Where Angels Prey

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

Thursday, March 31, 2011

Do We Need a New CGAP - "Consultative Group to Alleviate Poverty"?

Ramesh S Arunachalam
Rural Finance Practitioner

That the delivery of mere financial services (= consumption credit and small production loans) alone is insufficient to reduce or alleviate poverty is perhaps a no brainer, for all honest development practitioners. Despite the lack of serious impact studies, for those, who have worked at the grass-roots and continue to so, it is rather evident that mere access to finance cannot and will not help people out of poverty. Access to finance, is therefore a necessary, but not sufficient condition to poverty alleviation.

While micro-financiers and access to finance advocates can perhaps take comfort in the fact that, while genuine financial services cannot alone make a dent on poverty, there is a caveat in order. They cannot escape the fact that the drive and desire to include low income people with regard to financial services has resulted in the proliferation of financial services focussed on loans and even within loans, primarily consumption lending. The enthusiasm to include low income people has also led to not-so-good practices including multiple lending, top up loans, ghost/benami loans and the like driven by the motivation (some people even call it greed) of some MFIs to generate huge wealth for themselves and their promoters. In fact, one of the major reasons for the on-going Indian micro-finance crisis is the present mindless drive to include people financially, without asking the question (s) of whether the current bouquet of financial services  being offered are appropriate, whether the practices being followed are fair, transparent and ethically sound and whether the other conditions so much necessary for effective use of the financial services exist.

Without question, the onus[i] for this lies on institutions like the CGAP, which lays the claim to being the foremost agency with regard to financially including low income people. A second set of people who are responsible for this are the policy makers (including some Central Banks) who have, encouraged the proliferation of consumption credit and pretended all the time that such loans lift people out of poverty. A third set of stakeholders are the mainstream micro-finance industry practitioners including banks, MFIs[ii] and industry professionals, who have all along, for a large part (there are exceptions no doubt), blown their trumpet (huge and loud) on the fact that micro-finance and financial inclusion can make a serious dent on poverty. And last but not the least, are the hugely enthusiastic donors and international agencies who have played along with everyone, echoing the same old story, again and again...

micro-finance and/or financial inclusion = poverty alleviation

I want to share a recent incident (not to blame anyone and with no Malice what-so-ever), without identifying a large project, for which I led the proposal writing team and unexpectedly (I must be honest), our consortium won the bid. At the inception meeting, in December 2009, even as the micro-finance crisis was quietly simmering in India, I repeatedly made the point that, their (the donor’s) emphasis on enhancing quantity (read large numbers) of financial services through the traditional MFI consumption route is perhaps not appropriate and that the quality of financial services (= wide range of vulnerability reducing financial services including post harvest agriculture and post production financing) and access to other issues like markets and infrastructure will have to go hand in hand. I was really shocked when one of the donor team members dismissed this flatly and said that the delivery of financial services to low income people in India through MFIs is a no brainer and we need no new ideas and we need to push that agenda to scale in the specified underserved areas (This was in January 2010 when the AP crisis was already burgeoning and close to reach flash point over the next few months). I do hope that these people have kept abreast of the recent Indian micro-finance crisis...and understood the real impact of mindless growth of traditional consumption (and/or small production) loans on the low income clients...

For my part, I was disillusioned and I refrained from participating in the same project after the design exercise was - altered significantly and - to be based on whimsical notions and ideas in our various heads, when, in fact, our winning bid had proposed a very comprehensive methodology to understand complex issues related to poverty and inclusive growth in these states. As one of few members of the proposal writing and design team who had worked in every district in the four states where the project was to become operational, I knew for sure that this approach doomed the project for failure. I am now certain that it cannot and will not provide inclusive growth for the thousands, if not millions of low income people, in these states...time will surely prove me right...although, I still wish the project very well and hope my fears are unfounded and wrong…

That said, the larger point that I want to make here is about the role of that donors and various international agencies play and can play in shaping the future of low income people – not to blame any of them but they certainly have to be the watch guards of the poverty alleviation mission and ensure on-course corrections, as and when required. They often get caught in rhetoric and forget grass-roots realities and like hearing what they want to hear. It is about time that they change and encourage honest feedback as well as approaches consistent with peoples’ real aspirations...that alone will ensure real success (of their projects) on the ground...in terms of the fight against poverty…

