Where Angels Prey

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

Thursday, August 28, 2014

Some Ideas to Further India’s New Financial Inclusion Initiative!

Some Ideas to Further India’s New Financial Inclusion Initiative!
Ramesh S Arunachalam
In India as well as other developing countries, inclusive growth has always been seen as the imperative for achieving equity and equality objectives. While that point is well taken, the experience of the last few years, and especially during the global financial crisis, suggests that inclusive growth is perhaps essential to even sustain the overall growth momentum. That said, while the UPA sadly failed in creating a really inclusive growth paradigm (despite having a great chance to do so), I really hope that the NDA learns from the experiences of the last 10 years and ushers in a practical and yet effective inclusive growth program that yield dividends on the ground. Several aspects need emphasis here:
First, in emerging market economies like India, a huge proportion of the population (over 60% at least) is based in rural areas, where agriculture is the primary source of livelihood. And any further (substantial) increase in demand for manufactured goods and services will have to come primarily from this large rural population[i], which mainly depends on agriculture and allied sectors. And barring a couple of years (2005/6), by and large, the performance and growth of agriculture has been rather indifferent and continues to be so. Even when agriculture performs, the benefits accrue to the larger and better off (corporate) farmers and not the small/marginal farmers.
Indeed, what has become more apparent with this kind of skewed growth is the dualistic nature of the Indian economy - where the gaps are indeed deepening and widening across various sections of the society. The classic manifestation of these gaps and the failure of the economy to re-adjust and ensure equitable economic opportunities for wealth creation, especially in relation to the work and inputs, can hardly go unnoticed –one manifestation is suicides by small and marginal farmers and others  at the grass-roots. That several farmers and low-income people have committed suicide in the last few years tells us the causes of these problems are not short-term – they are, mainly due to serious structural weaknesses in livelihoods systems of low-income people that require urgent and systematic attention.
Why is this happening? What are the consequences in a country like India, where over 60% of the population is engaged in agriculture and related activities? The key point to note here is that the case of farmer suicides is neither a cotton specific problem nor a paddy crop germane issue. Rather, it concerns fundamental problems[ii] associated with one of India’s largest livelihood sectors, agriculture and allied activities – a sector where over 600 million people and a majority of India’s low income and poor[iii] people earn their living. More importantly, it is a sector without whose produce/products, we will be deprived of sustenance and cannot survive in the long run. Therefore, without question, agriculture and allied areas, as sectors, and the low income people dependent on it for their livelihoods must be “included” in the overall growth paradigm. That is an urgent imperative in India today and the inclusive finance paradigm must take the lead in facilitating/enabling this.
Second, as noted above, from the perspective of supply-side management, growth in agriculture is very vital for keeping manufacturing prices under check, ensuring food security and keeping inflation under control. India knows this better from its own (past) experience. Price stability is not merely important as an anti poverty measure but also as an instrument to ensure stable and sustained growth. Again, the lessons of the last five years should not be forgotten and especially, with regard to prices of essential food items as well as from a food security perspective. That the farmers who grew these commodities hardly got returns/rewards commensurate with their effort, investment and risks taken can hardly go unnoticed. This again points to very fundamental weaknesses in the structural aspects concerning agriculture and low income livelihood systems. Here again, financial inclusion can play a major role in enhancing the bargaining and staying power of such low-income people.
Third, higher growth in agriculture and rural areas coupled with demographic dividend (i.e. growing proportion of population in the working age group of 15-65) should result in a rise in the savings level, which, in turn, should facilitate financing the increasing level of investments required to maintain the overall momentum with regard to growth. This is again a very crucial aspect and the role of local and small savings should not be discounted in any serious measure. Its potential to support inclusive growth is phenomenal and appropriate incentives must be provided in this regard to encourage local/small savings as a resource alternative in any new inclusive growth paradigm. This is perhaps where responsible micro-finance/grass-roots banking can usher in a new era of savings led micro-finance in India, subject to various kinds of MFIs/other institutions enhancing the quality of the internal control/other systems. Perhaps, it may be better to use MFIs and others as business correspondents (BCs) to tap savings and, here again, policy may want to address inherent weaknesses in the business correspondent (BC) model, which has prevented this so far.
Fourth, the limitations on increasing production and productivity in agriculture are forcing people to migrate to urban areas, which results in increased population pressure in urban areas as well as larger numbers of urban poor. And this burgeoning urbanization has several important consequences for low income people, who tend to migrate and live in slums. As an NSSO survey revealed (a few years ago), nearly 40 per cent of farmers claimed that would like to quit farming, if they have the option to do so. Unfortunately, there is little option for them except moving into urban slums[iv].
