Ramesh S Arunachalam
Rural Finance Practitioner
It is going to be almost 5.5 months since this blog writer had tried to warn the then newly formed (informal) bankers forum about the impending crisis in Indian micro-finance. The bankers forum apparently has been formed through a World Bank project being administered through The Small Industries Development Bank of India (SIDBI) and is called The Responsible Micro-Finance Project. A similar effort had been made by this blog writer to try and inform CGAP of the impending Indian micro-finance crisis. This was done as a reaction to their article on SKS, which, in the blog writer’s opinion ignored crucial facts available in the public domain (especially, Prof Sriram's paper in EPW) with regard to Governance and other aspects at SKSML.
Now, you may argue that there is no use crying over spilt milk – fair point and agreed but there are important takeaways. Read on…
Please look at this interesting e mail in circulation (names withheld) among the for profit MFIs and you can judge for your self the ground situation…I do VERY MUCH appreciate the initiative taken by the concerned MFI (which itself indicates a desire for responsible finance?), although I feel that an appropriate process must be used to achieve the ends sort (in the e mail) and it perhaps cannot be done unilaterally and that too via an (impersonal) e mail…
As I have been saying all along over the last few months (please see links given at the end of this post), the ground situation cannot be sorted out until and unless the Shared Clients and JLGs are apportioned amongst the MFIs. This calls for a process of dialogue and negotiation and may be the bankers forum of the World Bank project should take the lead here. I am writing this as an open blog as, in the past, my efforts to reach out to the bankers forum through SIDBI or World Bank/CGAP, has proved futile. I hope they take note of this post and act accordingly, using their own judgment and analysis of the situation.
There are many approaches that the forum could take in sorting out matters…but the following are some of them…
First, they could introduce a debt swap product by banks to alleviate the issue of over indebtedness of the clients and under this client loans with MFIs could be taken over by respective banks. Second, they could facilitate MFIs to take over client loans from other MFIs, using some fair and agreeable formula such as (but not limited to) which of them originally formed the JLGs and first serviced the client, which of them is currently best positioned to service the client and so on. This has to be worked out through dialogue and discussion among the various MFIs and the bankers forum is perhaps best positioned to facilitate this. A third and final option could be considered, provided the RBI supports this idea – i.e., permitting banks to take over MFIs (acquire them) and allow them to function independently but as part of a larger banking group – which could, of course, over time translate into, better governance, appropriate systems and the like
The larger point that I have always made over the last few months and one that I continue to make is that: Unless the EXISTING shared clients and JLGs are apportioned carefully among the MFIs and/or banks, the REAL problem in Indian micro-finance – that of multiple lending and over-indebtedness – will not go away and is sure to reappear after a few years just as it did after the erstwhile Krishna micro-finance crisis. After all, as we have often seen, history repeats itself…at least for such events…I really hope that the bankers forum, SIDBI, World Bank and other stakeholders like CGAP perhaps, some of whom are an integral part of the Responsible Micro-Finance Project in India (ironically started around August 2010) take notice and ACT on this…Ignoring the shared clients and JLGs and the fast deteriorating ground situation is akin to waiting for a fast ticking away time bomb to explode…
You may be interested in looking at the following links and associated posts…
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