Where Angels Prey

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

Sunday, March 20, 2016

Governance and End User Client Protection: The “Revolving Door” Regulatory Conundrum for (Digital) Financial Inclusion and Microfinance

Ramesh S Arunachalam 
People have often asked me as to why the regulation and supervision of micro-finance and financial inclusion and especially, protection of end user clients has generally been weak in India. I attribute the same to the following reasons.

First is the near seamless shift of key people from the private financial sector to regulatory and supervisory bodies through the “reverse revolving door” phenomenon.

I have known top executives of large financial conglomerates (very interested in financial inclusion and microfinance) and representatives of special interest groups including lobbyists, who have built up extremely close (working) relationships with the regulators/supervisors - in particular those who oversee or regulate the financial inclusion/microfinance sector.

Specifically, these key people from the private financial sector, with a deep interest in financial inclusion and microfinance, have then been appointed to the governing boards, expert committees and/or senior management at regulatory and supervisory bodies (whose mandate also includes the regulation and supervision of the financial inclusion and micro-finance sector).

Often called as the reverse revolving door phenomenon, these people have established a very strong pro-financial inclusion and microfinance bias in policy formulation and regulatory enforcement by regulators and supervisors that oversee their (former) industry, former employers and/or related institutions. When I talk of regulatory enforcement, I am especially talking of end user client protection issues, which have not got the kind of attention that they require and deserve, especially given what happened in Andhra Pradesh in 2010!

And given the huge end user client protection and other risks that are prevalent in (digital) financial inclusion and micro-finance products and delivery processes, I am simply amazed at what is going on...indeed...especially, after what I have seen in eastern UP, Bihar and Madhya Pradesh as well as other contexts in recent times...

Second, I have seen the shift of key people from government institutions to the private (financial inclusion and microfinance) sector through the normal revolving door phenomenon. I am taking of the case where key people from regulatory and supervisory bodies, DFIs and other government lenders and institutions have moved (either through a permanent and/or temporary relationship) to lucrative private-sector positions (in financial inclusion and microfinance). Again, irrespective of whatever happens, end user client protection cannot and must not suffer but that is what is happening in real time (sadly)!

And interestingly, these people use their regulatory/government experience and long standing connections to benefit their new employer and/or industry directly as well as indirectly (e.g. through the drafting of a supportive regulatory policy, in public procurement and so on and so forth). This has not only led to a lax regulatory environment and poor supervision by their former colleagues (with regard to the financial inclusion and microfinance sector) but also resulted in the drafting/framing of policies hugely supportive to the financial inclusion and microfinance industry, and especially at the expense of end user client protection/well being. Again, this is not at all acceptable under any circumstances!

While I can easily name people and institutions, my objective is not that but rather to isolate reasons for lack of improvement in the regulatory/supervisory environment for financial inclusion and microfinance, especially with regard to end user client protection.  

Third, I have also seen situations where former decision makers (including policy makers and executive decision makers) have become paid advocates and use their knowledge of and connections with governmental agencies and regulators and supervisors to advance the interests of (corporate) microfinance and financial inclusion companies.  

Especially, this category of people are involved in lobbying a generalist view on the public good nature of financial inclusion and microfinance services when in fact there is so much harassment of end user clients that is taking place at the grass-roots and a whole lot of money is being made illegally (especially at the local level) at the expense of low income and bottom of pyramid clients. The agents who rule at the grass-roots make it very expensive – whether monetarily and/or physically for the low income and bottom of pyramid clients. Why are the regulators and supervisors turning a blind eye? Do not the end user clients matter in the larger scheme of things? These and other questions continue to run through my mind, even as I write this post!

The larger point that I want to make from all of this is that grass-roots reality is very different from what is being portrayed and there is hardly any regulation/supervision and client protection that is going on in real time (especially at the grass-roots)! And I am not talking of interest rates here but the fact that a whole lot of money is being made at the grass-roots (in the financial inclusion and microfinance sector) through mechanisms that are illegal, unethical and client unfriendly. And it is my humble belief that this calls for a serious effort to create a truly independent end user client protection regulator for (digital) financial inclusion and microfinance with a STRONG grass-roots presence and executive powers so that end user client protection indeed becomes a reality and can be ensured in real time always! Thank You!

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