFIs grew at a CAGR (over a 4 year period) of 61.19%, adding 12.91 million active borrowers during the period April 2005 to March 2009.
·    Of this, nearly 10.46 million active borrowers (or 81.03% of the total additional active borrowers covered from April 2005 – March 2009) were added during the period of April 2007 – March 2009.
·    This is equivalent to the 6 MFIs adding 0.44 million active borrowers (or 4, 35,971 active borrowers) every month, during the 24 month period.
·    And this is equivalent to each MFI adding 0.072 million clients (or 72661 active borrowers) every month, which is certainly a lot of active borrowers!
·    The above number translates to about 2389 new clients (or about 479 new JLGs or 69 new centres) to be added every day by EVERY MFI (on the average) and that is a huge ask, under any circumstances…

Ask some one who has worked at the grass-roots level and you will surely understand that sourcing clients and developing JLGs (Joint Liability Groups) and Associated Centres’ does take a lot of time…and that is why I would rate the above as very, very rapid growth...by any standards…

Growth by Gross Loan Portfolio For 6 Equity Leader MFIs:

·    The 6 Equity Leader MFIs grew at a CAGR (over a 4 year period) of 88.92%, adding US $ 2.68 billion as gross loan portfolio during the period April 2005 to March 2009
·    Of this, a whopping US $ 2.18 billion (or 81.21% of the total portfolio increase from April 2005 – March 2009) was added during the period of April 2007 – March 2009. That is significant by any standards and is the equivalent to the 6 MFIs adding portfolio worth US $ Million 90.81 (or Rs Million 4177) every month, during the 24 month period. Again, this is a staggering growth statistic, at least for me...

Further, it is interesting to note that the 6 equity leaders also received significant equity infusions during the same periods or a little later as shown in graph below



And of course, as noted above, these Equity Leader MFIs received significant equity infusion during the period April 2007 – March 2009 (US $ 228.87 million) and also thereafter during the period, April 2009 – July 2010 (US $ 287.88 million). The comparative data and specific data on number of active borrowers and gross loan portfolio for the 6 equity leader MFIs along with equity investments is given at the end of this post.

And also, the financials of the 5 of these 6 MFIs are given below, as calculated by Intellecap in the 2010 inverting the pyramid report…



As you can see, the connection between flow of equity[iii], growth of MFI in terms of number of active clients and gross loan portfolio and increased caseloads is no simple coincidence.

That said, several key questions arise here and I leave you with these…
·   How did the staff of these MFIs manage such higher caseloads? What (or who) helped[iv] them in managing such unusually high caseloads?
·   Especially, given that they were adding many new loan officers who could not function at peak performance (capacity), how did these MFIs manage to increase client caseload as significantly as shown in table earlier?
·   What (tangible) changes were made to the operating model to enable this? Were the changes as per the law? Specifically, were agents formally or informally appointed and did their invisible hand share the caseload of the loan officers? That needs to be better understood…
·    What other changes/shortcuts were employed in client acquisition, loan disbursement and loan repayment collection to facilitate management of such high caseloads?
·    What was the impact of all these changes on clients and their well being? That is very critical and again needs to be clarified
·    Overall, given that the KYC norms and RBI outsourcing guidelines came into force during the above periods, how did these MFIs manage the higher caseloads in wake of new staff, burgeoning growth, enhanced regulatory requirements and the like?

Ladies and Gentlemen, I leave you with these questions to ponder and reflect and all that I can say is that I have a very uncomfortable feeling about the Indian micro-finance business model…and its vision, growth strategies, operational methodology and the like...I leave it to you to judge for yourselves...

Adios!

Have a great weekend!

PS: Please note that I have refrained from identifying individual MFIs because the intention is not to malign them. Rather, the objective is to learn from this crisis so that we can take appropriate corrective action going forward...Thanks for your understanding on this...












