MFIN-NCAER study: Here’s the proof that microfinance agents are thriving in Tamil Nadu

Ramesh S Arunachalam

The MFIN-sponsored NCAER study has acknowledged the role that microfinance agents are playing in places like Hyderabad and Jaipur. Curiously, Chennai does not find a mention in this study. Here’s some concrete evidence to the contrary

Yesterday (18th October), we had written on how microfinance agents have spread their tentacles far and wide across the country, and how they are breeding resentment against MFIs (See:MFIN-NCAER study unearths agents’ role in microfinance, but does not find these middlemen in Chennai). We had also written on how the MFIN-NCAER study acknowledges the presence of these middlemen, but the report has a number of loose ends.

Click Here To READ More

MFIN-NACER study unearths agents’ role in microfinance, but does not find these middlemen in Chennai

Ramesh S Arunachalam

Agents have spread their tentacles far and wide across the country, and they are breeding resentment against MFIs. The MFIN-NACER study acknowledges the presence of these middlemen, but the report has a number of loose ends

As the Ministry of Finance and the RBI (Reserve Bank of India) are trying to solve the Indian microfinance regulatory puzzle, there is further evidence on the use of agents in Indian microfinance. The question to be asked then is whether and how the proposed Microfinance Bill will prevent use of such middlemen in the future.

Click Here To READ More

Proposed Microfinance Bill has to look at the centre leader as a microfinance agent

Ramesh S Arunachalam

Centre leaders have tremendous local knowledge and significant local support in villages; they are opinion leaders and can develop extreme familiarity with the microfinance concept, processes and procedures

Click Here To READ More

A Comparative Analysis of Two Types of Agent Led Micro-Finance Models in India: Imperative For RBI To Build Safe Guards Into Priority Sector Lending Directions…

Ramesh S Arunachalam

Rural Finance Practitioner

The recent RBI announcement with regard to priority sector being used for Micro-Finance NBFCs is a very welcome one and is much appreciated as I posted the other day. However, safeguards are needed to ensure that agents of MFIs do not misuse priority sector funds. Thus, when coming out with the detailed guidelines, I hope that the RBI takes cognizance of two major agent led models prevalent in the Indian micro-finance sector.

Let me make a few other assertions. While the exact scale of the agent models nationally is perhaps not known with precision, there is enough cause to believe that it is reasonably widespread as it has been observed in several places in AP, Tamilnadu, UP, Orissa, West Bengal, Karnataka and parts of Madhya Pradesh. This again needs to be looked into closely by the RBI, which is best positioned to conduct an objective and neutral national study and assess which kind of MFIs are involved and why and also geographic places where the same is widespread - and this needs to be done before the detailed directions regarding priority sector are promulgated... 

That apart, it is also imperative that the RBI looks closely at these models and builds sufficient safeguards against their use through supervision and other means and using various stakeholders including banks. If this (building safeguards) appears difficult, a more practical approach could be for the RBI to consider streamlining and legalizing the Centre Leader Type Agent Model and building greater accountability into this type of arrangement - especially, if the RBI feels that this model can be fitted under the Business Correspondent regulations. However, the political agent Micro-finance model should be banned without question. All of these are aspects that the proposed RBI committee on priority sector could look into and provide guidance on.

Here are the operational details of two agent led micro-finance models as I have seen it on numerous occasions and also heard from several stakeholders. Read on…

Have A Nice Day!

Reasons For Use of Agents in Indian Micro-Finance: Three Major Explanations From The Field…

Ramesh S Arunachalam

Rural Finance Practitioner

As I continue my field visits and learning in the crisis ridden micro-finance industry, I fondly remember what Prof Malcolm Harper has always said to me – failures and crisis teach you a lot as well and I am determined to make the most of the learning from the present crisis. And of course, I am trying my best to share it with all of you!