That said, let us get back to the issue of tackling poverty for which many of us came into the industry...The lessons from the last few decades suggest that access to finance alone cannot have any significant impact on poverty. Poverty alleviation and/or reduction can occur only when peoples’ livelihoods and opportunities (for work, investment etc) are strengthened. And that can occur only when they have access to a broader ecosystem (apart from finance) that provides a range of services that poor people and their enterprises and livelihood systems require – access to information, technology, business development and other skills, markets, product certification and quality assurance, infrastructure and advocacy

And given that CGAP has done a fantastic job of trying to financially include large numbers of poor people, I would very much like them to champion the larger cause of poverty alleviation – They have it in their DNA and in line with their acronym, CGAP must now become The “Consultative Group to Alleviate Poverty” and assume the lead role in fighting and trying to eradicate poverty globally. I am sure they have the wherewithal and resources to do this and let us hope their governing council takes this appeal seriously…

Have Great Day At Work!

[i] My intention is not to blame anyone. I am merely highlighting what has happened and would like to see course corrections
[ii] Only recently in a BBC interview did I hear a couple of practitioners say that the ability of “micro-finance” to alleviate/reduce poverty is hyperbole.

Wednesday, March 30, 2011

The Proposed Micro-Finance Bill and Regulating Micro-Finance in India: Getting The Framework Right…

Ramesh S Arunachalam
Rural Finance Practitioner

Yesterday, there was an article in the media that suggested that the proposed MF bill in India is likely to accommodate all kinds of MFIs including NBFCs, which are currently regulated by RBI. And it also mentioned that a special body would perhaps be created to regulate micro-finance. The increased interest for regulating micro-finance is clearly welcome and certainly long overdue. While we have been talking so much about the need for a comprehensive and exclusive regulatory structure for micro-finance, an important question here is: which specific institution is best positioned to perform the given responsibility?

Should it be the RBI or NABARD or a new agency or the industry associations (Sa-Dhan, MFIN or INAFI etc)? There are no easy answers but if the right process is followed, then, I am sure that we can get the framework right and institutions for this complex job… Here are some lessons from past experiences for what they are worth and what they are not and read on…

Comparative Analysis of Assets of Alternative Regulatory Structures: A regulatory system is more efficient if the responsibilities are assigned to the institutions/bodies that have the powers, resources, skills, and knowledge to perform them most effectively. If one uses this framework of analysis, the assets of a new proposed regulatory body (as per the proposed MF Bill) or SRO or similar organization (such as an industry association – Sa-Dhan or MFIn or INAFI) should be compared to the statutory regulators’ assets as they pertain to specific regulatory activities. This is a very critical exercise and must be done objectively and with utmost integrity. A related key question here is whether the proposed new body or SRO or industry association has, or can obtain, sufficient skills, resources, and capacity to perform its responsibilities effectively. If sufficient capacity does not exist or cannot be developed, building a regulatory structure that relies on such new bodies, SROs or industry associations will not yield the desired result. It may be safer to go with the major (primary) regulator in that case.

That said, other factors that should also be considered including the following:
·         Legal Jurisdictions: Which body has the legal jurisdiction to make rules and to supervise the micro-finance industry players involved – especially, given their diverse and varied legal forms?
·         Power and Authority: Which body has the power and authority to investigate, discipline, and impose effective sanctions on the micro-finance industry players involved? For example, most SROs or industry associations may have the power only to collect evidence from and to discipline member firms and their employees.
·         Conflicts of Interest: Do significant conflicts of interest arise/exist? Conflicts of interest always exist in regulatory systems but vary depending on the type of regulation and institution involved. There are obvious trade-offs and these need to be evaluated as well
·         Existing Regulatory Mechanism As A Platform: Is there an existing regulatory structure that can serve as a foundation for the proposed new micro-finance regulatory system? Has it been effective and can it be used as a platform?
·         Industry Specific Knowledge, Skills and Experience: Who possesses the knowledge, expertise, and skills required to regulate and supervise micro-finance?
·         Industry Information and Data: Which body has access to the information and data needed for the task of regulation and supervision? For example, would an SRO/industry association have access to all relevant records and information, or could an SRO/industry association obtain the necessary access?
·         Regulatory Tools: Which body has the necessary regulatory tools (including information technology tools) for the complex task of micro-finance regulation/supervision?
·         Resources Including Finance: Last but not the least, which body has the funding and resources to do a proper job and deliver in terms of regulating and supervising micro-finance in an enabling manner?

