Learning from What I Saw in Eastern UP, Bihar and Madhya Pradesh...

Ramesh S Arunachalam 

My travels through Eastern UP, Bihar and Madhya Pradesh have taught me several things and I have written them up below:

a)  The seriously flawed MFI operational model is in full flow in these areas and is being implemented by many MFIs including those that have a banking license. Let us make no mistake about that! And having seen things for myself on the ground at close quarters, I am unwilling to buy arguments provided by my friends sitting, mostly in Delhi or Mumbai or Hyderabad...

b) The centre leader/group leader/equivalent is the most common type of agent, who plays a very pivotal role in the entire credit disbursement and recovery process. As a result, KYC is provided by these agents is and will be as good as these agents deem it fit.A detailed post on the agent will be provided separately!

c)  In overall terms, the same DISRUPTIVE MFI practices that were prevalent in (erstwhile) Andhra Pradesh in terms of multiple lending, ghost lending, proxy lending, staff loans, frauds by staff and so on are prevalent as also strong arm tactics for recovery, which, in my opinion appears even more serious than it was in Andhra Pradesh.  

d) In fact, a TRULY independent VALIDATION of the credit bureau data with ground level data should be immediately conducted in an EXHAUSTIVE manner across the three states. Sample studies will not help and an exhaustive enumeration and validation of the credit bureau data by a completely independent team of people will close the debate, once and for all, on whether what happens on the ground is indeed reflected in what is there in the credit bureau. In my humble opinion, there is a lot that the credit bureau’s are missing in terms of actual action on the ground...

e)  We need to understand what are the causative factors that have led to the stupendous growth in loan volumes in these areas and on what basis these increases in loans have occurred? We also need to understand why and how multiple, ghost, proxy lending have increased? Likewise, the burgeoning use of agents and increase in coercive recovery practices in the MFI model will also have to be better understood! 

f)    With all due respect, so much for the tiered regulation and supervision that came from the Malegam Committee Report (MCR)...As I told the regulators/supervisors then, written about it later and also communicated to the Hon Parliamentary Standing Committee on Finance, the MCR proposed a regulatory/supervisory structure that SIMPLY cannot work on the ground. I have not seen any serious regulatory activity/supervision on the ground either by the regulator/supervisor and/or by others including the banks/SROs. As I have always mentioned, self-regulation is an OXY MORON. Period. If people want to satisfy their conscience with the presence of SRO’s, so be it but SROs by virtue of being member associations have an innate conflict of interest. We need to recognise that, deal with this issue and make appropriate alternative arrangements!

g)  My observation of the KYC practices in these areas is that it is extremely poor and primarily so because agents provide whatever KYC they can lay their hands on...I have dead peoples’ KYC details that were given for some proxy loans taken...and there is much more on KYC which I will post separately on...MFIs are captives with these NOTORIOUS agents who, as they did in (esrtwhile) Andhra Pradesh, can move clients around from one MFI to another and also get clients to just disappear from an MFI’s radar...at the blink of an eye lid!

h) Digital financial inclusion is at best limited to remittances/payments and the infrastructure for the same is very, very poor as we travel the real rural interiors in Eastern UP, Bihar and Madhya Pradesh. This is also true of much of rural India. I would be very worried in using digital financial inclusion for SAVINGS - especially, given the nature of the lower level intermediaries involved and the (lack of) controls prevalent therein - both of these constitute a huge risk to peoples’ money including public deposits. At best, digital financial inclusion can be an urban/peri-urban phenomenon and work among the younger mobile/internet savvy population, where ever they exist. Pilots of course can showcase DIGITAL FINANCIAL INCLUSION in great measure among any population/context but the ability to scale up these (in a commercial manner) will be limited to younger mobile/internet savvy population, where ever they exist. This is especially true in India, where the DIGITAL divide is still huge, especially when you travel to remote rural areas, both due to poor infrastructure as well as ability of clients to use these. A separate FULL post on DIGITAL FINANCIAL INCLUSION will be put up soon but let us not make the mistake and think that branchless banking and digital financial inclusion will help bring “lasting and sustainable financial inclusion” to the excluded and poor clients in these areas. For this, we need to be clear on the facts...as enumerated below

In many of the areas I visited, many of the families had at least one person who had been included in the formal/quasi financial system through the years but who was excluded later for a variety of reasons including poorly structured products, almost negative returns from agriculture/rural enterprises (often caused by imperfections in the markets for their produce/products as well as imperfections in the market for labor), imperfect delivery systems including corruption in the financial system and so on (This is dealt with separately). Therefore, it is too much to expect DIGITAL FINANCIAL INCLUSION to help bring “lasting and sustainable financial inclusion” to the excluded and poor clients in these areas. Much more will be needed or else, we would be setting ourselves up for failure at a later date! The key point that is that we need to be realistic in terms of what financial inclusion and/or digital financial inclusion can achieve on the ground and the risks/limitations inherently associated with both of these.

So long friends! Stay tuned for more updates!