As I have been interacting with various types of agents and especially, center leader/group leader turned agents, I think I have begun to understand the evolutionary process with regard to use of agents and I attempt to describe these below. Read on…

Desire of Many MFIs To Rapidly Build Scale: First, at least initially, the desire to use center or group leaders as agents seems to have emanated from the desire of MFIs to build scale quickly in delivery of micro-finance services to low income people. And many MFIs did get carried away without thinking about the kind of impact that these agents could have in the long run. As one MFI staff put it, “We wanted to disburse several crores[i] of rupees on a daily basis and there was a lot of pressure from the senior management and also bankers/equity investors. We were told that if we show exponentially increasing disbursements, we would be able to attract more equity capital and also go in for a large IPO. Of course, stock options had by then become the standard way of compensating staff and this skewed the incentives all the more…”

Consistent Pressure on MFIs to Reduce Interest Rates: A second reason seems to be the pressure to reduce interest rates and this is something that I have always been saying – ‘servicing the last mile is costly in micro-finance and any attempts to force interest rate reductions will cut out important controls and may even force MFIs to adopt short cuts’. And that is exactly what seems to have happened. The drive for artificial interest rate reductions and the constant pressure on MFIs to achieve this seems to have resulted in several things: a) omission of important client level and other controls at the last mile; b) the proliferation and use of the decentralized model in its ultimate form – the agent led model of micro-finance; c) further reduction of engagement with client (which was a significant one even in the original Grameen adapted to use in India); and several other aspects that favoured decentralization of micro-finance operations.

Adoption of The Profit/Value Maximization Syndrome by Many MFIs: A third reason appears to be the preoccupation of MFIs with the efficiency and value maximization syndrome - as part of the commercial micro-finance movement over the last 4 years – where cost leadership (at scale), profit maximization and shareholder value enhancement became the order of the day, courtesy equity investors and others including bankers. According to one senior manager at an MFI, “We started to look at ways to increase case load of staff significantly and this meant that we reduced the duration of center meetings, where we conducted these directly. Then, we realized that we could do better by outsourcing it with some quality checks and that is how the center/group leader agent came in. As these efforts expanded, in some cases we faced serious delinquency problems and to counter that in an effective manner, we used local opinion leaders and these strong men/women later became agents themselves. And then, there was no real exit and loan after loan had to be made and as long as the problems did not show up, we were not bothered. The use of agents soon was picked by many MFIs and in fact, that used to be the strongest and fastest way to the rapid burgeoning growth that the micro-finance sector in India wanted. Multiple lending and high indebtedness became natural phenomenon in the agent led model of Indian micro-finance.”

Thus, while there could be other reasons for use of agents, the above aspects of “building scale quickly”, the “pressure to reduce interest rates” and the “desire to be a cost leader and maximize profits and value to shareholders” look like the major ones that seem to have pushed the Indian micro-finance industry to – using agents in a decentralized model – the brink.

While the question of whether and how the Indian micro-finance industry can be rescued from its present use of (notorious?) agents[ii] always remains, it is also very clear that the industry is currently on a pathway towards long term disaster…And let us hope that the concerned stakeholders begin to introspect with integrity and quickly attend to rapidly spreading agent related problems on the ground. And the eternal optimist that I am, I do believe that the Indian micro-finance industry has the innate character to change its current course and rise like the phoenix…will the so called industry leaders stand up to this issue please, to be counted…

Have A Nice Day!

---

[i] 1 US $ = 46 Rupees and 10 Million Rupees = 1 Crore

[ii] I really hope that the RBI conducts a national study in several states to actually determine the scale and size of the agent problem, which appears to be growing in size, with each passing day…. I have personally met over 100 agents in small geographies during the last few months.

