Where Angels Prey

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

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!


  1. dear ramesh,
    am pasting some notes from a story that i had been researching about the mf agents. like you say, while more studies are needed to quantify the prevalence of agents, the structural reasons responsible for their entry into microfinance might be widespread.

    one. the generic agent models.
    1. 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. .

    2. In a second model, an community member -- a shopkeeper, a local bigwig, a rickshaw puller, etc --  offers to supply borrowers to the MFI. Over time, he becomes the local point person, and all the MFI's work is done through him. He does the lending and he does the recollections. He might lend to the women. Or he might take their names on the application forms but lend to someone else.

  2. There are some larger points to be made here. It is in the interest of the agent to keep the repayments on track. He/She stands to lose if the arrangement collapses. Also, the fact that agents are doing the onlending need not be bad per se. They know the market, and can customise loans far better than the MFIs – they might lend anywhere between 2000 to 200,000 to a borrower, offer flexible repayment schedules, all the while ingeniously ensuring weekly repayments are on schedule. Until, of course, an external shock throws all calculations awry.

    Which is what happened in Kolar. Accrding to an M-CRIL report on the crisis, a local agent called Sardar Khan had taken a loan in the name of 20-25 local women, and onlent it further. When he failed to repay, the MFI staff went after these women. Who in turn told Khan to pay up. In the heat of the moment, he drank poison, landed in hospital, his friends complained to the local Anjuman Committee, which issued a fatwa banning any business with MFIs.

    4. The third model is more predatory. Here, a local political agent steps in as a local intermediary. In this case, he becomes the local agent with the intent of converting the loans into political capital. Says an ex-employee of both SKS Microfinance and Spandana: " "In most of the slums, there is usually one ganglord whose permission you need to work in that area.""

    The balance of power here is in the agent’s favour. If the agent leaves, the MFI will not know who its final clients were. Nor would the clients know who the MFI is – because if the MFI tries to promote itself in the village/locality, it will alienate its agent. Also, if another MFI comes in, the agent can play the two against each other. Or start representing it as well. The branch staff of the first MFI will rarely be in a position to object. Also, if the agent is not able to keep the repayments coming, the branch staff is likely to advance him/her a fresh loan to avoid a default which would expose the distortion.

  3. (and this is the third and final comment from me on le agents)

    two. larger thoughts.
    The smaller agents lead lives of quiet desperation. If the borrower defaults, the MFI will contact the women. And then, they will point at the agent. Who will probably get hauled off to the police. The bigger agents raise questions about the utility of microfinance itself. They thrive on patronage. Which translates into a complete negation of what microfinance stood for. I am reminded of something that Lenin Raghuvanshi, founder and executive director of Peoples' Vigilance Committee on Human Rights, who works with the beleaguered weavers of banaras, says communities such as these are structurally marginalised. To ensure repayment, MFIs are tying up with local Dabanng characters. “But if an MFI ties up with the local elite to disburse funds, isn't it getting coopted into the existing semi-feudal society?" If so, what kind of qualitative change in the lives of its clients can it possibly bring about?


  4. Good to know atleast now about the deep root of broker and agent presence in mfi operations.

    Now all mfis must come and share the truth than hiddig the matters.

    These agents are organised in a systematic manner, but Mfis are in unorganised stage.
    so, it is better to work with transparency and accountability .
    unless we weedout agent model one day mfis has to pay a big price for this kind of events???.
    Even now it is not too late.

  5. Dear Sekhar and Peter

    Thanks for your useful feedback.

    I cover the operational evolution of the agents in a separate post and will use your insights in this


    Warm regards