Ramesh S Arunachalam
Dear Friends/Colleagues
Please see the e mail I posted in the Microfinance
Practice (MFP), a popular e group for Microfinance professionals in May 2010, about
5 months before the actual 2010 AP crisis...
Kindly note that the E mail precedes the 2010 AP
Crisis of September 2010 and thereafter...
And I am sure we are not far away from a HUGE crisis
in Indian Microfinance in 2016 and thereafter...
History after all repeats itself...and like before
there are others corroborating the facts I have stated...
The
BIGGEST PROBLEM is the MFI operational model and that has not changed...agents
still dominate the scene...so much for responsible microfinance...who is to
blame for...what is happening is hard to tell...but I can tell you with strong
conviction and authority that what is going on is CERTAINLY not
responsible microfinance...in any significant manner...What is worse is that all of this is happening with PUBLIC DEPOSITS...
Stay
tuned for more updates...
Date: Thu, 13 May 2010 17:39:01 +0000
To: MicrofinancePractice@yahoogroups.com
Subject: Re: Re: [MFP] Exclusive: SKS Microfinance journey to IPO - An inside story
From: r_arunachalam1@rediffmail.com
CC: r_arunachalam@hotmail.com
Dear Mr Manohar
Thanks so much for corroborating many of the issues and especially, the aspect of financial frauds and internal control failures. In most cases, the frauds and internal control failures seen in the Indian MF sector can be grouped into five categories:
1) Lack of adequate management oversight and accountability, and failure to develop a strong control culture within the institution.
Without exception, the cases of internal control failures and associated losses reflect: a) management inattention to, and laxity in, the control culture of the institution; b) insufficient guidance and oversight by boards of directors and senior management; and c) a lack of clear management accountability through the assignment of roles and responsibilities. These incidents also reflect lack of appropriate incentives for management to carry out strong line supervision and maintain a high level of control consciousness across the organisation.
2) Inadequate recognition and assessment of the risk of certain activities, whether on- or off-balance sheet.
Many organisations that have suffered such internal control failures neglected to recognise and assess the risks of new products and activities, or update their risk assessments when significant changes occurred in the environment or business conditions including growth. Many recent incidents highlight the fact that control systems that function well for traditional or simple products are unable to handle more sophisticated or complex products, especially in burgeoning growth.
3) The absence or failure of key control structures and activities, such as segregation of duties, approvals, verifications, reconciliations, and reviews of operating performance.
Lack of segregation of duties in particular has played a major role in the internal control failures that have occurred.
4) Inadequate communication of information between levels of management within the institution, especially in the upward communication of problems.
To be effective, policies and procedures need to be effectively communicated to all personnel involved in an activity. Some internal control failures occurred because relevant personnel were not aware of or did not understand the policies. In several instances, information about inappropriate activities that should have been reported upward through organizational levels was not communicated to the board of directors or senior management until the problems became severe. In other instances, information in management reports was not complete or accurate, creating a falsely favourable impression of a business (portfolio) situation..
5) Inadequate or ineffective audit programs and monitoring activities.
In many cases, internal audits were not sufficiently rigorous to identify and report the control weaknesses. In other cases, even though auditors reported problems, no mechanism was in place to ensure that management corrected the deficiencies.
Thanks and I am very grateful to members of this group who would like to share similar experiences. Thanks in advance
Best Regards
Ramesh
On Thu, 13 May 2010 22:40:02 +0530 wrote
>
Friends,
I spent around 2 months in the summers of 2007 studying the field practices of a loosely bound group of MFIs operating in many states of India, including Chhattisgarh, Madhya Pradesh and Maharashtra. While I conducted the major portion of my study in Maharashtra, the time spent in Chhattisgarh also is enough to corroborate many of the issues raised by Mr Arunachalam in his mail.
I came across and documented good number of cases of ghost clients, involvement of mafia like middlemen, local goons and recovery agents. Moreover, some of the goons were serving on the rolls of the MFIs and were creating trouble both for the MFIs and their clients.
The MIS was practically non-existent: the application forms were sparingly filled up, registers and records were incomplete and there were gross mismatches between the figures reported by the branch offices and the head offices.
The MFIs had become so dependent on the local goons that, despite knowing that they (the goons) were behind the ghost clients and other forgery, they(the goons) were still kept as staff on the rolls, just in anticipation that they would help recover some of the lost money.
Moreover, the sole purpose of the operation of these MFIs, in my opinion, appeared to be shareholders' profit maximisation, that too in short term. The interesting thing was- some of the people leading these MFIs had very genuine intentions, but they were unable to put proper systems and processes in place, resulting in failures of various kinds, including financial frauds, improperly designed products and loss of control over the employees.