MFI Staff Srinivas[i], Agent Amulu and Social Performance in Indian Micro-Finance: A Complex Relationship Indeed…

Ramesh S Arunachalam

Rural Finance Practitioner

MFI staff Srinivas worked for one of India’s largest and fastest growing MFIs.  His field areas were close to the Panchayat Union of Paramathy Velur, near Tiruchengode (and Namakkal). Srinivas wanted to be a high performer always and the only way he thought fit to be that - as per his organization’s mission, the orders of his superiors and the unsaid MFI incentive system in place - was to disburse more and more loans and quicker than his competitors. Realizing that it may be too much to do all of this by himself, he enlisted the help of several centre leaders and got them to act as agents.

According to reports available localy, it was mutually agreed (between Srinivas and the agents) that each agent would collect between Rs.300-Rs.500 depending on the quantum of the loan to be approved. One of his agents, Amulu, was a hard working centre leader who had in fact turned an agent because she saw a great opportunity to make money quickly and especially because her family business of making cement posts suffered huge losses due to inforeseen rains. Due to her familiarity with the local milieu and people, she quickly collected Rs.300 from about 1050 people, promising them loans of Rs.20,000 each. Faithfully, Amulu, paid Rs.300 received from each of 1050 people to Srinivas, who realised Rs.3,15,000/- (1 US $ = 46 Rupees) as ‘advance fees’ towards loan sanction and disbursement. Srinivas kept his word to agent Amulu and paid her back Rs.100 per loan promised (and advance money collected). Amulu earned Rs 1,05,000/- in total and she was determined to do better as an agent…

While Amulu and Srinivas kept their word to each other, they unfortunately reneged on the promise made to people in one village (towards Mohanur) and several other nearby places in The Paramathy Velur Panchayat Union. Further, Srinivas also collected loan repayments through these agents and together, they shared the collections in a ratio of 3 to 1, with Srinivas getting 3 shares and the concerned agent getting one share. Srinivas did not remit the collections to the MFI branches and the same is said to have been done by few other staff as well because of the non payment of salary by concerned AP headquartered MFI. These staff and Srinivas are absconding now…and before they left, they also spread the word that MFI loans need not be repaid…

As a result of their not keeping up the promise of disbursing loans to many people (after having collected upfront commissions from them) and also due to non-remittance of loan repayments to the MFI branches {this became known to clients when new staff asked them to repay (already repaid installments of) loans}, the poor people of Paramathy Velur appear to have got angry and are said to be revolvting against the malpractices by MFI staff, which many MFI managements are in no position to deal with. Bankers money of almost Rs 10 crores is said to be at serious risk, with people venting their anger by refusing to repay (current and future installments of) loans.

The above raises very serious questions about the decentralized MFI model, currently in vogue in Indian micro-finance and these are summarised below:

1.      While it is great to talk of social performance, internal controls and the like, how do you enforce this on the ground in a practical sense when you have multiple agents colluding with fraudulent staff (often hired without serious background checks and practically no training) and MFIs that rely heavily on a fully decentralized model that has all the wrong incentives? (Please read http://microfinance-in-india.blogspot.com/search/label/Micro-Finance%20Agents)

2.      Given that a lot of growth has occurred (and is perhaps still occurring) through outsourcing to agents, where the end user clients may not be strictly traceable, how can social performance be enforced in a practical sense? What lessons can the Indian and Global micro-finance industry learn from past efforts to enforce codes of conduct and the like? (Please read http://microfinance-in-india.blogspot.com/search/label/Code%20of%20Conduct)

3.      When simple internal controls (and internal audits) were busted and disregarded during the phenomenal growth phase of  Indian micro-finance that saw the burgeoning growth of multiple lending and other malpractices, with what confidence can we expect social performance to be implemented on the ground? (Please read http://microfinance-in-india.blogspot.com/search/label/Microfinance%20Frauds)

4.      When MFIs operate using different kinds of agents in an outsourcing model, how can one be sure of the data that is provided by the MFIs with regard to social performance management?  How can we rely on self-report data that is supplied by the MFIs with regard to these, especially when many MFIs may not even be aware of who their clients are because of the prevalent agent models?

