Early Lessons From the Indian Micro-Finance Credit Bureau Initiative: Aspects to Look Into While Finalising the Proposed Micro-Finance Bill

Ramesh S Arunachalam

Rural Finance Practitioner

It has almost been several months and the credit bureau for micro-finance is nowhere in sight – at least for the outsiders. This depressing (credit bureau) situation can be explained by several challenges that make setting up of a credit bureau, for low income people, especially complex in emerging markets like India. So what then are the challenges? Here are some aspects that I have identified through the credit bureau saga...Read on...

·         Lack of strong and committed leadership to ensure that credit bureau is indeed functional within the stipulated timeframe – several deadlines have gone by and we keep hearing threatening statements (I even saw one today that the credit bureau would be operational soon) that credit bureau is ready and will be operational. It has been getting ready from Dec 2009 and objectively analyzing why these deadlines have constantly shifted would surely help us understand the real issues better.

·         The credit bureau initiative has no serious regulatory support what-so-ever – I have not seen one statement from the RBI affirming the validity of the on-going credit bureau efforts and wonder what role will the RBI have in ensuring data integrity, especially given the proliferation of agents, multiple loans to shared JLGs and clients and also the lack of a unique ID. The ground situation is so messy that I doubt that any meaningful data will go into the credit bureau and I hope that the RBI looks into the various issues ASAP so that it is not caught on the wrong foot later.

·         Absolutely unrealistic targets which means that quick wins and early results are not possible to show. This gets further exacerbated by the micro-finance industry’s underestimation of data quality and information technology issues which are dealt with later. Quick wins provide a great momentum and that has not been possible in the Indian scenario. This is what makes the credit bureau a real Red Herring! From Dec 2009, when MFIN has been formed to date, I have seen a number of public statements on when the credit bureau is likely to be ready and used and I would like some one to get into the reasons for the shifting goal posts. I, for one, feel that this is occurring because of lack of proper data at the grass-roots and also the use of the decentralized agency model at the grass-roots (please see following post: http://microfinance-in-india.blogspot.com/search/label/Micro-Finance%20Agents)

·        Lack of reliable ground level data. A number of issues affect data quality in micro-finance and especially in India. There are both structural problems (agency models, shared JLG, shared clients) and bad credit-granting practices (over-lending, multiple lending, successive greening etc). Among the data issues observed are: lack of unique identifiers (people in villages especially can have the same names and initials); lack of location identifiers (e.g., village/street names and building numbering, especially in rural areas are hugely duplicated); unavailability of key credit information (e.g., especially because of the highly prevalent agency model); and poor data quality of available information (e.g., huge errors in data entry, data manipulation, frauds as you have been reading etc).

·         A range of information technology issues. Different IT-related constraints prevent the smooth establishment of a credit bureau. Among the IT issues observed are: the very lack of a standardized core MIS system at the MFI level; weak IT infrastructure within MFIs (branches not connected to headquarters, etc.); basic IT commodities not available or not reliable (e.g. unstable power supply; slow or unreliable Internet connections); hardware and software provisioning issues (e.g., limited availability of hardware brands and models to ensure quick and efficient processing of very large volumes of repetitive data that characterize micro-finance); and lack of experienced service providers for infrastructure setup and maintenance.

·         Design is often haphazard and not using accepted standardized best-practices. The problem is further compounded because MIS at the MFI level is not upto commonly accepted standards. Please see my post on MIS given earlier: (http://microfinance-in-india.blogspot.com/search/label/MIS)

·         The lack of focus on execution to overcome lack of implementation capabilities. I also see no serious effort what-so-ever by the micro-finance industry to overcome the implementation bottlenecks. All I get to hear is, “the job is very difficult as this is a low income financial services industry and therefore what the industry has achieved so far is commendable”.  What I find very strange is that the industry is low tech when it suits itself and especially, in terms of basic data and technology but a path breaker and innovator when it comes to the Governance of Compensation (Please see excellent article by John and Rajshekar in the Economic Times, dated Feb 2011).

All of the above issues do indeed make setting up a credit bureau in an emerging market like India an extremely challenging task – if serious efforts are made, it could take 3 or more years from initial discussions to regular use of the credit bureau (that produces reliable and valid credit information reports and not just some reports). So, folks, tune down your expectations…and I hope that the powers that be, who argue that a credit bureau will solve all problems in Indian micro-finance, do look into the above and other issues of practical relevance. I would also like the DFIs and commercial banks to come out and vouch safe the integrity and quality of the data being supplied to the credit bureau by MFIs – in terms of data integrity, internal consistency and physical compatibility with client existence and records and they must make themselves accountable and responsible for the quality and integrity of such data. Unless, all of the above are done, the credit bureau will just remain another idea like the multiple Codes of Conduct, supposedly operational on paper in the Indian micro-finance industry for a long time now!

Cheers

Have a Nice Day!