[i] Sometimes, the moment you refer to a link, it gets taken off and apologies, if that has happened. Also, the objective here is not to identfy or pinpoint any one MFI but the above example is merely provided as an illustration of MFIs that perhaps take the most out of their employees...
[ii] To the best of my knowledge, the data is correct but apologies if found otherwise, but I think not likely as I have tried to use some internal consistency tests and they worked well for the set of data given above. Thanks for your understanding and even if changes would be there, in my opinion, they should be marginal and not make a material difference to the caseloads
[iii] Data subject to caveats mentioned in specific posts on equity, done in November and December 2010
[iv] And especially, given the fact that technology has, at best, been piloted and not taken to scale in many places in Indian micro-finance. In fact, if you go back and see the organizations that won the CGAP award for technology, many of these technologies have not been operational for a rather long time now…not because they are obsolete technologies but because they lacked the sound business case in the first place and could not be taken to scale

Thursday, January 27, 2011

The Centre Leader as A Micro-Finance Agent: Some Insights Into The Operational Model…

Ramesh S Arunachalam
Rural Finance Practitioner

While there are several cases of agents, the most common one is where the center leaders become (informal) agents for the MFIs. This is a very logical and easy extension of the decentralized micro-finance model. I describe this model as I have seen it evolve in some MFIs over the years and there could be other ways in which agents function…

The Centre Leader as The Agent: This often happens when the loan officers, branch managers and others in a typical Grameen operation are pushed to pursue higher growth[i] and deliver quicker outputs in terms of client acquisition, loan disbursals and the like. These loan officers and branch managers start to rely on local support to do the same and often times, the hard working center leader becomes the automatic choice. Initially, it is a win win situation for all - the center leader, the branch staff (loan officer/ manager) and the MFI. The targets are easily met, new clients added, fresh loans disbursed and recoveries happen on time and slowly, the branch staff get to a point where they feel that the center leader can function in a state called as “auto pilot” – smooth operations, increasing at a good pace. The branch staff then tune off from this auto pilot center leader and start to look at other potential center or local leaders with a view to getting them to function as agents. This is when the problem starts – the auto pilot center leader starts to run her fiefdom and most of the initial rules of the game are given a go by. Meanwhile, with more and more branches following the center leader agent model, this model gets legitimized and rationalized within the MFI.

Characteristics and Roles of The Agent: When the agent is a center leader, she typically comes with significant experience. She has come through the system working with the loan officer and is well aware of the workings of the MFI including its weakness. Sometimes, she may have been a party to some of the frauds conducted by field workers and therefore knows that the chances of getting caught red handed are pretty low given that the internal audit function/equivalent is rather poor in MFIs.

The center leader generally has good skills in disbursement and maintenance of accounts, attendance and passbooks and the like and therefore can easily function as a proper outsourced micro-finance operation at the village level. In the last stages of their evolution, with one/two educated youth in her team, the center leader is even able to take care of KYC documentation – some of which would be falsely done

Among other things, the center leaders, as agents, perform the following key functions:
·    They act as catalysts in the JLG acquisition.
·    Sometimes, they assist loan officers in new JLG formation by pulling out clients from SHGs or competitor JLGs. Much of the Guntur problem in 2005/6 happened because two large MFIs were involved in breaking each other’s JLGs and taking over their clients. Centre leaders, as agents, played no small role in this. They also assist in the formation of green field JLGs
·    Many of them supervise the working of the JLGs and maintain tight control over these JLGs and their members through loyal group leaders (who function as associates) – often guarding them from takeover by other center leaders and agents. Therefore, constantly servicing clients with loans becomes an absolute imperative
·    They organize (informal) meetings for disbursement and recovery of loans and meet with their clients on a weekly basis (at least)
·    In several cases, large center leaders who may be involved with several MFIs play the most important role in negotiating and scheduling meetings with the various MFIs. Please recall the Zaherea Bee case that I had posted earlier. Also, please take a look at Dr Swami’s speech at a Washington event (with David Roodman in december 2010) where he talks of MFIs, that try to go to new areas, getting to hear that – oh, Monday and Tuesday are with MFI and MFI II, so we can give you Wednesday or Thursday for weekly centre meetings”. Now, all of this negotiation and schedule finalisation is typically done by center leaders, functioning as agents
·    Many of them maintain records and facilitate the MFI with regard to the KYC documentation, to the best extent possible