I really hope that, the concerned various stakeholders approach the issue of deciding on the micro-finance regulator using an objective and professional process, giving due consideration to issues such as those identified above…

Have A Great Day At Work!

Building Safeguards Into the Malegam Committee Report (MCR) Proposal for Using Industry Associations in the Indian Micro-Finance Regulatory Framework

Ramesh S Arunachalam
Rural Finance Practitioner

The Malegam Committee Report (MCR), if accepted as it is by the RBI, has a significant role for SROs (and in the present case, for the Industry Associations) and media reports strongly suggest that the proposals of the MCR may come into force from April 2011. While using SROs (Industry Associations) may seem as a practical step, especially given the scope and scale of supervision required in micro-finance in India, the fact that these industry associations were not even able to implement their respective codes of conduct over the last few years needs to be clearly recognized. And more importantly, this critical aspect must be suitably addressed, in case the RBI is going to rely on the use of industry associations as SROs, in the overall micro-finance regulatory framework.

Here are some suggestions in this regard for the RBI, based on good practices and lessons from global experiences…for what they are worth and what they are not…Read on…

The primary regulator (whoever it is) must have an appropriate oversight program for the SRO/Industry association and thereby ensure that:
·         The SRO has appropriate corporate governance policies and procedures and that it follows them in practice. This is very critical as many institutions have great governance policies and procedures on paper but rarely follow them in implementation.
·         The SRO’s functions and rules cover its regulation/supervision responsibilities and are fair and balanced.
·         The SRO’s regulation, supervision and risk management responsibilities have been met, including that its systems and processes meet appropriate standards. The regulator must also ensure that the SRO has effective compliance, supervision and enforcement programs.
·         Any identified conflicts of interest, within the SRO, have been squarely and appropriately addressed. This is a very critical aspect as there have been huge conflicts of interest in the Indian micro-finance sector and this is one of the main reasons for the Sa-Dhan and MFIN codes of conduct not having been implemented on the ground.
·         Shortcomings or needs that require a response from the SRO are identified and adequately addressed periodically.

In addition, the regulator, through appropriate supervision, must ensure that the SRO continues to meet all the conditions of its license[i] and other obligations imposed on it by law and/or regulation. Some of the main processes that regulators could use in these oversight programs with SROs/industry associations are given below:

Process # 1: Review Corporate Governance Standards in SRO

1.      Ensure that the SRO meets high standards of corporate governance required for being a part of the overall regulatory system and this would include consideration of all aspects including functioning of board of directors (or equivalent), their independence and the like
2.      Ensure that the SRO is responsive to all stakeholders including clients and also meets its public interest/civil society mandate in terms of transparency and disclosure
3.      Ensure compliance and consistency with the law and conditions of license.
4.      Ensure that the SRO’s internal functioning and management systems are consistent with its regulatory mandate and objectives and with overall regulations.
5.      Ensure that SRO rules and processes are fair and balanced, having regard to the interests of all stakeholders and most importantly, that of clients

Process # 2: Periodically Monitor The SRO and Its Reports
1.      Periodic review of the status of SRO’s monitoring and other programs, activities, and financial condition, as well as current regulatory matters.
2.      Provide ongoing supervision and practical advice, to ensure that the SRO is able to discharge its functions effectively. This is especially critical because the industry associations in India have not had any such regulatory/supervisory experience
3.      Help in coordination of activities with an SRO, as may be required

Process # 3: Enable Self-Assessment of its Own Performance and Operations by the SRO
·         Independently review SRO performance in line with its supervisory and related duties
·         Provide input to the SRO and enable it to develop its (own) targeted examination of its performance with regard to supervisory and other duties.
·         Help the SRO establish an objective process of self-evaluation and related measures for assessing its performance.
·         Identify areas of risk in SRO’s operations and suggest strategies for improvement with regard to the same
·         And finally ensure that the SRO itself has a code of conduct that it follows in its own functioning. This is very critical and it has often been a major reason for (industry associations) not being able to enforce their codes of conduct with their respective members

