Where Angels Prey

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

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


Monday, July 28, 2014

July 28th 2010 – An Important Day for Indian Microfinance!

Dear Colleagues,

July 28th 2010 – this day four years ago - was when the historic SKS IPO opened. It was a stupendous success and it set the bench mark for Indian MFIs aspiring to enter the capital market. However, the architect of India’s only microfinance IPO was however unceremoniously removed in October 2010. M. Rajsekhar and M. Anand (The Economic Times) highlighted these governance concerns in an article, which, in my opinion, changed the course of Indian microfinance in 2010, which had already plunged into a deep crisis because of previous happenings:

 “It just doesn’t add up. This May, the board of directors of SKS Microfinance gave CEO Suresh Gurumani a 50%-plus increment, hiking his annual compensation from Rs. 1.5 crore to over Rs. 2.3 crore. It also awarded him a Rs. 80 lakh cash bonus. Three months after that, Mr Gurumani helped complete a spectacularly successful IPO, the first by a microfinance institution (MFI) in India and the second the world over, fulfilling a key mandate the board had given him when he was hired in December 2008. The stock listed at a market cap of Rs. 8,000 crore, exceeding most analyst expectations. And yet, within two months of what was a landmark listing for India’s microfinance sector, the board fired Mr Gurumani. No official explanation was offered by the company, though CFO Dilli Raj, in a conference call with analysts, ruled out any financial irregularity. Many directors, all speaking on the condition of anonymity, chorus a one-line explanation for the termination—non-performance. ET interviewed over a dozen sources close to both Mr. Akula and Mr. Gurumani—investors, directors, current and former employees, bankers and regulators. Sources on Mr. Akula’s side paint this as a difference in business strategy. Those close to Mr. Gurumani say this was a personality clash, a power struggle. They point to Mr. Akula’s changing roles in the company as evidence.… Still, questions on the SKS board’s U-turn—giving a 50%-plus hike to the CEO and then firing him five months after that—refuse to go away.”[1]

Thus, the popular perception of microfinance had hit a low, and much of the good work done by many stakeholders, including some MFIs, was beginning to be viewed suspiciously. How did microfinance, once regarded a noble profession, come to be viewed this way? To what extent did the change in the microfinance paradigm (to hardcore commercialization) cause this negative perception? What led to the now famous AP 2010 microfinance crisis? What happened in AP in 2010 and before? Who was responsible for the state of affairs that led to the AP crisis in the first place? What specific and generic lessons can be learned from the crisis going forward, both for Indian and global microfinance?

These and other questions started to flit across my mind and I decided to pen my thoughts as a book - An Idea Which Went Wrong: Commercial Microfinance in India, which will be available from August 22nd 2014 at www.amazon.com and through several other global and Indian outlets.

I made a set of ground rules to follow while writing the book. One, it would have to be objective in terms of narration and content, but, at the same time, it would have to try and analyze the various happenings in a candid, analytical manner. Two, while describing problems and events, where there is no conclusive evidence, it would have to offer plausible explanations and leave it to the readers to judge for themselves the various cause–effect relationships. Three, it would need to be forward looking, in terms of suggesting practical lessons and strategies on what exactly would need to be done to re-engineer microfinance to serve the needs of the poor and low-income clients.

From the outset, this book is clear in focus—it examines antecedents to the commercialization of Indian microfinance and demonstrates that this commercialization is an idea that went horribly wrong—both in design and implementation—with significant ground-level consequences. Specifically, it shows that improper design and poor implementation of the commercialization strategy led to the 2010 AP crisis in the first place. And using empirical data and hard facts, it seeks to debunk the hypothesis (or myth) that the Andhra Pradesh government, by enacting the ordinance and the subsequent act, effectively caused the 2010 AP crisis and/or killed microfinance in India.

I state things as I saw them unfold over the past few years, backed by relevant data wherever available, taking off from a little before the Krishna district crisis of 2005–2006 in AP. Even before that, I narrate the story of Zaheera Bhee and her daily struggle for survival amidst severe poverty and adversity, to provide the readers with an overall context of (enthusiastic) financial inclusion that preceded the 2010 AP crisis. This is followed by a description of the antecedents to the 2010 AP crisis. I thereafter attempt to seamlessly weave in various happenings during this crisis with my own field-based analyses, before outlining the various lessons gleaned thereon with specific examples from the Indian microfinance sector, backed by solid evidence, data and facts where available!

The book is organized as follows: Part I, which includes chapters 1-2, sets the overall context for the book; Part II, comprising Chapters 3–11, looks at the antecedents to the 2010 crisis and takes the reader through the various happenings during the crisis and brings them up to date with events as of December 2013; Part III, which incorporates Chapters 12–34, offers critical issues and lessons for global and commercial microfinance, as discerned from the 2010 and previous microfinance crisis situations in India, with regard to a number of specific topics-ranging from corporate governance to risk management, compensation, MIS, internal controls, microfinance agents and staff, client acquisition, effective interest rates, nonbanking financial company (NBFC) regulation and supervision, priority sector lending (PSL), self-regulation, code of conduct, and the like. This part also houses two important chapters one for redeeming the Indian microfinance industry and another for reforming the agenda for global microfinance and the CGAP; and Part IV, concludes with a critical chapter - Chapter 35, which is the epilogue that focuses on the crucial aspect of making the RBI more accountable to the people of India, especially in the light of the 2010 AP microfinance crisis and recent events that occurred in the financial inclusion space. Part V is an appendix containing data, tables, exhibits, and other relevant material including references and glossary.

To reiterate, my sole objective in bringing out the aforementioned book is to ensure that the key lessons from the 2010 AP crisis and events thereafter are not lost for global and Indian microfinance. Other countries especially would not want to go through what India and specifically AP have gone through in terms of financially excluding millions of poor clients (who were once financially included) just because of a distorted growth process that had been adopted by the MFIs (then)

It is my humble opinion that the evidence, facts and examples provided in the book will serve to educate various stakeholders including microfinance practitioners, regulators, governments, investors, bankers, academics and several others  

I hope you enjoy the book


Warm Regards

Ramesh S Arunachalam

[1]Source: Quoted from “More to SKS script than meets the eye” by M. Rajshekhar and M. Anand, The Economic Times, October 8, 2010.

Friday, July 4, 2014

An Idea Which Went Wrong: Commercial Microfinance in India

The Indian microfinance industry was once the darling of global investors and bankers. Offering small loans to better the lives of the poor was both a noble and profitable goal. In hindsight, it may have been too profitable. Overzealous industry commercialization and an obsession with profits transformed an inclusive financial system, with potential to succeed, into all-out profiteering, with tragic results.

Just how tragic became clear in 2010, when the government of Andhra Pradesh, the "microfinance capital of India," reported that fifty-four people committed suicide in response to strong-arm MFI loan recovery tactics, especially in the context of rampant over indebtedness. The announcement ruined the international reputation of MFIs, leading one stakeholder to famously announce "microfinance in India has become a macro-mess."

In An Idea Which Went Wrong, microfinance expert Ramesh S. Arunachalam chronicles the regression of Indian microfinance from philanthropic and pragmatic idealism to profiteering at any cost, revealing the events leading up to the 2010 Andhra Pradesh crisis.

Equally important, he discusses the future of Indian and global microfinance. Many believe legislation and distrust have effectively killed the microfinance industry, especially in India. Arunachalam argues this is not the case, laying out a framework of practical remedial measures necessary to restore microfinance to its original purpose: serving the needs of the poor, disadvantaged, and excluded people-albeit, in a sustainable manner.