While social performance sounds fantastic on paper, any talk of social performance is meaningless when one looks at the current ground realities in Indian micro-finance. These concepts sound excellent at a conference in Mumbai (there is one in mumbai today) or Delhi or even Washington but when one quietly walks around the hot and humid Tamilnadu or Andhra Pradesh in sweltering heat of 42 degrees centigrade (or more) in the various field areas for several days together, it is clear that enforcing social performance on the ground is an almost impossible task…given the huge level of decentralised operations in current day micro-finance…and the manner in which this model has evolved and the associated motivations therein…

Before I sign off, I would like you all to read this very interesting REAL LIFE story from India …that shares many parallels with the social performance management situation and related reportingby MFIs…Read on…

“It was the autumn of 2008 and Satyam[ii] Company Secretary G Jayaraman was beaming. For the second time in six years, India's IT outsourcer had walked away with the coveted Golden Peacock Award for excellence in corporate governance, an award instituted by the World Council for Corporate Governance. Later that week, Vadlamani Srinivas proudly told the press that the award was 'a testament to our [Satyam's] efforts to continually innovate corporate governance best practices in the industry.'

The Golden Peacock was not the first award that year. In April, a global investor relations firm MZ Consult ranked Satyam among the top five companies in the Asia-Pacific region in the financial disclosure procedures category. 'We are pleased to be recognised.... Our practices are designed to provide complete, accurate, timely information in clear formats,' said Vadlamani Srinivas.

To the corporate world, Satyam's hubris was well earned. After all it had all the bells and whistles required of a well-governed modern-day company. Satyam's five star board of directors, as on-lookers liked to call it, had just the right number of independent directors with just the right credentials-eminent scholars and administrators. Also, Satyam had Price Waterhouse-one of the big four audit firms-as the statutory auditor. All was well with Satyam's world-or so everyone thought.

Two blows dealt to the company's image within a span of one month ended Sat yam's high-prized innocence-the fateful board decision taken on 16 December and then Ramalinga Raju's confession of 7 January.

Never in the history of corporate India has a company fallen so hard and fast. And everyone, from investors to experts, attributes this to the failure of the company's corporate governance controls. In fact, all events surrounding the scam-the aborted Maytas bid, World Bank barring the company from all Bank contracts-were being linked to the way Satyam was governed.”

The moral of the story is clear: it is always very easy to provide very positive data and reports that paint a great rosy picture but what may actually be happening inside could be very different…Several organizations that have won the well-intentioned CGAP award for transparency in micro-finance have also been reported as having serious Corporate Governance violations…please refer to Prof Sriram’s paper in EPW in June 2010 and other material on this blog…

Therefore, I hope that the well-intentioned on-going effort[iii] to bring out an annual social performance report[iv] for Indian micro-finance not only presents great sounding data, eloquently worded sentences and so called transparent information but also captures and highlights hardcore grass-roots realities and practical problems as well…That is imperative if the Indian micro-finance industry is to really serve and service its end user (low income) clients…

Have a Nice Day!

---

[i] The objective here is not to talk specifically about any MFI or individual. That is why names have been disguised and rather, the primary objective is to enable the micro-finance industry to learn from its field experiences…so that it can better serve its clients…

[ii] Quoted with Adaptation From Governing The Corporates, Aanand Pandey, Business Standard, in The Satyam Saga 2009.

[iii] As you are reading this post, there is a conference in Mumbai debating the structure of a proposed annual social performance management report for Indian micro-finance. In the coming days, I will be talking more about the social performance concept in greater detail…

[iv] Let us stop writing reports that make us feel good. What we need are reports that accurately present grass-root realities and issues so that the industry can better serve its clients. That is the most important aspect and this criterion should hold good for all paid reports in Indian micro-finance – from State of Sector to the proposed Annual Social Performance Report

Type I Agent: The Local Grass-Roots Politician as The Micro-Finance Agent

Ramesh S Arunachalam

Rural Finance Practitioner

There are several types of micro-finance agents who are operating and they can be classified as follows:

Type I Agent:  The Local Grass-Roots Politician as The Micro-Finance Agent

Type II Agent:  The Centre Leader as The Micro-Finance Agent

Type III Agent:  The Group Leader as The Micro-Finance Agent

Type IV Agent:  The Local Community Member as The Micro-Finance Agent

In a series of posts, I look at each of these agents, their characteristics and roles and also describe their salient features.