Agent Compensation: Initially, the center leader (agent) gets the incentive of a higher or additional loan – with passage of time, the center leader slowly begins to understand the importance of the crucial role she plays and is slowly able to extract more monetary payment – which also includes larger loans for some of her colleagues, out of which she takes a straight cut. As she gets more clients and disburses more loans, she begins to talk a new language – payment per loan (irrespective of size). Over time this gets converted to a commission per loan (which makes her payment proportionate to loan size). At this stage, the agent does everything – from KYC documentation to recovery and remittance at the branch. The agents also take a cut/fee on loans disbursed from clients. Therefore, in reality, they get monetary payments from MFIs as well as clients (by servicing both of them) and hence, are best called as broker agents in the micro-finance contract. When center leaders take an agents cut from the loan to the client, the effective interest rate to the client just shoots up. Sometimes, they also mark up the interest rate and this is one of the major reasons as to why there could be a difference in the nominal and effective interest rates stated by MFIs on paper and those on the ground – a remark that Al Fernandez made in his CGAP post…

Support Structures: The center leader, usually, has tremendous local support in her village and is an opinion leader locally, who has been involved in extra curricular activities in the village. She also perhaps has good support in the surrounding cluster of villages. Her operation could range from 7 – 8 groups (or 1/2 centres, depending on the grameen adapter model) initially to even as high as 35/40 JLGs or even a higher number of groups and several centers in a span of few years – at which point she handles a case load much greater than the normal case load of a loan officer and I will post on this crucial aspect separately. Of course, her ability to grow depends on her experience, age, clout and also capacity to position key support staff in the neighboring villages in the same/adjacent cluster. Often times, group leaders working under her graduate to become agent associates, supervising the operations in one village each where as, she, as the main agent, covers the entire cluster of villages. One further point – in some of the cases that I have seen, the agents tend to have a local support group comprising of their husbands or younger brothers or sons or other male relatives etc – basically, a male brigade, in the 20 – 55 years age bracket, that can talk tough with any stakeholder, including clients and/or MFI staff, as and when required

As Sekhar remarks in a comment to this blog, “The centre leader, usually a more affluent woman, uses her position to hold on to some of the borrowers’ loans. If she oversees, say, 8-10 groups (about 40-50 women), she retains and uses a part of the overall loan portfolio -- for consumption, or to put into her own business. While the loans continue to be in the names of the members, the centre leader makes the repayments. For this to happen, the field executive and the branch manager have to outsource the responsibility for disbursing and collecting money to the centre leader. She then decides whom to lend to...”

Agent related Issues: The kind of issues that the agent model throws could include the following:

a)  Ghost/benami clients with money taken entirely by the center leader and used for various purposes including money lending. They same money could be relent as a separate money lending operation and I have seen center leaders separate out the two for strategic reasons
b)  Real clients with some amount of their loan used by the center leader for various purposes ranging from money lending to own consumption as well as working capital for other businesses that the center leader could be running locally. The extra money could also be got by enhancing the loan amount and giving the correct amount to the clients and using the balance for other purposes
c)  A third possibility is to provide larger loans to clients, using names of several small clients and this something that can happen despite the Malegam report recommending a loan ceiling size of Rs 25,000 and/or loan outstanding of Rs 25,000
d)  I have seen cases where the center leader and staff collude and take a much high loan and disburse the required amount to the client and divide the balance amount amongst themselves

Let me reiterate that center leaders, as agents, are engaged in activities similar to what they were originally doing along with branch staff. However, there appears to be one major difference – when pushed to doing it independently, there have been no check and balances on them and that is where the problem started.

As an aside, internal audit departments are very weak in many MFIs and they often report to senior management, who have very little incentive to hear about systemic flaws in operations that they manage and oversee – this the classic conflict of interest problem. Rarely, have I seen internal audit departments report to the board as they should and this conflict of interest in reporting to the CEO or COO has prevented the effective functioning of such departments. I know of an internal auditor who quit a growing MFI then (and one of the largest MFIs today) when he came to know that the very mistakes that he uncovered in the field were indeed sanctioned by his seniors…This is a real incident that happened in 2005/6 in Andhra Pradesh

Therefore, with very little real time internal audits, many of the MFIs took a more withdrawn approach to grassroots functioning in their quest for growth and greater efficiencies - this can be seen from the fact that case loads for MFIs loan officers increased very significantly from the 200/300 clients range per loan officer to sometimes as high as 600/900 clients - and the center leader agents took the decentralized model to its extreme and with this several problems. The major issues were: lack of knowledge about ultimate end user for MFI, multiple lending, over lending, ghost lending, coercive repayments, diversion of funds and the like and this has essentially snowballed in the last few years as the following e mail quote clearly suggests...