The larger point I am making is that, given that the Malegam Committee Report (MCR) has provided for some level of self-regulation in micro-finance in India, let us try and ensure that there are core criteria to make this self-regulation work and work well. When effective, self-regulation, offers benefits to industry and consumers, but it must be consistent with the overall regulatory framework and accountability must be strong. In fact, accountability is most critical in this context and having good regulatory outcomes, whether legislated or self-regulatory or a combination of both, depends on the government, micro-finance industry, various stakeholders and clients being prepared to become accountable in the overall regulatory structure and framework. Unless this accountability is built into the system, no amount of regulation will help the beleaguered Indian micro-finance industry…

Have A Nice Day!

[i] I presume that the operationalisation of the MCR report will result in the provision of a license (or official sanction) for acting as an SRO

Monday, March 28, 2011

Introducing a Self-Regulatory System For Micro-Finance in India: PROCESS Issues for Consideration of The RBI and The Malegam Committee

Ramesh S Arunachalam
Rural Finance Practitioner

While the earlier post looked at the substantive policy issues with regard to regulatory reform, significant process issues must also be considered, as outlined below:

Design risks: The authorities should articulate the key drivers for changing the current approach to regulation (say for example, introducing self-regulation as has been done in the Malegam Committee Report which uses the SRO/industry approach as one of its pillars) and should assess the importance of achieving the objectives of reforming the system. Those objectives should be compared to the risks involved in designing changes to the system. Major changes carry risk, and the broader the scope of the planned changes, the greater the risk of problems or even failure. The major risks are:
·         Increased conflicts of interest
·         Ensuring that the SRO/industry association operates with real and effective independence
·         The potential for “regulatory capture” of the SRO/industry association system by regulated MFIs or by one powerful segment of the industry (say for example NBFC MFIs or large MFIs etc)
·         Disruption of standards of regulation and supervision during the transition period because of organizational conflict and uncertainty
·         Reduced standards of regulation and supervision under the new system
·         Overloading the SRO/industry association system with new responsibilities that it does not have time to build the capacity to address. This has to be also seen in the light of the past track record of the SRO/industry association.
·         Excessive interference by the statutory regulator in the governance and operation of SROs/industry associations
·         Failure to design the new system properly, leading to excessive duplication of activities and cost and the like

Transitional risks: Transitional risks are temporary risks that arise from the process of implementing changes in the case of regulatory systems, among a group of organizations. Whenever structural changes are made to a regulatory system (as has been proposed in the MCR), important transitional issues must be addressed. These include ensuring that:

·         Regulatory processes continue uninterrupted, especially supervision of the micro-finance industry players and intermediaries. I am not sure of what is happening in the present period
·         Regulated entities/persons remain within the legal jurisdiction of a regulator at all times.
·         The transition to new institution is as seamless as possible.
·         Dispute resolution mechanisms are agreed to address any unforeseen issues that arise during the transition period.

If major changes are contemplated, the industry and the authorities might consider taking an evolutionary or staged approach to implementation so they minimize the transitional risks involved. I am not sure if any of these aspects are being addressed currently.

Stakeholders’ views: In considering any changes to the present system of regulation, it is important to understand and consider the views of various stakeholders. Stakeholders include a broad range of participants:
·         Intermediaries (banks, MFIs and others)
·         Clients of the above institutions
·         Retail and institutional investors
·         Government and statutory authorities,
·         Existing SROs
·         Stock Exchanges, if applicable
·         Industry associations
·         Other Related regulators

This is indeed a critical issue and I am not sure of what is the degree of support for the changes proposed compared with the resistance to change? Building consensus among the various stakeholders on a “common vision” for the regulatory structure with regard to micro-finance is highly desirable and I hope the RBI/MCR engage and take this process forward quickly

Legal and regulatory risk: If institutions’ regulatory responsibilities are changed in the new structure, plans to minimize legal and regulatory risk are needed. Transfers of responsibilities will likely require (1) transfer of rules from one body’s rulebook to another’s, (2) transfer of responsibility for supervision programs, (3) transfer of experienced officers and staff, and (4) transfer of infrastructure including information