This first post looks at “Type I Agent:  The Local Grass-Roots Politician as The Micro-Finance Agent”

Characteristics and Roles of Agent

1.     Agent’s Background: Is typically a member of a political party or organizer/agent for local politicians. I have even know dynamic centre leaders graduating to this kind of an agent

2.     Clout: Is derived mainly from local organizing of people for Political and related work and this person has extreme familiarity with the local political/social milieu. He/she has tremendous local contacts with the powers that be and an excellent and well entrenched local network

3.     Type of Model: The agent model is totally decentralized and the MFI only knows the agent as the last mile. End user clients are rarely known and records may not even exist, let alone be inspected. A lot of KYC violations would occur here and the agent assumes responsibility for completing this, using local educated people, often youth. There is very little control that the MFI has over this kind of agent. Under this model, a lump sum amount is given to the agent and in return, names and ID proofs and other required documentation are collected.

4.     Roles: Loan disbursement and collections are done mainly to agents own clientele, using agents own staff/helpers (Read = Toughies). Such agents initially started to work with MFIs but have also started working with the SHGBLP & other government programs.  The agent is also a good conduit for channeling local money into micro-finance. The agent Kamala mentioned a few days ago is this kind of an agent who collected upfront commissions promising disbursement of loans after elections in Tamilnadu

5.     Compensation: This agent mark ups on interest as well as charges a flat. Additionally, they have as their return the money gained by deploying/rotating (MF) funds in their own business

6.     Credit Risk: The credit risk is huge as the agent carries enormous power and there is very little that the MFI can do to tackle the agent, in case of the agent reneging on their implicit and/or informal contractual obligations

A diagrammatic representation of these agents operations is given in figure below. Please note that the last mile is a black box.

Salient Features

As noted by one of the commenter’s to a previous blog posting of mine on agents and I quote, “this is a more predatory model. Here, a local grass-roots political agent steps in as the financial intermediary. In this case, he becomes the local agent with the intent of converting the loans into political capital. Says an ex-employee of both SKS Microfinance and Spandana: “"In most of the slums, there is usually one gang lord whose permission you need to work in that area."" And this toughie becomes an agent of the MFI overtime.

Several issues are critical here and must be noted from a regulatory/supervisory perspective:

·        The balance of power here is almost always in the agent’s favour and he/she controls the local activity.

·        Often times, the agent claims to disburse at a very fast pace and this burgeoning growth of portfolio could result in failures of established systems at higher levels of the MFI. Also, the complete decentralization in this model often causes deviation from prescribed credit policy and results in fraud, error or manipulation – and much of it is unknown to the MFI. Also, weak integration of information systems at the MFI level may not even permit MFIs to recognize such delinquency

·        Also, there is great difficulty in maintaining portfolio information when the agent is of this kind and having complete control. So, much of the data is what is provided by the agent who have helpers/assistants (including former group/centre leaders) that help them fabricate this data

·        The mandate of efficiency and the desire for lesser controls, procedures, information and  supervision to reduce costs and thereby interest rates, seem to have prompted MFIs to go in for this model initially and this is proving to be a bane for many of them today.

·        The last mile is the agent and the MFI will not know who the actual clients are and any attempt to do so will be taken as a serious loss of face for the local political agent – the end result being loss of money for the MFI and an effective ban on its working in the area

·        If the agent absconds, the MFI will not know who its final clients were. Nor would the clients know who the MFI is – because, as noted above, if the MFI tries to promote itself in the village/locality, it will alienate its agent.