Thus, in reality, migration to urban areas primarily implies greater growth of urban slums, which hold a lower quality of life for the poor, many of whom have migrated from rural areas in search of better livelihoods. This growth of urban slums, typically, is associated with greater unemployment for the poor living there, harsh living conditions, enhanced crime, greater negative impact on health and several aspects including environmental degradation[v]. Therefore, the major point to be noted is that the infrastructure in urban areas is simply not enough to cater to the growing needs of these migrants. Huge and appropriate investments are therefore needed in housing, sanitation, water, lighting and power, solid and other waste management, education, health, and so on and so forth. Therefore, we need “inclusive and enabling investment” in the above areas to deal with the huge and ever increasing flow of low-income migrant population into urban areas. This is yet another new area of focus for the new financial inclusion paradigm. This also calls for a paradigm shift in urban planning, which must also become more inclusive.
Fifth, in countries such as India, the growth process is essentially knowledge-based and primarily services led. These new growth areas will continue to have a lot of potential going forward. Hence, the requirement of skilled labour is rather huge in comparison to the current levels of availability. Therefore, in order to ensure availability of adequate supply of labour skilled to tackle opportunities in new growth areas mentioned above, we also need huge enabling and inclusive investments in areas such as practical education and skill development. This is to enable the vast majority of people who have the latent potential but cannot afford these services to gain access to such practical skills and knowledge, and thereby perform to their potential. The role of financial institutions (MFIs, banks etc) in servicing the last mile end users clients and facilitating such enabling and inclusive investments must be seriously explored.
Last but not the least, whenever we talk of rural areas, the sector that comes first to our mind is agriculture. However, there is the (unorganized and informal) non-farm sector which continues to play an increasingly important role in absorbing large numbers of rural people. Make no mistake, all put together, this non-farm sector and value added agriculture enterprises (MSME) sector have huge potential for growth. This again requires investment in  `inclusive infrastructure and enabling mechanisms’  for ensuring easier/quicker access to assets, skills, appropriate technology, wide range of vulnerability reducing financial services (including credit for post harvest and post production) and fair linkage to various markets and other market development infrastructure (both private sector and government procurement). Without question, the financial inclusion paradigm should lead such efforts, and facilitate these hitherto excluded sectors to become expanding bases for wealth creation for low-income people in a competitive manner.
Therefore, to reiterate, it is critical to ensure that growth takes place in: (a) agriculture, allied and non-farm sectors as well as service (enabling) sectors in rural areas; and (b) amongst urban poor so that they (also) serve as a growing market for the goods and services produced by the expanding industrial sector including those produced by MSMEs. However, this growth cannot be mere dumping of goods and/or provision of services in rural areas or among the urban poor. It has to be responsible growth and delivered in an ethically sound and transparent manner. This is one of the most important lessons from the Andhra Pradesh/Indian micro-finance crisis and growth story. Otherwise, all the gains will be lost.
Thus, it is clear that a new paradigm of inclusive growth is very necessary for sustainable development and equitable generation of wealth and prosperity. However, achieving this inclusive growth is the biggest challenge in a democratic country like India as it translates to the concern of integrating 600 million people living in rural India, and several million living in urban slums, into the mainstream economy.
And this requires that we let go of our narrow conceptualization of inclusive financial services and broaden the paradigm to ensure that financial services play a very vital role in addressing two critical supply-side issues: (i) by creating an effective ecosystem for delivery of a wide range of financial services to facilitate productive and enabling investment in largely excluded but employment impacting sectors such as agriculture, value added agriculture, MSMEs etc as well as hitherto excluded areas and for enabling low income and excluded people (living in rural India and urban slums) to realize their latent untapped potential; and (ii) by driving large scale investment in inclusive infrastructural facilities and enabling mechanisms like watersheds, irrigation, rural/urban reconstruction, social infrastructure such as health care, education and sanitation and the like.
 So, how can this be achieved on the ground in India today, where financial inclusion is narrow implemented either as micro-credit for consumption or as access to no frills accounts opened by banks. As noted earlier, without question, mere credit[vi] to low-income people can do very little for inclusive growth and it is time to bell this cat. Only a new paradigm of inclusive finance can help usher in an era of real inclusive growth in India and I hope that the NDA government expands its financial inclusion program of today!