The need of the hour is to acknowledge the real situation and face these as challenges. Otherwise, it would be like shutting our eyes to the fire around us and ultimately burn down to ashes. Any action would begin with acceptance of the problems, which exist undoubtedly.
Regards,
Murli Manohar
--- On Thu, 13/5/10, Ramesh S Arunachalam wrote:
From: Ramesh S Arunachalam
Subject: Re: [MFP] Exclusive: SKS Microfinance journey to IPO - An inside story
To: MicrofinancePractice@yahoogroups.com
Cc: r_arunachalam@hotmail.com
Date: Thursday, 13 May, 2010, 4:22 PM
Dear Colleagues
A lot has been written about the SKS IPO, the commercialisation of MF and how the for-profit approach is superior is to other appraoches and vice versa. Several enlightening responses have been received including discussions on (Prof) Sriram's papers. Indeed, Sriram's papers are candid, revealing and thought provoking and the paper by Dr Thorat and I (2005) did attempt to highlight several issues raised in his papers.
While alternative points of view are well taken and must be respected, there is something very fundamental and serious that needs the attention of the industry in India. I just returned from several days in the field (to several states in India) where all the well known Large Indian MFIs are operating. Much of what I saw in the visits and what I heard re-confirms what Dr Thorat and I wrote in our paper for the NABARD high level policy conference in 2005. A lot of it resonates with what Sriram wrote in a recent article. I summarise some of the key issues below:
First, there still appears to be huge fraud in the Indian MF industry. I came across several cases of blatant internal control failures (I have documented about 43 cases so far). From staff running away with Rs 1.39 Crores to several other intentional and inadvertent failures, unethical practices and frauds appear to abound in the Indian MF sector - including ghost clients, ghost branches and ghost field officers. Dr Thorat and I said this, way back in 2005 and I am even more convinced now!
Second, the collected interest rates (effective - in a sense - PUN intended) are very different from the stated interest rates (nominal - in a sense - PUN Intended). I do have evidence from the field which shows the huge variation in what is stated as interest and what is collected as interest and I will share that with this group at a later date (as I am calculating the EIR and having it re-verified). It is amazing indeed!
Third, I have seen how some of the new and fast growing MFIs are engaging in very unethical practices including snatching clients of other MFIs - by enticing them with larger loans and through other unethical means - like standing outside bank branches and catching hold of members/leaders who come to make repayment and using various means (including coercion) to make them clients of new entrant MFIs (A new method of client targeting indeed). Clients are also on record about Goondas (thugs) and 3rd Degree Methods being used by a new group of intermediaries allegedly used by MFIs - the DSA (Direct Sales Agent) kind of group leaders (could be a centre or a group leader), who apparently use local thugs to ensure that payment comes back on time and/or that they join another MFI and/or they take a loan, even if not required. These DSA group leaders often transfer groups from one MFI to another for money and get new clients for MFIs and they are getting to become district level mafia groups. I infact came across sets of DSA group leaders in several districts, whom claimed to be exclusively switching groups of clients between and across MFIs for a good commission as also performing other tasks like creating ghost clients, recruiting other MFI clients, ensuring repayments etc.
There are two other observations for now:
a) it is clear from the field that clients are hugely shared and duplicated, there is a lot of double/triple counting of clients and therefore the outreach numbers (and scale) are hugely hugely over-estimated; b) the use of technolgy is over hyped and most experiments (including the first ones that got awards from CGAP/others for use of technology) are no longer operational on the ground - simple because they are not convenient and also because, in many cases, the base MIS is very weak. It would have been good if these organisations had leap frogged the original technology but they have not done that either. There are several instances where the MIS continues to be inaccurate and non-transparent, especially at the branch and lower level. In fact, in many remote places, no MIS exists and what the field worker says is the MIS and the same gets reported upward - some times, all the way up to the commercial bank. Again, I have very good evidence from AP, Orissa, Tamilnadu, Karnataka, Chattisgarh and other states
Overall, there appear to be a lot of skeletons in the Indian MF cupboard... and it is time that cupboard is emptied and the industry gathers courage to cleanse its stables. A key issue here (that I am raising) is that a lot seems to be going wrong in the Indian MF sector because of the drive for scale, commercialisation and share holder profits. What also seems clear is that this has perhaps resulted in the Indian industry slowly forgetting its clients. While profits, scale, share holder welfare, access and inclusion are undoubtedly important, clients should come first and need to be remembered and focussed upon. And of course, last but not the least, while wealth can be created and profits can be made - it should be done in a fair, transparent and ethical manner. I am sure every one in this group will agree to that and I sincerely hope that all of those who are involved in MF in India, will try to emphasise and ensure that this indeed happens - both in the short and long run.