All of the above process issues will also have to be considered and dealt with by the RBI and the Malegam Committee before finalizing the regulatory and supervisory arrangements for Micro-Finance in India…

Introducing a Self-Regulatory System For Micro-Finance in India: SUBSTANTIVE POLICY Issues for Consideration of The RBI and The Malegam Committee

Ramesh S Arunachalam
Rural Finance Practitioner

The Malegam Committee Report (MCR) has proposed a self-regulatory mechanism, through SROs/Industry Associations, as part of its four pillar approach. While the idea is fundamentally a good one, when ever one considers introducing a new self-regulatory system (or for that matter, reforming such an existing system), a number of important issues must be addressed. These are highlighted in the present post and hope the RBI and/or the Malegam committee looks into some of these issues.

Basically, the concerns include both (1) substantive policy issues on the design of the self-regulatory system and (2) process issues that arise in implementing self-regulatory reform. We take up the former in this post and look at the latter (process issues) in a separate post.

And policy makers should consider the following substantive policy issues in addressing whether self-regulation is appropriate for the concerned micro-finance markets and, if it is, how the system should be designed.

National Strategy for Development of Micro-Finance: What is the government’s (and prime regulators) strategy for developing the nation’s micro-finance industry? Any strategy should consider the structure and competitive position of the micro-finance industry, nationally, regionally and internationally. A strategy should encompass the following:

·         How to ensure that the industry best supports economic development?
·         How to enable the industry to foster market development, competition, and innovation to better meet the needs of clients in micro-finance?
·         How to alter/raise/revise standards of regulation and conduct to ensure that clients and other stakeholders (including investors and other participants) are treated fairly?
·         How to improve integrity of the micro-finance market in general?
·         How to achieve an appropriate cost level for regulation of the micro-finance industry?
  • How to ensure that the MFIs, FIs and various stakeholders have the business focus, competitive positioning, systems, and governance standards required to succeed in their missions?

·    Commitment to self-regulation: Do clients, investors, lenders, MFIs and other stakeholders have a sufficient degree of confidence in self-regulation to make the system viable, both today and going forward? Are the members of the SROs/industry associations committed to the concept of self-regulation, and are they prepared to invest the requisite time and resources? Do the regulatory authorities believe that use of self-regulation in the micro-finance industry is indeed appropriate?

·    Size and complexity of micro-finance industry: Does the micro-finance industry need, and can it support, multiple layers of regulation as has been proposed in the Malegam Committee Report?

·    Effective and efficient regulation: What approaches, according to the authorities and industry stakeholders (including clients), are likely to deliver the most efficient and effective regulation of the micro-finance industry? Do the benefits of self-regulation outweigh the potential extra costs and disadvantages? What about the issue of regulatory efficiency and costs - is it likely to be significant? Finally, can the conflicts of interest that arise be managed appropriately?

·    Regulatory priorities and key risks: The authorities, MFIs and other stakeholders should determine and agree on what regulatory issues and risks (the MCR lists several risks and provides some suggestions to tackle them) need to be prioritized. Does the existing system adequately address those issues and manage those risks? If not, how should the system be reformed to respond more effectively to the issues, and what role should SROs/industry associations play? This should particularly look to address in practical and feasible manner, some of the key issues that have caused the present day micro-finance crisis. With all due respect, it is the blog writer’s humble opinion that some of the proposed solutions in the Malegam Committee Report do not meet the criterion of practicality and feasibility.

·    Fairness and consistency: In choosing a particular SRO/industry association structure, the fairness and the consistency of regulation for different segments of the micro-finance (for profit, mutual benefit and not-for-profit) and larger financial services industry need to be maintained. This means that players in different segments of the industry that offer similar services should be treated equally. This is critical and the omission of not-for-profits and other legal forms in the MCR can perhaps be addressed at the SRO/Industry association level, even if the banking regulation act cannot absorb regulating these legal forms. This again requires close analysis and redressal perhaps

·    Funding: Who should pay for the cost of regulation? While industry players may fund government regulators to a significant degree in many countries, can MFIs and other stakeholders do that in the present context? Which groups of MFIs/stakeholders should fund a self-regulatory system, and how should the costs be allocated among groups or members of a group? Those issues are invariably contentious but need to be addressed as well and this is again something that has not been exhaustively dealt with in the MCR

·    Legal framework: Does or will an SRO/industry association have sufficient powers to perform the responsibilities allocated to it? If not, is changing the applicable/related laws possible in practice and feasible from an implementation sense?