·        Also, if other MFIs come in, the agent will usually play one against each other and/or even start representing the other MFIs as well. The branch staff of the first MFI will rarely be in a position to object and they may not even know of it.

·        Also, if the agent is not able to keep the repayments coming, the branch staff is likely to advance him/her a fresh loan to avoid a default which would expose the distortion. Thus, restructuring (rescheduling and refinancing) of delinquent amounts is an often-used strategy to camouflage portfolio quality

·        Finally, this agent plays a huge role in transferring money during electioneering – something that the election commission in India has woken up to in the last month. It may be worthy to note that huge consignments of cash were confiscated from two major MFIs in Tamilnadu in the last two days – While some of it could be genuine micro-finance money, much of it is money used by the political agent for distribution to political parties

The next posts will provide a similar overview of other kinds of agents in micro-finance…

Have a Nice Day!

Micro-Finance Agents in Tamilnadu: A New Class of Local Financial Intermediaries at the Grass-Roots?

Ramesh S Arunachalam

Rural Finance Practitioner

I have been travelling in my home state of Tamilnadu and of course, apart from doing my work, I have also been interacting with micro-finance clients, MFIs and staff, agents, bankers, SHGs, JLGs and other stakeholders involved in micro-finance. Here is what I found…Read on…and much of this is on record…

Micro-finance agents, created by MFIs are still active in many districts in Tamilnadu and I, in fact, met a few agents in the last 10 days, who were using repayments collected from clients (and not paid back to MFIs) for further intermediation amongst the people at fairly high rates of interest (excess of 30% in many cases). Some of these agents have also formed themselves into small NGOs/trusts/societies and are trying to access funds for financial intermediation from various sources including MFI funds, politicians, banks funds…and other sources…They are clearly becoming a new class of financial intermediaries at the local level but with no institutional and/or individual accountability…

An interesting incident was mentioned by one stakeholder and confirmed by women in the field…Three Andhra MFIs operating in Tamilnadu apparently had not paid staff their salary for some months after the MFI crisis in AP and some of the key staff along with agents collected money from clients (without giving receipts) and were now using the same money (running into several crores of Rupees, 1 Crore Rs = 10 Million Rs and 46 Rs = 1 US $) as capital for financial intermediation at the local level. The same is being rotated at the local level at much higher rates of interest. The same stakeholder confirmed that as many of the MFIs are not aware of several of their last mile clients (end user clients), they also could not directly collect the repayments from the clients. This also has very serious implications for KYC norms and the traceability of the money at the grass-roots…some thing that I have been crying hoarse for some time now…

Several clients also claimed to have paid a huge fee to agents in anticipation of a future loan from MFIs – which agents had said that they would disburse after the elections (scheduled for April 13^th 2011 in Tamilnadu) got over. In fact, one group of clients stated that nearly 800 people had paid between Rs 700 – Rs 1000 as fees to an agent (Kamala) in Salem district to get loans of Rs 25000 – Rs 40000 each from various MFIs, after the elections. Assuming an average fee of Rs 850, this works out to more than 1/2 a million rupees in upfront fees paid to the agent

Coercive repayment is also said to continue and a middle aged client said that staff of one MFI took away her child in the morning in Feb 2011 and returned the child only after she was able to make the weekly instalment payment at night by pledging her ration card (for a fee and for use by another client to get a loan from another MFI) and also selling her rice/rations at a distress price. Still others confirmed that staff have now started sleeping in the villages (and sometimes outside the homes of clients) at night, if they could not collect money from the clients during the day.

