Where Angels Prey

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

Thursday, January 6, 2011

Will A Credit Bureau Eliminate Multiple Lending?

Ramesh S Arunachalam
Rural Finance Practitioner

At almost every press conference, one can hear the CEO of MFIN (Mr Alok Prasad) saying that once the credit bureau is operational, the problems of multiple lending will simply vanish…This perhaps prompted, the popular micro-finance website, www.indiamicrofinance.com to put up a new year cartoon – titled The Slumdog Microfinance Cartoon[i]. 

I have also heard other microfinance practitioners like Mr Vasudevan, CEO of Equitas (one of the fastest growing and top 10 Indian MFIs) who argues that the credit bureau will completely take care of multiple lending

Let us look at whether this possible…

First, I would like to set the record straight with regard to my views on the credit bureau. I have not spurned the suggestion of a credit bureau at any time. In fact, if one would read my previous (joint) post (with Mr Bhalchander) on the credit bureau (http://microfinance-in-india.blogspot.com/2010/11/proposed-credit-bureau-for-micro.html), it will be clear that all we are saying is that a credit bureau is a good thing but let us not put so much pressure on it as it may then fail. We also said that a credit bureau is not a guarantee against multiple lending and will not eliminate it and there are many good reasons as to why it may not work at all.

That said, and I emphasise that again – as long as client acquisition is through agents, brokers, take over/breaking of SHGs and other not-so-good means and as long JLGs and clients are OPERATIONALLY shared by MFIs and as long as MFIs hold meetings and disburse loans on successive days to shared JLG and clients, the problem of multiple lending will not go away.

Make no mistake about that.

The credit bureau is a data solution but there has to be a physical solution on the ground…Also, a credit bureau gives you data based on what you feed in and there are lots of issues with regard to the credibility of MIS in MFIs and please see an earlier post related to MIS… http://microfinance-in-india.blogspot.com/2010/11/understanding-state-of-management.html

Okay, what then can perhaps make a credit bureau work? In my opinion, there are several things that need to happen and I hope that the RBI sub-committee and the micro-finance industry work together in ensuring that these happen on the ground…

First, for the credit bureau to work ‘The Boards of MFIs’ must be able to re-orient their organizational vision to one of responsible finance - this means they will have to move away from their desire for ‘Super Fast’ unnatural growth and high profits (to gain better valuations in investment and go for an IPO etc) to balanced natural growth and normal profits. Much of the motivation for multiple lending appears to be related to the above and unless that vision is altered, no amount of technology can perhaps prevent multiple lending. Technology was touted as the solution in 2005/6 after the Krishna crisis and you can judge for your self what it has achieved so far…You may want to read the post on MIS given above as well…which clearly shows that even the most basic issues with regard to an MIS still need significant attention in Indian micro-finance…

That said, further, even when the boards take the call, the MFI’s senior management must be able to translate the above vision in action by bringing about changes in systems, policies, procedures, processes, staff attitudes etc. This is very critical as otherwise, ‘intended strategies’ will remain on paper and realized strategies will be very different. It is like what Jack Welch, the famous CEO, commenting on the new breed of strategic planners in the 1980s, once said, “There is no point in developing great plans with lot of effort when you are going to do something else on the ground. Often times, organizations put these well prepared plans in the shelf and lock them up and get around to doing what they are anyway doing”. 

Therefore, once the MFI board and senior management have done what they have to do, then it may be possible to check multiple lending provided:
a.      Internal control systems have sufficient checks/balances to do so;
b.      Internal audits spot multiple lending exceptions, as and when they occur and recommend/ensure immediate corrective action
c.      MIS provides accurate branch/field level data both from the perspective of the credit bureau (CB) and also in terms of portraying ground level reality, so that multiple lending can be tracked and dealt with – this is a very critical aspect
d.      Field level frontline are NOT incentivised on disbursements and they are also made to believe in and work towards responsible finance - where multiple and reckless lending is viewed as a bane rather than boon for the organisation
e.      A related issue here is that MFIs must wholeheartedly decide to adopt green field client acquisition processes and do not indulge in other types of (not-so-desirable and fast tracked) client acquisition methods
f.        Bankers exercise appropriate due diligence with regard to multiple lending, as part of their (notional) supervisory role in discharging their priority sector obligations
g.      The Central Bank ensures appropriate supervision on the ground, with regard to practices of its (NBFC) MFIs including multiple lending, as part of its on-site and off-site supervision obligations stemming from its non-bank supervision duties

This and much more - all with a view to put Clients and their Situations/Needs FIRST - would have to be done to ensure stop page of multiple lending. Therefore, the idea of thinking that a credit bureau alone could eliminate multiple lending seem very na├»ve - like the experiences with the previous codes of conduct (which were not implemented on the ground), such a view could result in the credit bureau becoming a red herring rather than actual solution, because, as of now it seems to be distracting the micro-finance industry and its stakeholders from the real problems at hand…

[i] I am merely reproducing a Cartoon found on the web at www.indiamicrofinance.com as an illustration of how the credit bureau idea is being used by the microfinance industry as The Solution to the problem of multiple lending... Under no circumstances, am I trying to belittle any one for that matter.