First, in many contexts, most SROs/industry associations often have the statutory authority to perform their regulatory responsibilities, but they can also obtain or reinforce jurisdiction by specific contracts with its members. Second, because SROs/industry associations are private bodies, the countries’ civil code legal systems will also need to be examined for any limits that they may place on SRO’s/industry associations rule-making authority or regarding the extent to which the regulator can delegate activities to an SRO/industry association. Both of these need to be looked at by the MCR in the present context and addressed accordingly.

Some obstacles may however be addressed rather easily: (a) by relying on SROs/industry associations mainly to supervise compliance with regulations (this is a critical aspect of regulation versus supervision); (b) by designing effective working agreements; and/or (c) through MOUs to clarify the role and working relationships of SROs/industry associations with the regulator.

·    Supervision of an SRO/Industry Association: Does the regulator have the powers and the capacity to effectively oversee an SRO/industry associations operations? In some cases, a more limited role for self-regulation may be appropriate; for example an SRO/industry association that is mainly made responsible for supervision of compliance with regulations set by the regulator.

These and other issues will have to be looked at by the RBI and the Malegam Committee before finalizing the regulatory and supervisory arrangements for Micro-Finance in India…

PS: The above paper is based on various ideas and resources available and there are far too many resources to mention here but they are all gratefully acknowledged

Friday, March 25, 2011

Making Micro-Finance Associations More Effective as Self-Regulatory Organisations: Lessons From The Indian Experience

Ramesh S Arunachalam
Rural Finance Practitioner

A lot of questions have been raised about the effectiveness of micro-finance associations as Self-Regulatory Organisations (SROs). While it is true that these associations may have tried hard, the fact of the matter is that this self-regulation has not worked and here are some reasons why. It would useful for the RBI and The Malegam Committee to look at some of these aspects and address them, as the Malegam Committee Report (MCR) does provide a fairly important role for micro-finance associations as SROs. The various reasons are briefly highlighted below:

(1)   To be effective, MF associations that act as SROs must have a common set of public policy objectives including the enhancement of market integrity, market efficiency and client/investor protection with regard to micro-finance;
(2)   They must be actively supervised by government regulators and in the present instance by RBI, IRDA and other such regulators;
(3)   They must have (official) statutory regulatory authority and/or authority delegated by the government regulator(s). This would give them the much-required legitimacy and this is a very critical aspect because, then the SROs will act (on behalf of the government regulators and also) along with them in maintaining decorum and order in the micro-finance industry
(4)   They must establish simple and practical rules for MFIs and individuals to follow and this must be subject to their official regulatory authority and it should also be in line with the objectives in the larger regulatory framework;
(5)   They should monitor compliance with these rules, without any conflict of interest and irrespective of whether the member MFI is a pioneer, founder, largest MFI and the like;
(6)   They must have the official authority and more importantly, administrative will to discipline MFIs and individuals that violate these rules. Clearly they must show intent to self regulate rather than provide a lip service;
(7)   While they should have industry representatives on their Boards and also ensure that industry representatives have a meaningful role in governance, the board must have the equivalent of independent directors from civil society and/or official regulators. That alone will make them more accountable; and
(8)   They must maintain structures, policies and procedures intended to ensure that all conflicts of interest between their membership (commercial) and regulatory activities are appropriately managed.

Along with the core characteristics outlined above, MF association SROs also need to carry out a variety of other activities that are consistent with their mandate to enhance market integrity, market efficiency and client/investor protection. These activities would need to include the provision of: (1) Consumer redressal services for the end user clients; (2) Dispute resolution services for and among their members; (3) Client literacy and education for end user clients as well as educational services for staff of their members in special areas like gender etc; and (4) Reliable and valid market data for their members and other market participants.

Within the above broad continuum of services and characteristics, MF associations as SROs can then start to occupy a unique position and play an important role, using their official regulatory authority as well as their special relationships with government regulators and their members. I hope that the RBI and Malegam Committee look at this aspect closely and work out the relevant details…

Have a nice day!

