Human Resource Systems in MFIs, Social Performance, Client Protection and Responsible Micro-Finance: What Is The Relationship?

Ramesh S Arunachalam

Rural Finance Practitioner

I have been seeing a very interesting pattern in the present Indian micro-finance crisis with regard to MFI staff. Many places where serious problems  - like multiple lending, frauds, high levels of willful default, use of agents – exist on the ground, a common denominator can be usually found and it is the fact that “Staff” turnover is (has been) very high.

As observed, Staff A from MFI A have usually moved to MFIs B and C (within a short time) and also got promoted through the hierarchy to occupy a much higher position in MFI D. In many ways, I see these (fraud perpetuating moving) staff as the primary cause of the various problems:

1)      They use their past knowledge of other MFIs to enable new MFIs to lend to the older JLGs and cause multiple lending in the areas. Entire branches of older MFIs have been closed because of this as I have observed;

2)      They tell clients to not repay older MFIs and promise them higher/fresh loans from their new/other institution and thereby set the trend for wrong (defaulting) behavior by clients

3)      They get well known center leaders and local opinion leaders to come away with them and act as agents for forming new JLGs, especially by breaking up past JLGs/SHGs and the like.

4)      They collect loan dues of their past MFIs and do not repay these to the concerned institutions. They often abscond with this collected money and move to another area and join to work with a new/other MFI

5)      They network with similar peers and form a nexus ring leader type operation that can sometimes cause large scale problems like witnessed in Vellore, Salem, Karur and other belts of Tamilnadu as well as in many districts of Andhra Pradesh

6)      They are primarily responsible for unleashing local toughies through agents for collecting loan repayments and the like

7)      And Plus more…

So, while a lot has been written about the not-so-good practices in MFIs in this Indian MF crisis, one of the main drivers of the same, in my opinion, is the fact that all and sundry are hired as staff and especially, without sufficient background checks (due diligence) and placed on the job without requisite training and the like. And much of this has happened as the drive to grow quickly and reach scale has prompted many MFIs (and especially, some of the newly established commercially oriented entities) to use all possible methods to achieve the same. Some specific comments are in order here:

The lack of background checks has meant that staff who have committed frauds in one place (MFI) have got into higher positions in other MFIs and naturally, they also re-socialise new staff at the other (new) MFI and attune them towards not so good practices. The lack of background checks also has resulted in people with criminal records entering the MFI roster and moving on from one MFI to another, often engaging in increasing frauds at the various levels…

The lack of training has meant that the staff do not understand the mission of micro-finance or that of the MFI and this has again resulted in the excessive drive towards growth, scale and profits – as a result, several MFIs have moved towards using agents for loan disbursement and recovery and also have lent for purposes, that need not be strictly called as micro-finance {I came across a few cases of illicit arrack (liquor) production and the like}

And a lot of this has to do with the overall incentive system for staff at MFIs – where the unsaid (or widely proclaimed) rule is to either ‘disburse a lot quickly or perish’. No matter how much of denial that MFIs provide with regard to the existence of such incentives on paper, in practical terms, at the grass-roots and branch./field worker level, they are very apparent and this observation was also made to me by a journalist from the international media, who also extensively toured the field areas in India in 2010/2011.

So, the above are some of the issues that the regulators, industry associations, MFIs and other stakeholders must focus on and attempt to redress immediately through various mechanisms 

In fact, before I sign off, I would also like to present the perspective of many genuine MFI staff and draw the attention of the RBI and other stakeholders to dismal working and living conditions of many such staff in the Indian micro-finance industry. In many places, there are no service rules and often, it is very high pressure 24 x 7 work. Also, usually, there are no contracts issued by many institutions and the hiring/firing is done verbally and at the whims and fancy of the superiors. Grievance procedures also do not seem to exist in many MFIs and faced with such a situation, it is hardly surprising that the level of frustration among many genuine staff is rather high. In fact, some (good) staff have crossed the line because of such an environment...and moved towards behaviors such as those listed above...

Given the above situation, it is therefore imperative that the Indian micro-finance industry starts looking inward so as to immediately address the prevalent HR problems and also help build professional and ethical HR systems at (many) MFIs. Until that is done, neither can social performance nor client protection nor responsible micro-finance be achieved in any significant measure…on the ground…

Have a Nice Day!