  1. hi Ramesh, i agree with u that a lot of simultaneous efforts are required to prevent multiple lending from happening. credit bureau is definitely just one part of it and as u say, the will and desire of the promoter and top management must be definitely there too. if this is there, then the whole challenge of execution has tobe carried out to implement this top management desire to prevent over lending. if all this is there, then the credit bureau comes in handy for such 'Responsible' MFIs to use as an added tool to prevent over lending. there is neither any confusion nor disagreement on that.

    i believe that what we shoudl do as a sector is that a team must work on getting the bureau up and running while another team is working iwth all the MFIs to change their mindset as well as on the ground practices like the ones u have mentioned in this post. this is critical becasue if one fine day we find that all MFIs are ready to be 'responsible' in their lending practices, they may still not be able to fully impelemnt it due to lack of authentic information on existing levels of borrowing of members.

    my only comment is that both shoudl go hand in hand rather than one after the other. my own personal wish would be to put a very short time frame to get both sides rolling out ... unfortunately neither the urgency or criticality is sufficiently demonstrated by enough number of MFIs ... hopefully the current crisis will atleast spur them all into action

  2. Dear Sir,
    I agree fully with you. Now a days MFIs look for were we have given loan and knowingly financing them with bigger loan. MFIN has decided to give three MFI to one client as allowed. How to say who is the third and not forth? Even three means 1.5 lakhs maximum loan to one client. Once I raised this with Mr. Vikram Akula and he said "we should not deprive them taking loan and our system is very strong and time tested to avoid such things.

    Now before starting a branch, MFIs look how many other MFIs are working and take this as potential rather going to un-reached region.

    The credit bureau will give information to such MFIs poaching others client.

    I appreciate Bandhan in this regard. Once I informed Mr. Ghose about multiple lending by one of their branch. Within no time he called me and send his senior staff to resolve the issue with both the branches.

    So it is the attitude not the information which will solve the issue


  3. MFIs need change in business model and not just some kneejerk changes or adhererence to creit bureau guidance only.

  4. Thank you Ramesh, again. I suspect that the banks and others whose over-lending caused the USA sub-prime crisis were well-served by credit bureaux, and they did not prevent the problem.

    But, as with microfinance itself, we must beware of discarding or belittling solutions because they are only partial solutions.

    Microfinance's over-arching problem has been the claim that it can, on its own, eliminate poverty. Some of its critics have over-reacted to the folly of this claim by rubbishing the whole notion of microfinance. Similarly, a credit bureau cannot on its own eliminate multiple borrowing and over-indebtedness; but it can help.


  5. Great post, Ramesh.

    I myself have been confused and frustrated at the Indian NBFC MFIs' approach to this issue. Already a year ago, having acknowledged and recognized that multiple lending IS a problem, and presented a solution to deal with that -- a cap of 3 loans or 50,000 Rs per client -- MFIN then conveniently put off any efforts to implement such limits until the credit bureau was made operational. I fully agree that a credit bureau is an important tool, but it is not indispensable, nor, as Ramesh points, in any way foolproof.

    Fact is, already a year ago, MFIN's members could have easily begun to implement real-world measures to reduce multiple lending. It is well-known that loan officers are often aware of how many loans their clients have. Thus, I can't help but think that the credit bureau was simply a convenient delaying tactic for MFIs who weren't at all interested in complying with MFIN's guidelines, but were willing to agree, knowing that it would be years before the credit bureau would come online. Importantly, that timeframe all but assured that those planning IPOs (and not just SKS) would be able to execute them before the credit bureau started functioning, thus enjoying a couple more years of unconstrained growth.

    I know that a number of individual MFI leaders in India have been very serious about these sector-level risks, with multiple borrowing high on the agenda. Their efforts seem to have been thwarted at every step by others who saw this as an effort they couldn't publicly reject, but could still undermine through delay tactics. To make matters worse, RBI, which holds a pretty tight leash on the banks, has seemed to favor the clearly unworkable self-regulation approach of the NBFC MFIs, in effect allowing them to operate with zero oversight over client protection, portfolio risk, and other critical factors.


  6. Dear Ramesh -

    I second Malcolm's opinion.

    I would add that such a bureau would need to take into account internal SHG loans; and loans from informal lenders (neighbors, moneylenders, shopkeepers). This is a tall order since SHG books are not always the best and informal lenders might benefit from credit bureau information but would be unlikely to report into it.

    This credit bureau would also need to include forms of redress. In the US, when we received a poor credit rating (sometimes it is unwarranted), there are many avenues for individuals to rectify the rating - all of them a great pain to do. This all reminds me of the wonderful novel by RK Narayan called the Financial Expert. I see many small businesses cropping up to help consumers make sense of both their financial institutions and their credit ratings. If only the Narayan's humor could be part of the solution.

    Thank you for your post.

    Kim Wilson
    Faculty, The Fletcher School of Law and Diplomacy (617-763-2469)

  7. SHGs constitute nearly 50% of the lending in India. Hence taking into account SHG loans is important. This measure may by itself as an ancillary benefit improve record keeping or at the least increase attention to good record keeping.

    Another benefit to SHGs due to credit bureau would be faster approval of loans especially since some banks disburse loans to SHGs only after getting a no-objection certificate from neighbouring banks.

    Malcolm's post on 'best being the enemy of the good; impossible to implement, and thus an excuse for implementing nothing' posted on yahoogroups is also valid. Trying to get information from all informal lenders (money lenders,neighbours, shopkeepers) is really a tall order. It would make the whole project a non starter.

    Nevertheless, the credit bureau project should have a basic fundamental soundness such as having MFI, SHG and direct bank borrowing for the household ( husband, wife and other family members in case of a joint family) as a bare minimum for a credit bureau's usefulness. Without some basic soundness, the credit bureau will not be trusted and members may not report data to the credit bureau, causing the premature demise of a wonderful idea.

    Most important would be creating a culture of responsible lending across the board. That is an important solution every organization would need to pursue vigorously.

    Bhalchander Vishwanath