Legal Notices to Delinquent Clients and Insolvency Petitions by Delinquent Clients: Where is The Indian Micro-Finance Sector Really Headed?

Ramesh S Arunachalam
Rural Finance Practitioner

It is raining (legal) notices in the Indian micro-finance industry. Please see the enclosed attachment below (Exhibit B) and it is the notice issued by one MFI to a client who owes it Rs 810 (about 16 US $). While I am not sure of the number of clients who have been issued such notices (authoritative sources however put it at around 15000 clients at least), I am really appalled by the behaviour of MFI field staff as evident from this e mail conversation between two fieldworkers of MFI 1 and MFI 2. Read on…Exhibit A…below
 As the e mail (in Exhibit A) suggests, clearly, what is happening on the ground is neither financial inclusion nor poverty alleviation. It is organized money lending as Dr Y V Reddy has remarked.
From the above attachment (I have the originals), it is very clear that codes of conduct don’t work on the ground – much to the chagrin of MFIN and/or Sa-Dhan. Please see adjoining piece, which enumerates some of the reasons for this. The above attachment (Exhibit A) even talks of scars on the face of the clients husband and police complaints and I am not sure that this is the type of financial inclusion that we all wanted in the first place…I leave it to you all to judge for yourselves…
And I do have some unanswered questions here:
a)      Why did the 7 MFIs lend to the same client?
b)      Where was their due diligence? What about the correct lending processes and methodologies that many of them claim?
c)      What about SIDBI and/or banks? Did they not spot this in their field visits?
d)      What about the rating agencies? Did they not spot this and note it in their reports?
e)      Where are the SROs and many of the MFIs are members of either Sa-Dhan or MFIN? What are these associations doing? Why has self regulation not worked?
f)        Is this the inclusive finance we want?
g)      And finally, this is not AP? There is supposedly no govt interference in Tamilnadu in terms of a law or bill. So, how come this is happening? 
h)      Will someone help me find the answers please?

Please also see the legal notice sent by an MFI to a client who owes it Rs 810 – Exhibit B and over 15000 such notices are supposed to have been sent to clients. The notice is in Tamil but the contents are simple: Please pay up or we will take legal action to recover Rs 810 from you...Juxtaposed with Exhibit A above, it is clear that Micro-Finance is now becomming organised and registered money lending.

·         When I went through the 1st CGAP ToT course on Delinquency in 1998 (With Mr Sanjay Sinha, Mr Ron Chua, Mr Jith was there as an observer and several others), I remember Ms Brigette Helms, Ms Janet and Ms Joyita Mukherjee of CGAP telling us regularly, there are no bad clients, there are only bad loans and institutions alone are responsible for delinquency
·         I would like all of you to remember this…and going by the number of notices and tough measures employed for collection, there seem to be a lot of bad loans that have been made in the Indian micro-finance sector. That is the REAL growth story of Indian Micro-Finance folks. Read on…

From the 2nd attachment (Exhibit B), it is clear that MFIs are facing serious collection problems in places other than Andhra Pradesh (and the letter alludes to the member neither attending meetings nor paying back properly) and I really hope that people are listening…I have already put out several e mails in this regard and have many more in possession that can stand scrutiny in a court of law.

Very interestingly, I also came across a legal notice by a client’s lawyer to 13 MFIs stating that the borrower YYYYY had filed for insolvency and was unable to pay back the 13 MFIs – Exhibit C

The above raises several issues:
a)      How did these 13 MFIs lend to the same client?
b)      Is this the real method of larger outreach in Indian micro-finance?
c)      What were the banks and SIDBI doing? What were their officers doing?
d)      What were the associations doing?
e)      What were credit rating agencies doing?
f)        Is this what we want in inclusive finance?
g)      Given that many clients are in the process of doing this, where is the Indian MF sector headed?

From the 3rd attachment (Exhibit C), it is clear that the inclusive finance paradigm used micro-credit to multiple lend to same person several times. The attached notice is to 13 institutions and again, I want people to tune in please. There is strong evidence that clients are starting to do this more and more…
Honestly speaking, the growth story of Indian micro-finance will soon be known as one of multiple lending to shared clients in (same) JLGs, who lack the income sources to repay multiple loans. Now, is that not a sub-prime like situation? Was not Dr Y V Reddy, former RBI Governor, correct in stating that MFIs are registered money lenders and micro-finance is India’s sub-prime?
I leave you to judge things for yourself…
Have a Nice Day!