[i] And this issue becomes even more critical when one considers the fact that the average monthly per capita consumption expenditure (MPCE) in urban areas in India is near double that of rural areas. And in some States (like in Central or Eastern India), these disparities are even more glaring.
[ii]  “Farming is both a way of life and the principal means of livelihood to 65 per cent of India's population of 110 crore, Our farm population is increasing annually by 1.84 per cent, The average farm size is becoming smaller each year and the cost-risk-return structure of farming is becoming adverse, with the result that farmers are getting increasingly indebted. Marketing infrastructure is generally poor, particularly in perishable commodities. The support systems needed by farmers, like research, ex-tension, input supply and opportunities for assured and remunerative marketing are in various stages of disarray. Small farmers are forced to borrow money from money-lenders at high rates of interest, since less than 60 per cent of the credit requirements of farmers is met by institutional sources.” (Dr M S Swaminathan, Chairperson, National Commission on Farmers, 2006 as cited in The Hindu Survey of Agriculture).
[iii] Despite significant progress made by India during the last decade or so, about 30 – 35% of the total population still lives below the poverty line.
[iv] INDIA has always been considered a country that lives in its villages. But increasingly rural Ind1a is moving towards the town and the city.  The 2001 Census established that almost one- third of India's population, an estimated 285 million people, lived in urban areas. By 2020, half the country's population is expected to be city-based.
[v] In fact, as the data suggest, almost 50% of country’s population and a large majority of the poor are likely to reside in urban slums in India by 2020. And Noted environmentalist Chandrasekar confirms the above trends and summarizes the issues with rapid urbanization, “Although on paper all cities have some kind of development plan, the actual development follows no particular pattern except that dictated by expediency, patronage and privilege. As a result, every city in India is the epitome of urban chaos - lacking in adequate water and sanitation, affordable housing, all weather roads, decent public transport and clean air. Cities generate wealth but increasingly Indian cities have become home to the urban poor. Every city is marked by the informal settlements where the poor are forced to live without access to basic services like water and sanitation. City administrations are unable to check the flow of poor people into the city and have failed to build affordable housing where the poor can live. As a result, in some cities like Mumbai, for instance, half the population lives in slums. And in Maharashtra, India's most urbanized state, 61 cities and towns have slum populations that together makeup over 27 per cent of the total urban population and a third of the total population of the State. Indeed, the slum has now become an inescapable part of the Indian urbanscape” (The Hindu, 2006).
[vi] Several factors like market imperfections and other factors (like poor infrastructure and production practices etc) severely constrain these low income people in their efforts to build sustainable livelihoods and enhance their economic security - as a result of fragile livelihoods, they often go through a cycle of being financially included and excluded at various times.  The key point is that, in the absence of other infrastructure and mechanisms, the use of loans by poor and vulnerable people renders them into greater debt.