When cash flow (read bank loans) are flowing fully, the kind of control that these agents wield over the clients as well as the MFI is phenomenal and if either of them misbehave, the agent does not wait to take action – which could, among other things, include shifting entire groups to other MFIs, telling the concerned MFI that repayments will not be made henceforth, repossessing assets from clients who do not fall in line, coercing and harassing clients (who refuse to pay fees) for closure of the full loan at one shot and the like. 

Without question, there is increasing evidence about the (I would even say widespread) use of agents in Indian micro-finance (Rozas and Krishnaswamy 2011; Micro-Finance Focus 2011; Srinivasan 2010; Thorat and Arunachalam 2005b and several others) but the industry and key stakeholders continue to be in Denial mode, often pretending that there is nothing wrong at all…As the email extract above suggests and as per other evidence available with regard to agents, it is now clear that they are the real problem in Indian micro-finance.

I do sincerely hope that the micro-finance industry in India and the regulators including the Malegam committee take notice and together tackle this Frankenstein monster – either by bringing them under a robust legal framework or by ensuring that they just cannot operate - as otherwise, financial inclusion (let alone poverty reduction/alleviation) in India will just remain a mirage and never become reality…

Jai Hind!


[i] Much of the growth that happened between April 2007 to March 2009 for which I have already provided data, is perhaps due to the agent model.

Wednesday, January 26, 2011

Have The Commission Agents Finally Arrived in Indian Micro-Finance?

Ramesh S Arunachalam
Rural Finance Practitioner

As I was reading the informative and well written article by Daniel Rozas and Karuna Krishnasamy, I felt that it vindicated much of what I have been saying - like a broken record - for a rather long time now…and I quote…

“ But besides heavy presence of multiple borrowing, an even more insidious factor is the extensive presence of loan agents, who act as intermediaries between the clients and the MFIs. Of the six borrowers interviewed above, two were agents/group leaders. To make matters worse, both of the agents were also heavy multiple borrowers (with 3+ loans), and at least in one woman’s case, these multiple loans all came from the same MFI, with the agent having used fictitious borrowers for the purpose. Such a situation further increases the agent’s incentive to default on her own loans, while influencing her group members to default on theirs.

In a couple of cases, the agents had such a dominant role that the borrowers didn’t even know which MFI their loans had come from. For an MFI seeking to restart collections, this makes the matter that much more difficult. In effect, the MFI will be forced to bargain with the agent if it is to have any hope in collecting not just that agent’s several loans, but also those of the group members.” – Quoted from Microfinance in Crisis: the Case of the Hidden City, 25th Jan 2011[i]

When I first mentioned about the notorious broker agents in micro-finance, I was told that I must be joking…this was some years ago…I had seen them in Vaizag, Pargi, Pudur, and other parts of Ranga Reddy as also parts of Chattisgarh, Orissa and Madhya Pradesh…

Recently, before the AP crisis, a very credible magazine and one of India’s leading weekly dailies, The Outlook, spoke to me about micro-finance and again, I talked about agents…Please see quotes below…The reactions I got from the industry are that this guy (Ramesh) is off his head and there are no (broker) agents in Indian micro-finance…

“Also, the emergence of broker agents (who supply joint liability groups to MFIS) is a scary phenomenon, as their presence makes traceability of priority sector funds rather difficult. Arunachalam recalls first coming across a broker agent in 2005. Today, they are in many fast-growing and urban areas. “The excesses attributed to MFIS are perhaps due to broker agents, who are not accountable to the microfinance system in any way,” he underlines.” – Quoted from The Outlook, Is it Micro-Usury?[ii]

During the run up to the AP crisis, I had several e mail conversations with several leading NATIONAL and INTERNATIONAL experts and some of them even said that it would not be productive to look at the negative happenings in Indian micro-finance…it is a different matter altogether that the AP crisis subsumed everything thereafter as suicides mounted and the AP government reacted rather impulsively…even as regulators looked on as by standers…the Indian Micro-finance crisis in 2010 is now firmly a part of history and I am sure that people like David Roodman capture the deep reality in their narrations…of the crisis and the REAL causes of this crisis…