Warm Regards
Ramesh
PS: I have reasonably good evidence with names of organisations, people and places and the actual incidents, which I am writing up!
To: MicrofinancePractice@yahoogroups.com
Subject: Re: Re: [MFP] Exclusive: SKS Microfinance journey to IPO - An inside story
From: r_arunachalam1@rediffmail.com
CC: r_arunachalam@hotmail.com
Dear Mr Manohar
Thanks so much for corroborating many of the issues and especially, the aspect of financial frauds and internal control failures. In most cases, the frauds and internal control failures seen in the Indian MF sector can be grouped into five categories:
1) Lack of adequate management oversight and accountability, and failure to develop a strong control culture within the institution.
Without exception, the cases of internal control failures and associated losses reflect: a) management inattention to, and laxity in, the control culture of the institution; b) insufficient guidance and oversight by boards of directors and senior management; and c) a lack of clear management accountability through the assignment of roles and responsibilities. These incidents also reflect lack of appropriate incentives for management to carry out strong line supervision and maintain a high level of control consciousness across the organisation.
2) Inadequate recognition and assessment of the risk of certain activities, whether on- or off-balance sheet.
Many organisations that have suffered such internal control failures neglected to recognise and assess the risks of new products and activities, or update their risk assessments when significant changes occurred in the environment or business conditions including growth. Many recent incidents highlight the fact that control systems that function well for traditional or simple products are unable to handle more sophisticated or complex products, especially in burgeoning growth.
3) The absence or failure of key control structures and activities, such as segregation of duties, approvals, verifications, reconciliations, and reviews of operating performance.
Lack of segregation of duties in particular has played a major role in the internal control failures that have occurred.
4) Inadequate communication of information between levels of management within the institution, especially in the upward communication of problems.
To be effective, policies and procedures need to be effectively communicated to all personnel involved in an activity. Some internal control failures occurred because relevant personnel were not aware of or did not understand the policies. In several instances, information about inappropriate activities that should have been reported upward through organizational levels was not communicated to the board of directors or senior management until the problems became severe. In other instances, information in management reports was not complete or accurate, creating a falsely favourable impression of a business (portfolio) situation..
5) Inadequate or ineffective audit programs and monitoring activities.
In many cases, internal audits were not sufficiently rigorous to identify and report the control weaknesses. In other cases, even though auditors reported problems, no mechanism was in place to ensure that management corrected the deficiencies.
Thanks and I am very grateful to members of this group who would like to share similar experiences. Thanks in advance
Best Regards
Ramesh
On Thu, 13 May 2010 22:40:02 +0530 wrote
>
Friends,
I spent around 2 months in the summers of 2007 studying the field practices of a loosely bound group of MFIs operating in many states of India, including Chhattisgarh, Madhya Pradesh and Maharashtra. While I conducted the major portion of my study in Maharashtra, the time spent in Chhattisgarh also is enough to corroborate many of the issues raised by Mr Arunachalam in his mail.
I came across and documented good number of cases of ghost clients, involvement of mafia like middlemen, local goons and recovery agents. Moreover, some of the goons were serving on the rolls of the MFIs and were creating trouble both for the MFIs and their clients.
The MIS was practically non-existent: the application forms were sparingly filled up, registers and records were incomplete and there were gross mismatches between the figures reported by the branch offices and the head offices.
The MFIs had become so dependent on the local goons that, despite knowing that they (the goons) were behind the ghost clients and other forgery, they(the goons) were still kept as staff on the rolls, just in anticipation that they would help recover some of the lost money.
Moreover, the sole purpose of the operation of these MFIs, in my opinion, appeared to be shareholders' profit maximisation, that too in short term. The interesting thing was- some of the people leading these MFIs had very genuine intentions, but they were unable to put proper systems and processes in place, resulting in failures of various kinds, including financial frauds, improperly designed products and loss of control over the employees.
The need of the hour is to acknowledge the real situation and face these as challenges. Otherwise, it would be like shutting our eyes to the fire around us and ultimately burn down to ashes. Any action would begin with acceptance of the problems, which exist undoubtedly.