I also met a few centre leaders who said that they are breaking up old JLGs and forming new ones at the instance of one MFI, so that loans could be provided to these so called newly acquired clients and not old older clients in other JLGs. Overall, the practices at the ground level do not seem desirable with regard to client acquisition, client preparation and the like and this is such a fundamental and critical issue…

Very interestingly, the micro-finance agents also claimed to be working with the SHG – Bank Linkage model, by taking groups to banks for the 1^st linkage. One of them said that they received no commission from the banks but received between 7 – 10% from group members for getting the group a first loan of Rs 50000

Agents also confirmed that bankers are now actively calling them in to help them meet their various targets, including those pertaining to financial inclusion. To reconfirm some of these aspects, I met several bank managers in the same areas and two managers candidly said that since they lacked sufficient staff and were being pushed on targets, they started relying on the agents for bringing in the groups to meet the various targets

One of them even had an interesting observation…the groups brought in by agents typically paid off their first loan within 1 year whereas the loan term was around three years and then, they took the 2^nd loan of 4 times the savings – many of these groups accumulate as much as between Rs 30000 – Rs 40000 and therefore receive a 2^nd loan of Rs between Rs 120000 – Rs 160000 (46 Rs = 1 US Approximately). Managers also confirmed that several groups do not repay the 2^nd loans and that, many of the members migrate to other areas and are not traceable. One manager even said that Rs 40 Lakhs (Rs 4 million) is likely to be written off in the future as the members are not traceable

Yet another startling fact was brought up the managers and they said that Rs 50000 first loan taken is not used towards any income generating activity and that this money sans the commission paid to the agents was used as the corpus for a local chit run by the group members, who divided the interest profit amongst themselves…

Clearly, as far as I can see the burgeoning growth of micro-finance and financial inclusion initiatives, have indeed led to the development of an entire new set of intermediaries – agents – who are best described as a new class of money lenders, especially because of their overall coercive behaviour, the harsh terms that they offer and the strong arm strategies that they employ for collection…I can see some parallels with agents used for personal loans in India, that turned out to be disastrous for many banks

Therefore, it is about time that we as practitioners, begin to introspect with integrity, on what is working on the ground, why or why not and what can be done to salvage the various micro-finance and financial inclusion innovations in India…Otherwise, much of our efforts of several decades could be sadly lost…

I know that many of the proponents of the models may become defensive and try to argue Y versus X and so on. My humble plea to them is to refrain from doing that and rather, take practical steps to enable a serious Nation-wide reality check (conducted by a neutral set of people from Civil Society, with no vested interest or stake) with regard to the micro-finance (MFIs and SHGBLP Models), financial inclusion and other initiatives and the extent to which the ground situation is rapidly deteriorating. In my opinion, I have no hesitation in saying that the current growth, practices and direction of the various micro-finance, financial inclusion and related initiatives is not as was originally desired/planned and if unchecked, these could result in serious damage to the low income economy in India in terms of credit culture, economic transformation and the like…So there is a lot at stake indeed

Make no mistake, the cancer is spreading and spreading very fast and before, it consumes much of the low income economy in urban and peri urban and completely destroys the credit culture, let us do something to salvage the situation. People at the grass-roots need and have a right to access finance and other basic services and therefore, throwing out these initiatives is not the solution. We as a country, need to get the delivery of financial and other services to low income people right and for that, we need to introspect with integrity and not be defensive…

Among other things, this immediately calls for a national strategy and policy on access to finance for low income people, a single supervisory micro-finance authority (created by an Act of Parliament) which understands the nuances and has the wherewithal for SUPEVISING micro-finance and such initiatives, and the creation of a larger ecosystem with enabling services that will help low income people to start, nurture and scale up urban and rural enterprises and livelihoods in a sustainable manner…so that inclusive growth becomes a reality as envisaged by the Government of India

I hope the senior practitioners and all other stakeholders will start on this in full earnest…

Have a Nice Day!

A Day In The Life of An MFI Loan Officer: Some Insights From The Adapted Grameen Replicators in India…

Ramesh S Arunachalam

Rural Finance Practitioner

The loan officer, by a large margin, has always been a “he” (it is a ‘her”, rarely), at least in the adapted grameen replicators in India - a commonly used metaphor for some of India’s largest MFIs.