I have been writing consistently about agents as see them as the major cause of the present Indian micro-finance crisis: They are all pervading and powerful…they get clients for MFIs and they can make clients disappear…from an MFIs horizon and put these clients onto another set of MFIs…they (can) stop client repayments…they indulge in coercive collective practices as many of them have backing of thugs and criminals (locally)…once created by the MFIs in search of fast growth and greater efficiency, they are turning out to be the bane of Indian micro-finance and yet, we have many stakeholders pretending that agents do not exist…For Gods sake, it is time that Indian micro-finance wakes up and deals with them in a swift and strong manner and I hope the RBI will take the lead in this…

Read on…and look at the following e mails, in circulation among MFIs, where they admit to the commission agent problem being a serious one and even state wide…Make no mistake, the commission agents are there from UP to Tamilnadu, Orissa to Kerala, Rajasthan to North East…for they were created ONLY by the MFIs and for the MFIs alone…that they are turning out to be Frankenstein like monsters for MFIs is entirely an another story…And unless, this issue of broker agents or commission agents is sorted out, the Indian Micro-Finance Industry will remain in perpetual crisis and any solution that does not tackle them directly and head on (either by legalizing them with a proper regulatory framework or ensuring that they cannot operate), will only keep postponing the Indian micro-finance crisis to perpetuity…

Happy Republic Day to All Indians!

Have a great day!





Why Calculating Effective Interest Rates Are Important in Access to Finance Studies?

Ramesh S Arunachalam
Rural Finance Practitioner

Dear Doug

Thanks for taking the time to clarify and really appreciate it! I attempt to provide my (final?) detailed response to your response. Again, much appreciate the work of CMF…and my raising issues does not take away the excellent work done by you all…I am such a regular reader of the research that you do…so please do take my comments for what they are worth and what they are not…


Your Stated Difficulty in Calculating Effective Interest Rates: Your point is well taken on the aspect of effective interest rates (EIR’s) – there are genuine difficulties in getting this information but I am sure that you will agree that any access to finance study will have limited utility, if it does not present information on effective interest rates.

That said, many other studies that have looked at access to finance (Odisha Study by Access Development Services, APMAS Studies and even an UNTRS/FAO studies on fisheries that I was involved with), despite the real time difficulties, did try and calculate the effective interest rates and in many cases, at least provided a range of the effective interest rates for the various sources of finance. Please see example tables, below, reproduced from A Study of SHGs and their Federations in Odisha, For TRIPTI, Access Development Services, New Delhi



Why is this so?

All of us have access to finance but at differential rates of interest and therefore, we need to understand the effective rates of interest (EIR’s) for the various sources. Only then, can we come to an informed judgment about the quality of access to finance and not mere access to finance. For example, for a medical emergency, even a very high cost informal loan may be classified as high quality access on the basis of the (very short) lead times to access the loan as it has the potential to perhaps save life. Likewise, a bullet 120 day period loan at a higher rate of interest may be preferable to a standardized 52 week MFI loan – as the potential of the former to satisfy working capital needs and suit the clients’ cash flows is perhaps better. Therefore, it becomes imperative, to understand all terms and conditions including effective interest rates when comparing alternative sources of finance…I am sure you will agree with this…

That said, forgive me, but I am unable to accept the argument that because it is difficult to calculate, we omit something that is as fundamental and as important as interest rates in an access to finance study…I would like to volunteer to help CMF in this if the raw data is available or can be compiled. I have a software tool (self created) by which we can compute the EIR’s fairly accurately in quick time. I have time in March and am happy to do it for you for the loans that you have data on…Do e mail or call me if you would like to take up my offer…

Additionally, people like Daniel Rozas, perhaps correctly feel, that the terms and conditions of friends/family who lend (for and without interest) are perhaps much more lenient (also long in tenor) in terms of several factors and therefore, should be analysed and presented separately in any access to finance study. It would be interesting to see what results the study throws up when friends/family as a category are selected out and presented separately – it would also be useful to understand the terms and conditions of friends as lenders of money…

In the fisheries sector, in Enhancing Financial Services Flow to Small Scale Marine Fisheries Sector a study done for UNTRS/FAO (2007) in Southern India as part of the UNTRS project, we found that fishermen saved by giving their excess money (sometimes, they have this huge liquidity when they may have caught a special variety of fish – hammer head shark for instance) as medium/long term loans to their peers. In fact, many of the women said that they preferred this kind of loaning to avoid the money from being wastefully spent away by their husbands…such were loans were also made for safety purposes…

In the same study, while admittedly difficult, we calculated the effective interest rates…rather laboriously…please see tables and figures below…