Regards,
Murli Manohar
--- On Thu, 13/5/10, Ramesh S Arunachalam wrote:
From: Ramesh S Arunachalam
Subject: Re: [MFP] Exclusive: SKS Microfinance journey to IPO - An inside story
To: MicrofinancePractice@yahoogroups.com
Cc: r_arunachalam@hotmail.com
Date: Thursday, 13 May, 2010, 4:22 PM
Dear Colleagues
A lot has been written about the SKS IPO, the commercialisation of MF and how the for-profit approach is superior is to other appraoches and vice versa. Several enlightening responses have been received including discussions on (Prof) Sriram's papers. Indeed, Sriram's papers are candid, revealing and thought provoking and the paper by Dr Thorat and I (2005) did attempt to highlight several issues raised in his papers.
While alternative points of view are well taken and must be respected, there is something very fundamental and serious that needs the attention of the industry in India. I just returned from several days in the field (to several states in India) where all the well known Large Indian MFIs are operating. Much of what I saw in the visits and what I heard re-confirms what Dr Thorat and I wrote in our paper for the NABARD high level policy conference in 2005. A lot of it resonates with what Sriram wrote in a recent article. I summarise some of the key issues below:
First, there still appears to be huge fraud in the Indian MF industry. I came across several cases of blatant internal control failures (I have documented about 43 cases so far). From staff running away with Rs 1.39 Crores to several other intentional and inadvertent failures, unethical practices and frauds appear to abound in the Indian MF sector - including ghost clients, ghost branches and ghost field officers. Dr Thorat and I said this, way back in 2005 and I am even more convinced now!
Second, the collected interest rates (effective - in a sense - PUN intended) are very different from the stated interest rates (nominal - in a sense - PUN Intended). I do have evidence from the field which shows the huge variation in what is stated as interest and what is collected as interest and I will share that with this group at a later date (as I am calculating the EIR and having it re-verified). It is amazing indeed!
Third, I have seen how some of the new and fast growing MFIs are engaging in very unethical practices including snatching clients of other MFIs - by enticing them with larger loans and through other unethical means - like standing outside bank branches and catching hold of members/leaders who come to make repayment and using various means (including coercion) to make them clients of new entrant MFIs (A new method of client targeting indeed). Clients are also on record about Goondas (thugs) and 3rd Degree Methods being used by a new group of intermediaries allegedly used by MFIs - the DSA (Direct Sales Agent) kind of group leaders (could be a centre or a group leader), who apparently use local thugs to ensure that payment comes back on time and/or that they join another MFI and/or they take a loan, even if not required. These DSA group leaders often transfer groups from one MFI to another for money and get new clients for MFIs and they are getting to become district level mafia groups. I infact came across sets of DSA group leaders in several districts, whom claimed to be exclusively switching groups of clients between and across MFIs for a good commission as also performing other tasks like creating ghost clients, recruiting other MFI clients, ensuring repayments etc.
There are two other observations for now:
a) it is clear from the field that clients are hugely shared and duplicated, there is a lot of double/triple counting of clients and therefore the outreach numbers (and scale) are hugely hugely over-estimated; b) the use of technolgy is over hyped and most experiments (including the first ones that got awards from CGAP/others for use of technology) are no longer operational on the ground - simple because they are not convenient and also because, in many cases, the base MIS is very weak. It would have been good if these organisations had leap frogged the original technology but they have not done that either. There are several instances where the MIS continues to be inaccurate and non-transparent, especially at the branch and lower level. In fact, in many remote places, no MIS exists and what the field worker says is the MIS and the same gets reported upward - some times, all the way up to the commercial bank. Again, I have very good evidence from AP, Orissa, Tamilnadu, Karnataka, Chattisgarh and other states
Overall, there appear to be a lot of skeletons in the Indian MF cupboard... and it is time that cupboard is emptied and the industry gathers courage to cleanse its stables. A key issue here (that I am raising) is that a lot seems to be going wrong in the Indian MF sector because of the drive for scale, commercialisation and share holder profits. What also seems clear is that this has perhaps resulted in the Indian industry slowly forgetting its clients. While profits, scale, share holder welfare, access and inclusion are undoubtedly important, clients should come first and need to be remembered and focussed upon. And of course, last but not the least, while wealth can be created and profits can be made - it should be done in a fair, transparent and ethical manner. I am sure every one in this group will agree to that and I sincerely hope that all of those who are involved in MF in India, will try to emphasise and ensure that this indeed happens - both in the short and long run.
Warm Regards
Ramesh
PS: I have reasonably good evidence with names of organisations, people and places and the actual incidents, which I am writing up!
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