Where Angels Prey

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

Saturday, March 12, 2016

2010 Andhra Pradesh Microfinance Crisis Like Symptoms in Eastern UP, Bihar and Madhya Pradesh (India)!

Ramesh S Arunachalam 
The microfinance institution (MFI) model in India has been through a (serious) crisis over the years (since 2005 and especially in 2010) and a lot of this has to do with the inability of the boards of MFIs to actually implement (in real time) some of the very (high sounding) concepts and prescriptions for responsible finance that came from various quarters.

While it cannot be denied that some MFIs were not interested in responsible microfinance, some others perhaps could not ensure the implementation of these well-meaning concepts on a consistent basis in real time. A classic example is the well-intentioned (Sa-Dhan) code of conduct[1] in 2006, which was often waved at meetings with the AP government but rarely visible, in terms of practice, on the ground. Slowly, perverse incentives (as Vijay Mahajan had famously noted in 2010) set in and eventually led to what is now referred to as the 2010 Andhra Pradesh microfinance crisis – the world’s largest crisis to date. Many of those symptoms are now appearing in India’s most populous state of Uttar Pradesh (UP) - Eastern UP to be precise. Similar symptoms are also observable in Bihar and Madhya Pradesh as well.

In retrospect, a good 6 years after the 2010 crisis took shape, one can look back dispassionately and analyze what essentially happened was a failure of the commercial microfinance —primarily because the checks and balances required for commercial microfinance (to actually work on the ground) were almost absent. 

By checks and balances, I mean two things, including lack of (i) supervisory oversight, and that contributed in huge measure to the crisis then, and (ii) a strong, independent, and objective internal audit function within these MFIs. While even a single letter from the supervisor (or regulator) could have mitigated the scale of the problems that happened in AP in the years preceding 2010, the absence of an independent and objective internal audit system certainly hurt the MFIs even more. It may be worthwhile to mention that even on date, as the 2010 like crisis starts to unfold in Eastern UP, Bihar and Madhya Pradesh, both supervisory oversight, as well as a strong, independent, and objective internal audit function within concerned MFIs is sadly inadequate! 

I hope that the powers that be are able to look into and redress the situation immediately as otherwise, the Indian microfinance sector’s date with another (larger, nationwide) crisis is most certainly on the anvil!

A friend sent me this news from the field some time ago and I wrote to many of the leaders in microfinance (in India and elsewhere) via e mail on, Jan 18, 2016 at 12:24 PM. I have now visited various places in these different states, which I also happen to know very well because I have worked in each and every district in these three states. And as things stand, they are INDEED, much, much more serious than as noted in the article

When I warned the sector leaders (including bankers) many times about the 2005/6 Krishna and 2010 AP crisis (prior to the crisis), they tried to shoot the messenger. Never mind! What is coming is worse than the 2010 Andhra Pradesh crisis and some of the leading MFIs may be directly involved. Déjà vu! As I have repeatedly written in my blog (
www.microfinance-in-india.blogspot.com) and my three books - The Journey of Indian Microfinance and An Idea Which Went Wrong: Commercial Microfinance in India – and  – Where Angels Prey , the microfinance operational model is hugely flawed and it calls for many strong changes/interventions on the part of the microfinance industry which, in my humble opinion, has either failed to learn from the past crises situations and/or refused to implement learning from past crisis situations like Krishna (2005/6), Kolar (2008/9) and AP (2010). As a result, we are now we are headed for a nation-wide microfinance crisis in 2016!

Readers may recall that the crisis in Krishna district was localized. Kolar, was a little larger and more concentrated in terms of the crisis spread. Then we had a whole state in crisis (erstwhile AP 2010) and now it is a national microfinance crisis (spread across multiple states). It is indeed a time bomb that is ticking away and when it bursts, I can assure you that a lot of money from across the world will be lost and more importantly, a lot of FINANCIAL INCLUDED clients will have been financially excluded! So much for the INCLUSIVE FINANCE AGENDA!

While stakeholders may have tried to introduce good practices in the intervening years, it appears that there is very little change in the operational model of the microfinance (mainly practiced by the new generation for-profit MFIs including NBFCs and Banks) which continues to grow in many places in these three states at a very alarming rate. Self reported data by MFIs to the Mix Market does not provide a true picture and I have warned MIX about the problems in the data that they collect. When you visit the field and observe for yourself, you can see that the crisis could become (much) worse than what we saw in Andhra Pradesh in 2010.

Irresponsible growth, as you all know, carries a huge price and through this article, I am informing the Indian Microfinance Industry and its stakeholders PUBLICLY (again) that if this irresponsible growth is unchecked and if solid changes are not brought about in the industry, the price will be much, much larger than what it was in Andhra Pradesh in 2010. I have nothing to gain by stating this and I have no vested interest what-so-ever. I am deeply concerned about the microfinance industry and of course, the well being of all of its clients. This is why I have repeatedly written about the happenings (pro bono) for almost 6 years now!

Centre/group leaders acting as commission agents is a practice that continues as is the incentivisation of field workers on a growth strategy which results in continued multiple lending and the like. In many places, days of a week in a place are shared for centre meetings with duplication of members across MFIs. Outreach continues to be hugely overestimated. MIS is far from satisfactory and rarely transparent. Governance is still extremely poor and there is so much conflict of interest across the microfinance industry in India. Ghost, multiple and over lending via agents continues to take place and systems are being sheared across the New Generation MFIs. KYC norms cannot be easily implemented because of the lack of a unique primary identifier (despite the Aadhaar card being available) and the remoteness of the physical locations, the duplicity of names across people in villages and the like are continuing to make matters worse. And there is so much more, but I don’t want to sound like a BROKEN RECORD...I really hope that the Indian Microfinance industry and stakeholders who invest in it will wake up before it is too late...

[1] I have subsequently pointed out serious flaws with code of conducts assessments in 2011 in several articles...

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