We had even tried to do an attribute ranking among the respondents with great difficulty – see relevant table below…I do however agree that the above study was much smaller in terms of sample size…



Therefore, come what may, it is imperative that any access to finance study provide at least some information on the effective interest rates…I am sure that you will recognize this crucial aspect…That was the larger point I am making…

Inability to Pinpoint Sources of Cash for Loan Repayment: Likewise, it is important to understand the sources of cash for repayment as I have often come across clients borrowing from one source to repay another and also taking a 2nd/3rd loan to pay off the first and this does not take them anywhere…in the medium and long term…I just wanted to understand this aspect with regard to the study…I am sure you will agree that it would be important to know this…Much of the present crisis has been caused by huge levels of indebtedness with very little genuine repayment capacity… as Dr Y V Reddy, Mr Aditya Puri and others have regularly remarked…I felt your study could have provided valuable information to the world on this critical aspect…especially because it was conducted in AP

The Choice of Sampled Districts and The Exclusive Rural Focus: On the point of the districts, I am sorry but I missed figure 15 and my profuse and humble apologies - yes, the districts names can be got from there but I would have still preferred you coming out and saying that this study was conducted in “such and such districts”…for such and such reasons. I found it very difficult to read the fine print as well… I still feel that irrespective of the reason, the inability to survey and include highly saturated districts like Krishna[i], Guntur, East/West Godavari, Nellore, Kurnool, Khamman make the findings of the study less representative. I am sure that your study would have had very different results if some of these highly saturated districts, with lots of MFIs and multiple lending, had been included.


Please look at the following article (http://www.microfinancefocus.com/content/microfinance-crisis-case-hidden-city) which looks at urban/peri-urban clients and shows a significant difference in incidence of multiple borrowing and the like…
On the issue of the study being representative and also stating the exclusion of the urban areas, I still feel that it could have been presented in a straight forward manner…

·         If one were to look at the title of the paper, one comes to the conclusion that this is a study on access to finance in Andhra Pradesh.
·         If one were to look at the executive summary, the impression changes to the study being an access to finance study in rural Andhra pradesh.
·         Now, when one gets to the fine print…(and not everyone may read the real fine print) - one would see your comments on it being representative of rural AP minus Krishna.

I am not nitpicking but please note that depending on the depth to which a person gets into, the impressions about the study could be very different.

Therefore, I would have preferred the study to have been titled – “Access to Finance in Rural Andhra Pradesh”.

This title would also have explicitly told everyone that the study excludes urban areas…

Further, the point about NABARD not wanting to survey urban areas is perhaps understandable and also your point of therefore leaving out urban areas is well appreciated. However, the fact of the matter is that this survey does not cover urban areas where MFIs grew and proliferated at a frantic pace and where multiple, ghost and over lending was rampant. Therefore, the lack of urban respondents indeed severely limits any inference with regard to multiple lending and associated aspects in Andhra Pradesh and I am sure you would agree with this… Please look at the following article (http://www.microfinancefocus.com/content/microfinance-crisis-case-hidden-city) which looks at urban/peri-urban clients and shows a significant difference in incidence of multiple borrowing and the like…
 
Lack of Information About Sources of Funds for Friends: Again, knowledge about the sources of funds for the friends who lent for interest would have thrown light on whether - as Mr N Srinivasan has argued - clients were engaged in using (benami or other) loan money for money lending as an enterprise. Please see my post on agents (http://microfinance-in-india.blogspot.com/2011/01/broker-agent-in-indian-micro-finance.html) in Tamilnadu where MFIs themselves admit this…Hence I raised this issue…

The Positioning of The Study: And on the study being presented as a fresh study on AP, I am sorry but I beg to differ. Apart from the manner in which it was introduced in the CGAP blog and also the timing of its introduction, there are e mails from people close to CMF which have positioned the study rather incorrectly…I can share these with you…but the point is not to fault any one individual…so let us leave it at that…as I have made my position rather clear…

Thanks once again and I am grateful for the time taken by you and the CMF team to do the study and also respond to me...