Friday, August 22, 2014

An Idea Which Went Wrong: Commercial Microfinance in India is Now Published

Dear All

An Idea Which Went Wrong: Commercial Microfinance in India is now published

It will be up on all amazon sites in a couple of days and the kindle version has also been set up

The book may be immediately ordered from

Hope you enjoy the book

Look forward to your feedback and you can write to me at r_arunachalam@hotmail.com  


Warm regards


Thursday, August 14, 2014

Milford Bateman's Review of An Idea Which Went Wrong: Commercial Microfinance in India

----- Forwarded Message -----
From: milford bateman <milfordbateman@yahoo.com>
To: "MicrofinancePractice@yahoogroups.com" <MicrofinancePractice@yahoogroups.com>
Sent: Monday, August 11, 2014 12:13 PM
Subject: Re: Brilliant updated book on microfinance in India
New book just out
An idea which went wrong: Commercial microfinance in India
By Ramesh S Arunachalam
ISBN-13: 978-1494792480
ISBN-10: 1494792486
Available at www.amazon.com and elsewhere after August 22nd.
Anyone wanting to really understand what happened to the microfinance sector in the Indian state of Andhra Pradesh (AP) a few years ago, and why, needs to get hold of this extensively revised, shortened and very usefully updated book by India’s leading microfinance analyst, Ramesh Arunachalam. Thanks to amazing detail, forensic analysis, a brave willingness to name names, and an independent mind, Arunachalam’s latest book is a masterpiece in explaining one of the most important of the growing number of ‘boom-to-bust’ episodes that mark out what many, including myself, see as the final chapter in the history of the now discredited and rapidly collapsing commercialised microfinance model. To be honest, I think it’s the only book you need on the hugely important AP crisis.
Arunachalam achieves several important things. First, he shows that beyond a doubt one word explains the main driving force behind the dramatic rise and then equally dramatic fall of the commercialised microfinance sector in AP - greed. Greed on the part of the CEOs of the ‘big six’ MFIs, greed on the part of the consultants and advisors egging on the sector to new unsustainable heights, greed on the part of the MIV’s all registered in low tax locations, and greed on the part of the many so-called ‘independent’ Directors of some of the largest MFI’s (including even Harvard Professors no less) who should have raised the alarm but were too busy quietly cashing their cheques and selling their share options. Anyone who genuinely thought, or incredibly still thinks, that microfinance in AP had anything whatsoever to do with ‘poverty reduction’ just needs to go through this book to see what really motivated all of those most intimately involved. The detail at times is quite shocking, with Arunachalam exposing AP's microfinance sector to be nothing more than India's own version of the vastly unethical and criminal financial elite that disastrously congealed on Wall Street and in the city of London in the run up to the events of 2008.
Importantly, Arunachalam’s book also firmly consigns to the dustbin the always ludicrous idea that it was the AP government that brought about the AP crisis in 2010. This thesis has been debunked by the facts so many times it can now be officially classified as another of what Australian economist John Quiggin calls a ‘Zombie idea’ - an idea that no matter how many times it gets killed by the facts and reality, it nevertheless continues to rise from the dead before proceeding to lumber forward creating yet more damage in its rotten wake. Pushing this Zombie idea in the past have been some of the current and former CEOs of the leading MFIs in AP, but also some investment companies, a number of US-based academics-cum-supporters of microfinance, and even the current governor the RBI in India, Raghuram Rajan. While, yes, regulatory failures were apparent in AP prior to 2010, as Arunachalam shows, a much bigger issue that had to be dealt with, btu was totally ignored, was the raft of dirty tricks the microfinance industry deployed to keep the regulators from spoiling their party. Arunachalam shows that the AP government was actually a victim in the 2010 crisis and it was hoodwinked almost as much as so many in the wider financial sector in India and just about everyone in the global microfinance movement.
Finally, Arunachalam also usefully comments on the future of microfinance in India and his worry that so many of those who played a role in bringing about the AP disaster are now back on the scene, obtaining new important positions and appointing each other to new positions, and generally talking up their supposed ‘passion’ and ‘deep concern’ for the very latest entirely empty concept promoted by an increasingly desperate microfinance industry - ‘financial inclusion'. Arunachalam’s last comments are thus on what he thinks needs to be done to avoid another AP crisis and to return the microfinance model to what he calls its original purpose – serving the poor recipients of microfinance, not the usually already very wealthy providers. 
Note also that this latest edition is not nearly as massive as Arunachalam's first book on this topic - known affectionately by some as 'the building block' - so you can actually read it quite easily while having a coffee and without serious risk of physical injury!

