Ramesh S Arunachalam
The
microfinance institution (MFI) model in India has been through a (serious)
crisis over the years (since 2005 and especially in 2010) and a lot of this has
to do with the inability of the boards of MFIs to actually implement (in real
time) some of the very (high sounding) concepts and prescriptions for responsible
finance that came from various quarters.
While it cannot be denied that some MFIs
were not interested in responsible microfinance, some others perhaps could not
ensure the implementation of these well-meaning concepts on a consistent basis
in real time. A classic example is the well-intentioned (Sa-Dhan) code of
conduct[1]
in 2006, which was often waved at meetings with the AP
government but rarely visible, in terms of practice, on the ground. Slowly,
perverse incentives (as Vijay Mahajan had famously noted in 2010) set in and
eventually led to what is now referred to as the 2010 Andhra Pradesh
microfinance crisis – the world’s largest crisis to date. Many of those symptoms are now appearing in India’s most populous state
of Uttar Pradesh (UP) - Eastern UP to be precise. Similar symptoms are also
observable in Bihar and Madhya Pradesh as well.
In retrospect, a good 6 years after the
2010 crisis took shape, one can look back dispassionately and analyze what
essentially happened was a failure of the commercial microfinance —primarily
because the checks and balances required for commercial
microfinance (to actually work on the ground) were almost absent.
By checks and
balances, I mean two things, including lack of (i) supervisory oversight, and
that contributed in huge measure to the crisis then, and (ii) a strong,
independent, and objective internal audit function within these MFIs. While
even a single letter from the supervisor (or regulator) could have mitigated
the scale of the problems that happened in AP in the years preceding 2010, the
absence of an independent and objective internal audit system certainly hurt
the MFIs even more. It may be worthwhile
to mention that even on date, as the 2010 like crisis starts to unfold in
Eastern UP, Bihar and Madhya Pradesh, both supervisory oversight, as well as a
strong, independent, and objective internal audit function within concerned
MFIs is sadly inadequate!
I hope that the powers that be are able to look into and
redress the situation immediately as otherwise, the Indian microfinance sector’s
date with another (larger, nationwide) crisis is most certainly on the anvil!
A friend sent me this news from the field some time ago and
I wrote to many of the leaders in microfinance (in India and elsewhere) via e
mail on, Jan 18, 2016 at 12:24
PM. I have now
visited various places in these different states, which I also happen to know very
well because I have worked in each and every district in these three states. And as things stand, they are INDEED, much, much more serious
than as noted in the article
When I warned the sector leaders (including bankers) many times about the 2005/6 Krishna and 2010 AP crisis (prior to the crisis), they tried to shoot the messenger. Never mind! What is coming is worse than the 2010 Andhra Pradesh crisis and some of the leading MFIs may be directly involved. Déjà vu! As I have repeatedly written in my blog (www.microfinance-in-india.blogspot.com) and my three books - The Journey of Indian Microfinance and An Idea Which Went Wrong: Commercial Microfinance in India – and – Where Angels Prey , the microfinance operational model is hugely flawed and it calls for many strong changes/interventions on the part of the microfinance industry which, in my humble opinion, has either failed to learn from the past crises situations and/or refused to implement learning from past crisis situations like Krishna (2005/6), Kolar (2008/9) and AP (2010). As a result, we are now we are headed for a nation-wide microfinance crisis in 2016!
Readers may recall that the crisis in Krishna district was localized. Kolar,
was a little larger and more concentrated in terms of the crisis spread. Then we
had a whole state in crisis (erstwhile AP 2010) and now it is a national microfinance crisis (spread across multiple states).
It is indeed a time bomb that is ticking away and when it bursts, I can
assure you that a lot of money from across the world will be lost and more importantly, a lot of
FINANCIAL INCLUDED clients will have been financially excluded! So much for the INCLUSIVE FINANCE AGENDA!
While stakeholders may have tried to introduce good practices in the
intervening years, it appears that there is very little change in the
operational model of the microfinance (mainly practiced by the new generation
for-profit MFIs including NBFCs and Banks) which continues to grow in many
places in these three states at a very alarming rate. Self reported data by MFIs to
the Mix Market does not provide a true picture and I have warned MIX about the problems in the data that they collect. When you visit the field and
observe for yourself, you can see that the crisis could become (much) worse
than what we saw in Andhra Pradesh in 2010.
Irresponsible growth, as you all know, carries a huge price and through
this article, I am informing the Indian Microfinance Industry and its
stakeholders PUBLICLY (again) that if this irresponsible growth is unchecked and if solid
changes are not brought about in the industry, the price will be much, much
larger than what it was in Andhra Pradesh in 2010. I have nothing to gain by
stating this and I have no vested interest what-so-ever. I am deeply concerned about the microfinance industry and of course,
the well being of all of its clients. This is why I have repeatedly written
about the happenings (pro bono) for almost 6 years now!
[1] I have subsequently pointed out
serious flaws with code of conducts assessments in 2011 in several articles...
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