Ramesh S Arunachalam
People have often asked me
as to why the regulation and supervision of micro-finance and financial
inclusion and especially, protection of end user clients has generally been weak
in India. I attribute the same to the following reasons.
First is the near seamless
shift of key people from the private financial sector to regulatory and
supervisory bodies through the “reverse revolving door” phenomenon.
I have known top executives
of large financial conglomerates (very interested in financial inclusion and
microfinance) and representatives of special interest groups including
lobbyists, who have built up extremely close (working) relationships with the
regulators/supervisors - in particular those who oversee or regulate the financial
inclusion/microfinance sector.
Specifically, these key
people from the private financial sector, with a deep interest in financial
inclusion and microfinance, have then been appointed to the governing
boards, expert committees and/or senior management at regulatory and supervisory
bodies (whose mandate also
includes the regulation and supervision of the financial inclusion and micro-finance
sector).
Often
called as the reverse revolving door
phenomenon, these people have established a very strong pro-financial inclusion
and microfinance bias in policy formulation and regulatory enforcement by
regulators and supervisors that oversee their (former) industry, former employers
and/or related institutions. When I talk of regulatory enforcement, I am especially
talking of end user client protection issues, which have not got the kind of attention
that they require and deserve, especially given what happened in Andhra Pradesh
in 2010!
And given the huge end
user client protection and other risks that are prevalent in (digital) financial
inclusion and micro-finance products and delivery processes, I am simply amazed
at what is going on...indeed...especially, after what I have seen in eastern
UP, Bihar and Madhya Pradesh as well as other contexts in recent times...
Second, I have seen the shift of
key people from government institutions to the private (financial inclusion and
microfinance) sector through the normal revolving door phenomenon. I am
taking of the case where key people from regulatory and supervisory bodies,
DFIs and other government lenders and institutions have moved (either through a
permanent and/or temporary relationship) to lucrative
private-sector positions (in financial inclusion and microfinance). Again,
irrespective of whatever happens, end user client protection cannot and must
not suffer but that is what is happening in real time (sadly)!
And interestingly, these
people use their regulatory/government experience and long standing connections
to benefit their new employer and/or industry directly as well as indirectly (e.g.
through the drafting of a
supportive regulatory policy, in public procurement and so on and so forth). This
has not only led to a lax regulatory environment and poor supervision by their former
colleagues (with regard to the financial inclusion and microfinance sector) but
also resulted in the drafting/framing of policies hugely supportive to the
financial inclusion and microfinance industry, and especially at the expense of end user client protection/well being. Again,
this is not at all acceptable under any circumstances!
While I can easily name
people and institutions, my objective is not that but rather to isolate reasons
for lack of improvement in the regulatory/supervisory environment for financial
inclusion and microfinance, especially with regard to end user client protection.
Third, I have also
seen situations where former decision
makers (including policy makers and executive decision makers) have become
paid advocates and use their knowledge of and connections with governmental
agencies and regulators and supervisors to advance the interests of (corporate)
microfinance and financial inclusion companies.
Especially, this category
of people are involved in lobbying a generalist view on the public good nature
of financial inclusion and microfinance services when in fact there is so much
harassment of end user clients that is taking place at the grass-roots and a
whole lot of money is being made illegally (especially at the local level) at
the expense of low income and bottom of pyramid clients. The agents who rule at
the grass-roots make it very expensive – whether monetarily and/or physically
for the low income and bottom of pyramid clients. Why are the regulators and
supervisors turning a blind eye? Do not the end user clients matter in the
larger scheme of things? These and other questions continue to run through my
mind, even as I write this post!
The larger point that I
want to make from all of this is that grass-roots reality is very different
from what is being portrayed and there is hardly any regulation/supervision and
client protection that is going on in real time (especially at the grass-roots)!
And I am not talking of interest rates here but the fact that a whole lot of
money is being made at the grass-roots (in the financial inclusion and
microfinance sector) through mechanisms that are illegal, unethical and client
unfriendly. And it is my humble belief that this calls for a serious effort to
create a truly independent end user client
protection regulator for (digital) financial inclusion and microfinance with
a STRONG grass-roots presence and executive powers so that end user client
protection indeed becomes a reality and can be ensured in real time always!
Thank You!
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