Thursday, March 24, 2011

Indian Micro-Finance Industry Update: The Unfolding Mess in Tamilnadu, India

Ramesh S Arunachalam
Rural Finance Practitioner

I woke up today to hear three disturbing pieces of news[i] about the Indian micro-finance industry and Read on…

(1)   I just heard from a close friend that an MFI client, who had taken (13) loans from 13 MFIs in Salem district in Tamilnadu, has filed an insolvency petition. She wants her loans written off and there are supposed many others like her in the offing;
(2)   There is also wide spread discussion in Tamilnadu with regard to an MFI that is said to have sent legal notices to several thousand clients (another friend put the number of notices sent at close to 15,000), who have been unable to make payments (on their multiple loans) to this and other MFIs. Other MFIs are likely to follow suit; and
(3)   I also heard that when MFIs go back to collect money from these several thousand clients who have been served a legal notice by the above MFI, the women are telling the other MFIs – “now that a legal notice has been issued by one MFI, we are not willing to pay any of you back. You will have to collect the money through the same legal route only”

A lot of these problems can be attributed to the growth and client acquisition strategies pursued by the MFIs during the last three years. Given the large-scale ramifications of the present situation, who is responsible for this situation and who needs to be held accountable?

There are several stakeholders including the following who need to answer for the mess created in India’s rural and urban low income economy

a)      Large and fast growing MFIs who desired to have supernatural profits and artificial growth numbers to attract equity investments at a premium and create wealth for themselves and their investors,
b)      Investors, who paid a premium and hence, perhaps pushed MFIs to grow recklessly and mindlessly, using the bait of further and larger equity investments to get MFIs to show better results and offer artificially high returns,
c)      Banks, who had a great time in making supernatural profits from micro-finance, often piggyback riding on MFIs/Equity Investors. Without question, the banks ably led by SIDBI irresponsibly threw their (public deposit) money in the garb of financial inclusion, knowing fully well that greening and other strategies were being used to repay loans,
d)      International Agencies like CGAP and others who have pushed the agenda of hardcore commercialization, without for once thinking whether inclusive access to finance was being implemented as envisaged and/or whether it made any real difference on the ground,
e)      Policy makers who strongly pushed the vision of financial inclusion without realizing that this concept primarily translated into small consumption credit (and perhaps some small production credit) being channeled to the very same borrowers multiple times, and
f)        Last but not the least, the so-called SROs (Self-Regulating Organisations like MFI associations), which have not been able to bring a semblance of order to the chaotic growth of the Indian micro-finance industry in the last few years.

As the Indian micro-finance mess continues to unfold, I would like to use this opportunity to (humbly) caution my Dear African and Latin American friends and request them to learn from India’s large scale micro-finance mess that promises to stay that way for a long, long time ahead. The credit culture in our ‘low income economy’ appears as good as dead. And make no mistake, irrespective of any regulation and/or bill that is going to be passed, the mess on the ground is very severe as I have always been saying and it is sure to take long to clean up – there are many many shared clients/JLGs with multiple loans and these clients have no real means of repaying the multiple loans that have been literally consumed over the years. I am sure that some stakeholders will continue to say that all is well but there are very clear signs emanating that things are going from bad to worse in many places in the Indian micro-finance sector and much of this is not necessarily in Andhra Pradesh (AP)

Without question, the low income economy in rural and urban India has been shredded in many places and the people are the real sufferers…as many of them are not seen as credit worthy even by their traditional financiers (informal money lenders)… so much for the inclusive finance agenda being pushed world wide. I really hope that CGAP and others including UNCDF or UNDP or USAID learn from the Indian micro-finance crisis - even as they are implementing and furthering the inclusive finance agenda globally elsewhere[ii] – and alter their approaches and strategies accordingly!

Have a Nice Day!

[i] There is strong evidence with regard to the above
[ii] Please see the proposed e conference on March 29th and 30th being organized by World Bank, IFC and USAID