Thanks

Warm Regards

Ramesh


Originals Post:

CMF Study on Access to Finance in Andhra Pradesh: Some Observations for The RBI and Other Stakeholders…
http://microfinance-in-india.blogspot.com/2011/01/cmf-study-on-access-to-finance-in.html

CMF Response:

Response to Criticism of "Access to Finance in Andhra Pradesh"
http://www.indiadevelopmentblog.com/2011/01/response-to-criticism-of-access-to.html


[i] I also think that much of the randomness was lost when Krishna district was omitted, whatever be the reason…

Monday, January 24, 2011

The Malegam Committee Report on Micro-Finance: What’s On The Platter?

Ramesh S Arunachalam
Rural Finance Practitioner

The much-awaited Malegam committee report is laudable because it is the 1st committee report of (some) significance to attempt the creation on of a (national) regulatory framework for MF in India. The Malegam committee report must be strongly appreciated because it seeks to legitimize microfinance as an integral part of the Indian financial sector. By recommending creation of a new category - called NBFC MFIs (with associated conditions which are perhaps open for discussion) - the report has clearly positioned and mainstreamed micro-finance within the framework of the larger financial sector in India. This ensures that micro-finance will come under the purview of the RBI and no longer can microfinance be treated as a fringe activity or as an orphaned child in the larger Indian financial sector.

A second aspect that deserves appreciation is the fact that while the report has recommended continuation of priority sector funds for MFIs, it was however made it conditional - especially after recognizing some of the key problems like ghost lending, multiple lending, over lending and attempting to outline some measure to tackle them as well.

A third issue that merits appreciation is the fact that the report has sought to promote greater transparency with regard to interest rates…through various measures.

Fourth, the report has recognized and stressed the importance of off-site and on-site supervision of NBFC MFIs (including systemically important ones) while also alluding to the need for significantly enhancing the supervisory capacity of RBI with regard to micro-finance.

Fifth, the strong emphasis on corporate governance is note worthy and specifically, the committee has suggested that corporate governance rules will have to be specified (encompassing several issues) for NBFC MFIs by the regulator. A very critical aspect indeed…

Sixth, there are several other aspects in the report that require commendation:
·         The intent to ensure that the aggregate amount of loans given for income generation purposes is not less than 75% of the total loans given by the MFIs;
·         The strong desire to deal with multiple lending, over lending and ghost lending through several measures including better loan origination procedures, establishment of a credit bureau etc
·         The emphasis on having strong client projection measures in place including various codes for MFIs
·         The desire to keep NBFC MFIs out of the purview of state level money lending acts

That said, I am therefore a bit perplexed by the strong (initial) criticisms of the Malegam report…While stakeholders appear to have perceived several weaknesses in the report, I try to list some of these below and provide some explanations with regard to these issues, apart from suggesting ways forward. Many of these issues can (easily) be addressed by dialogue and discussion and do not take away the excellent work done by Malegam committee – that is a point that I would like to make clear upfront…Read on…

1.   The first cited issue is that the ‘implementation mechanisms’ proposed with regard to various suggested measures perhaps lack the required depth and detailing - but that is (only) to be expected in any such first cut broad strategy report. I think it would be unfair to criticize the Malegam committee report on the lack of implementation detail - after all, much of this can be detailed out only after the RBI accepts the various recommendations and I am sure that necessary precautions (by the RBI) will be taken with regard to codes of conduct, client protection measures, corporate governance etc

2.   A second aspect is the use of caps for annual family income, restricting it to Rs.50, 000/-. This is admittedly a suggestion that perhaps cannot be implemented on the ground. On the contrary, this condition could in fact serve to encourage local level corruption, as more and more clients and MFIs seek to get <Rs.50,000/- annual income certificates from the local village administrative officers (or equivalents). It would be impossible to enforce this and in the spirit of argument - “Do not regulate something that you cannot supervise” – it may even be better to remove this artificial barrier.

3.   A third issue is the capping of “overall interest” and “margins” as well as loan size and total loan amount outstanding - they are again not feasible to implement on the ground and can be easily overcome as shown by the past experience with SSI loan and other such (lending) limits.

