Responsible and Fair Micro-Finance in India: What are the Key Issues?

Ramesh S Arunachalam

Rural Finance Practitioner

Recently, according to The Microfinance Focus, January 31, 2011,

“A group of 40 global investors met at a recently concluded Responsible Finance Forum in The Hague for promoting responsible finance for Investors in Inclusive Finance. The event was organized by the Dutch Ministry of Foreign Affairs in The Hague, Netherlands, BMZ, CGAP and IFC. The United Nations Secretary-General’s Special Advocate for Inclusive Finance for Development, Her Royal Highness Princess Maxima of the Netherlands was among the ones present at the event.

The event saw investors stating their commitment towards a fair treatment and protection of the interests of the clients in inclusive finance- low income households and small and medium-enterprises. They also asserted their goal of supporting and investing in those financial service institutions that offered responsible micro-finance, including a wide range of quality services to clients together with embracing transparency and sustainability.

James Gifford, Executive Director of Principles for Responsible Investment, said “Micro investments are one of the most important mechanisms to help us achieve the UN Millennium Development Goals. Principles for Investors in Inclusive Finance make an important first step to mainstream microfinance in a way that safeguards all stakeholder interests.”

There are several issues that I would like to bring to the attention of the Responsible Finance Forum and other stakeholders in Micro-Finance and my objective is not to find fault with anyone but rather to continue highlighting critical issues…

First, many of today’s MFIs are perhaps getting to be more and more transparent about their interest rates and that is perhaps evident from the fact that they have cooperated with MF Transparency to publish their effective and all inclusive interest rates. Congrats to all the MFIs and MF transparency for this wonderful effort. Where some of these MFIs are perhaps unfair to their low income clients concerns the aspect of related party transactions, governance of compensation (both salaries and stock options) and burgeoning growth achieved through multiple lending and other not-so-good practices. I will highlight these aspects in a series of posts with hard evidence from the financial statements of Indian MFIs

Second, in a few cases, I have observed that the stated interest rate is not what is actually collected on the ground and people like Mr Al Fernandez have talked about this in a recent CGAP post. In fact, my experience at the grass-roots and published client level data indicate divergence in interest rates between those stated on records and that actually collected. Part of this could be the result of internal control failure and part of this may relate to use of centre leaders and others as agents.

Third, please recall that I reported on an APMAS study of effective interest rates in Andhra Pradesh (in 2010) and the data from the study appear not to be in consonance with some of the interest rates published for the same organisations (as per publications from the concerned MFIs and also as per data published by MF Transparency recently). I am not finding fault with MF transparency’s excellent work (which needs to be really appreciated given the hugely difficult task) but the excel sheets with raw data, as sent by APMAS to me via e mail, show some divergence in interest rates for some organisations. I would like to humbly record it and I will be providing the specific examples in a post later

So, I would like to humbly submit that fairness and transparency should not be equated with merely providing information on and/or stating the inclusive interest rates. It must reflect in actual (and not theoretical) Governance practices at MFIs and should not manifest itself as related party transactions (loan to promoter to buy shares in the MFIs), high compensation for promoters and their families especially involving huge equity, using multiple lending and other such means for achieving growth and the like. As long as the above (not-so-good) practices remain and continue to be used, no amount of transparency on interest rates may really help…the Indian micro-finance sector...become fair and responsible to its clients...