MFI Staff Srinivas[i], Agent Amulu and Social Performance in Indian Micro-Finance: A Complex Relationship Indeed…

Ramesh S Arunachalam

Rural Finance Practitioner

MFI staff Srinivas worked for one of India’s largest and fastest growing MFIs.  His field areas were close to the Panchayat Union of Paramathy Velur, near Tiruchengode (and Namakkal). Srinivas wanted to be a high performer always and the only way he thought fit to be that - as per his organization’s mission, the orders of his superiors and the unsaid MFI incentive system in place - was to disburse more and more loans and quicker than his competitors. Realizing that it may be too much to do all of this by himself, he enlisted the help of several centre leaders and got them to act as agents.

According to reports available localy, it was mutually agreed (between Srinivas and the agents) that each agent would collect between Rs.300-Rs.500 depending on the quantum of the loan to be approved. One of his agents, Amulu, was a hard working centre leader who had in fact turned an agent because she saw a great opportunity to make money quickly and especially because her family business of making cement posts suffered huge losses due to inforeseen rains. Due to her familiarity with the local milieu and people, she quickly collected Rs.300 from about 1050 people, promising them loans of Rs.20,000 each. Faithfully, Amulu, paid Rs.300 received from each of 1050 people to Srinivas, who realised Rs.3,15,000/- (1 US $ = 46 Rupees) as ‘advance fees’ towards loan sanction and disbursement. Srinivas kept his word to agent Amulu and paid her back Rs.100 per loan promised (and advance money collected). Amulu earned Rs 1,05,000/- in total and she was determined to do better as an agent…

While Amulu and Srinivas kept their word to each other, they unfortunately reneged on the promise made to people in one village (towards Mohanur) and several other nearby places in The Paramathy Velur Panchayat Union. Further, Srinivas also collected loan repayments through these agents and together, they shared the collections in a ratio of 3 to 1, with Srinivas getting 3 shares and the concerned agent getting one share. Srinivas did not remit the collections to the MFI branches and the same is said to have been done by few other staff as well because of the non payment of salary by concerned AP headquartered MFI. These staff and Srinivas are absconding now…and before they left, they also spread the word that MFI loans need not be repaid…

As a result of their not keeping up the promise of disbursing loans to many people (after having collected upfront commissions from them) and also due to non-remittance of loan repayments to the MFI branches {this became known to clients when new staff asked them to repay (already repaid installments of) loans}, the poor people of Paramathy Velur appear to have got angry and are said to be revolvting against the malpractices by MFI staff, which many MFI managements are in no position to deal with. Bankers money of almost Rs 10 crores is said to be at serious risk, with people venting their anger by refusing to repay (current and future installments of) loans.

The above raises very serious questions about the decentralized MFI model, currently in vogue in Indian micro-finance and these are summarised below:

1.      While it is great to talk of social performance, internal controls and the like, how do you enforce this on the ground in a practical sense when you have multiple agents colluding with fraudulent staff (often hired without serious background checks and practically no training) and MFIs that rely heavily on a fully decentralized model that has all the wrong incentives? (Please read http://microfinance-in-india.blogspot.com/search/label/Micro-Finance%20Agents)

2.      Given that a lot of growth has occurred (and is perhaps still occurring) through outsourcing to agents, where the end user clients may not be strictly traceable, how can social performance be enforced in a practical sense? What lessons can the Indian and Global micro-finance industry learn from past efforts to enforce codes of conduct and the like? (Please read http://microfinance-in-india.blogspot.com/search/label/Code%20of%20Conduct)

3.      When simple internal controls (and internal audits) were busted and disregarded during the phenomenal growth phase of  Indian micro-finance that saw the burgeoning growth of multiple lending and other malpractices, with what confidence can we expect social performance to be implemented on the ground? (Please read http://microfinance-in-india.blogspot.com/search/label/Microfinance%20Frauds)

4.      When MFIs operate using different kinds of agents in an outsourcing model, how can one be sure of the data that is provided by the MFIs with regard to social performance management?  How can we rely on self-report data that is supplied by the MFIs with regard to these, especially when many MFIs may not even be aware of who their clients are because of the prevalent agent models?