The committee must also recognize that caps on loan sizes and total loan outstanding may be some what restrictive for the clients and perhaps even at variation with current RBI policy. Therefore, this aspect also needs to re-looked and adapted accordingly. Further, the capping of loan amounts and loan outstanding would severely hurt the clients (in the medium and long term) in their efforts to climb out of poverty. Hence, the committee may want to go with the existing RBI ceiling of Rs 50,000 for loan size as well as total loan outstanding and back it up by ensuring that MFIs have good loan origination and appraisal systems (especially, for large non-consumption loans to individuals, which must also be permitted) and appropriate ceilings for consumption loans (as already proposed by the committee)

The capping of interest could severely hurt the prospects of nascent/small MFIs and those operating in difficult terrains. More importantly, the resultant search for greater efficiencies will surely result in more short cuts being taken with regard to client acquisition, client engagement and the like - we all know what problems that (all of) this caused in AP in the recent past. Hence, the committee may consider removal of the capping on overall interest, while continuing to suggest the capping of the margins – but through more appropriate slabs and with greater flexibility to accommodate the diverse nature of Indian micro-finance and MFIs. This would be a pareto optimal solution indeed…

An alternative would be to completely remove these caps and go in for caps on return on equity and/or dividends…as this blog writer had proposed earlierhttp://microfinance-in-india.blogspot.com/2010/11/never-waste-crisis-use-it-to-get-micro.html

4.   Fourth, given the need for pluralism and choice, it would be appropriate if the committee recognizes and provides legitimacy/space for operation of other legal forms of MFIs including non-profits and mutual benefit institutions. Even if the RBI does not regulate/supervise them (and in all fairness, perhaps cannot do so in a legal sense without amendments to its own acts), this legitimacy provision will go a long way in ensuring that: a) banks lend to these institutions (I have already heard that some banks are telling some MFIs that only large NBFC MFIs will be supported hereafter); and b) usury laws are not used against them, in an operational sense, as has happened in Andhra Pradesh

5.   Fifth, even within the category of NBFC MFIs, the Rs 15 crore net worth requirement seems a big ask for the small and nascent MFIs. Therefore, it would be appropriate if the committee reconsiders this aspect so that all existing small and nascent players – both NBFCs and those NGO MFIs ready and desiring to transform - are not unduly inconvenienced. This seems fair from an equity (pun intended) perspective…

6.      Sixth, Sa-dhan has played a very important role in the development of the Indian microfinance industry and the requirement of an association having 33 1/3 % of its members as NBFC MFIs needs to re-looked at from a practical stand point. At any rate, not treating Sa-dhan as an MFI association will again be perceived as patently unfair and hence, this aspect also needs to be reconsidered…and perhaps changed accordingly...

7.      Seventh, it would be important for the committee/RBI to take cognizance of the (widely prevalent) agent model of micro-finance in India and address issues related to the use of agents – much of the multiple, ghost, over lending and recovery practices can be traced to the use of this fast tracked model that puts clients as the very last… Read on… http://microfinance-in-india.blogspot.com/2011/01/broker-agent-in-indian-micro-finance.html   

8.      Eighth, it would also be useful if the committee looks at the aspect of equity investment in MFIs and build necessary safeguards to ensure that what happened in AP does not recur again. Specifically, the aspect of MFIs growing very, very fast (through multiple, ghost and over lending), perhaps, on their volition and at the behest of (private) equity investors so as to provide greater and faster returns for themselves/investors/shareholders and get further investments at a premium and so on… needs to be looked at closely by the committee/RBI and strongly addressed…Other wise, we may have a few Satyam like situations down the road…

9.      Last but not the least, the report pf the committee, while providing a good framework for the future, perhaps does not adequately address the existing crisis situation (in AP and slowly beginning to unfold in Tamil Nadu) and issues around these – there are a large number of clients and JLG who have been shared at the field level, with each MFI reaching out to them, on a specific day of the week. For example, there are sometimes 6 MFIs sharing a JLG and its clients and this has been the REAL secret of the micro-finance growth story so far…Add to this the huge levels of indebtedness on the ground and I am not sure that the report provides any way out for these aspects…I hope that the committee and RBI look into and address these issues as otherwise, there would be no REAL way forward…

Overall, the Malegam Committee has done a highly commendable job with a very complex problem and that needs to fully recognized and well appreciated. It has shown the right strategic intent and direction for establishing a uniform national regulatory framework for micro-finance in India that attempts to put clients first…Ladies and Gentlemen, let us give the committee a Big Warm Hand…rather than JUST nitpicking on specific issues that can (perhaps) be sorted out through discussion and dialogue…Clearly, it is about time that we - stop being Penny Wise and Pound Foolish and - recognize the huge and legitimate platform for action that the Malegam committee has provided all of us…

Have a great day and wonderful start into the week!