Milford Bateman

Wednesday, July 30, 2014

When Dr Thorat and I Could Have Competed With the Best Astrologers on This Planet!!!

That microfinance in India turned into a macro-mess in 2010 is indeed a sad truth. However, the fact is that much of this was predicted in May 2005, when Dr Thorat and I presented a paper {Regulation and Areas of Potential Market Failure in Microfinance, by Thorat, Y. S. P. and Ramesh S. Arunachalam (2005)} at the National Bank for Agriculture and Rural Development (NABARD) high-level policy conference in New Delhi. This paper had suggested that the burgeoning growth of microfinance could result in a number of not-so-desirable practices being adopted. I reproduce the Hindu Business Line article dated October 2005 as per link given below:


It needs to be noted carefully that despite a paper in which the Managing Director of NABARD (Dr Thorat was that then) was the first author and the same was presented in a high powered panel (chaired by a Joint Secretary, Ministry of Finance, GoI) to a distinguished set of participants in May 2005 including representatives of regulators such as RBI and even international donor's like CGAP,  consistent regulatory failure occurred through the years in microfinance in India. First in 2006, then 2009 and finally 2010. My forthcoming book, An Idea Which Went Wrong: Commercial Microfinance in India, talks about these happenings in detail with a historical perspective...

Déjà vu...

Interesting Events Before the SKS IPO of July 28th 2010!

Dear Colleagues

During March – June 2014, Prof Sriram {formerly of IIM (A)} raised several issues including corporate governance at SKS Microfinance Limited (SKSML). Yet, the RBI and SEBI did NOT take necessary action. In fact, in An Idea Which Went Wrong: Commercial Microfinance in India, forthcoming, August 2014, I reproduce an e mail sent by one of India’s most client sensitive and brilliant financial sector experts, Late Shashi Rajagopalan. The mail clearly shows that the regulators and supervisors and many Indian and global microfinance experts were made aware of the presence of malpractices/issues raised by Prof Sriram in an EPW article and corroborated by some of us. Yet, sadly no serious action what-so-ever was taken until the crisis just wiped out Andhra Pradesh from the Indian microfinance landscape!

SEBI, in fact, was unresponsive and refused to entertain any feedback on corporate governance in an official sense! However, when I (informally) spoke to their middle level officers at SEBI (in anonymity) in July 2010, before the SKSML IPO, two reasons was given by them regarding their lack of knowledge about the issues/malpractices raised by Pro Sriram. First, they feigned ignorance because microfinance was apparently ‘new’ and that they did not have the requisite domain knowledge. One can hardly accept their argument because Prof Sriram’s article was in the public domain, especially through a reputed journal like EPW (Commercialization of Microfinance in India: A Discussion of the Emperor’s Apparel by Prof. M. S. Sriram, Economic and Political Weekly (EPW), June 12, 2010 – Vol: XLV No: 24) . Second, they claimed the IPO was a smaller one that did not merit significant attention (that the SKS IPO turned out to be moderately huge even by normal standards is another story).

Also, both the RBI and SEBI had received my paper on “Corporate Governance at SKSML”, which clearly provided additional empirical evidence for Prof Sriram’s assertions. And given that one of RBI’s deputy governors also sits on the SEBI board, I just cannot fathom as to how and why the regulators ignored the key issues regarding corporate governance in microfinance, especially because even the media had started highlighting them. Please see several papers by well known senior journalist, M Rajshekhar of The Economic Times...

OK, Let bygones be bygones but whether the regulators and especially, SEBI have learned from this experience is a key question that begs an answer! We need to know if there are safeguards NOW in place now to protect the money of retail investors! The erosion in share value for SKSML’s investors has undoubtedly been huge and going forward, SEBI and RBI must offer a guarantee that they will not let enterprises with a controversial track record and huge inherent/unknown risks go through an IPO, that could, in the long run, impact small retail investors! 

Warm Regards