While social performance sounds fantastic on paper, any talk of social performance is meaningless when one looks at the current ground realities in Indian micro-finance. These concepts sound excellent at a conference in Mumbai (there is one in mumbai today) or Delhi or even Washington but when one quietly walks around the hot and humid Tamilnadu or Andhra Pradesh in sweltering heat of 42 degrees centigrade (or more) in the various field areas for several days together, it is clear that enforcing social performance on the ground is an almost impossible task…given the huge level of decentralised operations in current day micro-finance…and the manner in which this model has evolved and the associated motivations therein…

Before I sign off, I would like you all to read this very interesting REAL LIFE story from India …that shares many parallels with the social performance management situation and related reportingby MFIs…Read on…

“It was the autumn of 2008 and Satyam[ii] Company Secretary G Jayaraman was beaming. For the second time in six years, India's IT outsourcer had walked away with the coveted Golden Peacock Award for excellence in corporate governance, an award instituted by the World Council for Corporate Governance. Later that week, Vadlamani Srinivas proudly told the press that the award was 'a testament to our [Satyam's] efforts to continually innovate corporate governance best practices in the industry.'

The Golden Peacock was not the first award that year. In April, a global investor relations firm MZ Consult ranked Satyam among the top five companies in the Asia-Pacific region in the financial disclosure procedures category. 'We are pleased to be recognised.... Our practices are designed to provide complete, accurate, timely information in clear formats,' said Vadlamani Srinivas.

To the corporate world, Satyam's hubris was well earned. After all it had all the bells and whistles required of a well-governed modern-day company. Satyam's five star board of directors, as on-lookers liked to call it, had just the right number of independent directors with just the right credentials-eminent scholars and administrators. Also, Satyam had Price Waterhouse-one of the big four audit firms-as the statutory auditor. All was well with Satyam's world-or so everyone thought.

Two blows dealt to the company's image within a span of one month ended Sat yam's high-prized innocence-the fateful board decision taken on 16 December and then Ramalinga Raju's confession of 7 January.

Never in the history of corporate India has a company fallen so hard and fast. And everyone, from investors to experts, attributes this to the failure of the company's corporate governance controls. In fact, all events surrounding the scam-the aborted Maytas bid, World Bank barring the company from all Bank contracts-were being linked to the way Satyam was governed.”

The moral of the story is clear: it is always very easy to provide very positive data and reports that paint a great rosy picture but what may actually be happening inside could be very different…Several organizations that have won the well-intentioned CGAP award for transparency in micro-finance have also been reported as having serious Corporate Governance violations…please refer to Prof Sriram’s paper in EPW in June 2010 and other material on this blog…

Therefore, I hope that the well-intentioned on-going effort[iii] to bring out an annual social performance report[iv] for Indian micro-finance not only presents great sounding data, eloquently worded sentences and so called transparent information but also captures and highlights hardcore grass-roots realities and practical problems as well…That is imperative if the Indian micro-finance industry is to really serve and service its end user (low income) clients…

Have a Nice Day!

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[i] The objective here is not to talk specifically about any MFI or individual. That is why names have been disguised and rather, the primary objective is to enable the micro-finance industry to learn from its field experiences…so that it can better serve its clients…

[ii] Quoted with Adaptation From Governing The Corporates, Aanand Pandey, Business Standard, in The Satyam Saga 2009.

[iii] As you are reading this post, there is a conference in Mumbai debating the structure of a proposed annual social performance management report for Indian micro-finance. In the coming days, I will be talking more about the social performance concept in greater detail…

[iv] Let us stop writing reports that make us feel good. What we need are reports that accurately present grass-root realities and issues so that the industry can better serve its clients. That is the most important aspect and this criterion should hold good for all paid reports in Indian micro-finance – from State of Sector to the proposed Annual Social Performance Report