The loan officer may simply be called as a loan officer or project assistant or field coordinator etc. The loan officer, typically, as I have seen him over the years, starts his day at around 5.30 AM in the morning, getting up and readying himself to go to the field and meet micro-finance clients. Among other things, the collection sheet and disbursement schedule are critical documents and the loan officer goes through these before setting off on the day’s journey.

In a typical adapted grameen replicator, the branch is located at a central place and the loan officers cover a radius of 25 kms around the branch. They, by and large, stay in the branch in a back room – 3 or 4 or sometimes even 5 of them huddled together. Often, the living conditions are woefully inadequate by any standards. They cook their own food in this small room and also use it to house their things as well as sleep.

The loan officer starts from the branch at around 6 AM and reaches the venue of the centre (a commonplace in a village) typically by 6.30 AM in the morning for the centre meeting. The traditional model, which was by and large followed by many of the adapted grameen replicators in India - starts with a roll call (group attendance) followed by various activities such as loan repayment, loan disbursement, pledge/oath taking and the like. Generally speaking, given that loan officer has various records (including receipts) to update (both for the client/MFI) and also given that discussions may be held amongst the members with regard to which of them will get the loans in subsequent weeks, it should be safe to assume that a center meeting will last at least an hour, if not more.

Box 1: Some Time Consuming Tasks at The Centre Meeting

There is good reason to believe that a center meeting, conducted as per the traditional model, would last more than an hour…The grameen model and the Indian replicators have always prided themselves about the fact that the repayments would be collected first and kept separately and then, any loans would be disbursed, often using the 2:2:1 formula, where the JLG leader receives the loan the last and other 4 members receive the loan in batches of two each, in an interval space of few weeks. The same happens for the remaining 7 JLGs and that is the way the center generates peer pressure, as at any time, there are always some members at the center who require a loan and it is believed that they would exert sufficient pressure on the rest of the members (who have taken a loan) to make prompt and regular repayments. Therefore, the task of choosing members who will receive loans in the subsequent weeks is one that could take significant time - as I have seen members within a JLG and center, argue out competing demands.

Therefore, while nascent field workers (loan officers) may be able to only take care of 1 centre meeting in a day, experienced loan officers can perhaps handle 2 centre meetings daily. Such experienced loan officers, after the 1^st meeting, would typically go to a 2^nd centre meeting at a nearby village/hamlet/slum and get back to branch by 10.30 to 11 AM. Here, they hand over the cash and reconcile the balances. After eating their breakfast, they sit down and complete all the accounting and portfolio entries (either manually or in the computer) in the branch records, pertaining to the centers they visited.

This usually takes up to 1.30 PM or latest, 2PM or so after which they take lunch and rest until 4/4.30 PM. Then, at 5 PM, they leave for the villages to have contact meetings, to form new JLGs/centers and they come back to their room by 9/9.30 PM and eat/sleep so that they can start the next day afresh. This routine is normally followed for the five-week days and on Saturday, the loan officers do work at the branch, either updating records or planning activities with the branch manager. As an aside, actually, the life of a micro-finance loan officer is rather tough and I must confess that, if some one like the ILO would look into it, they would find the living and working conditions very stressful and inadequate…In fact, I came across a complaint (by a loan officer perhaps and I am not sure) on the web and I attach the link[i] of the same here: http://www.complaints-india.com/complaints/3570/EMPLOYEE-TORTURE.html

Okay, back to the topic at hand, there are two points that deserve mention here:

·    Given the efficiency that may have been built into the process and the learning curve experience, at best, experienced loan officers, may be able to handle, not more than 2 center meetings or 16 JLGs in a day – this is equivalent to a maximum 400 clients per week (assuming a five day work week and leaving the weekends for office work) and this is perhaps an outer limit and a very optimistic estimate….of loan officer caseload…

·    Likewise, a nascent loan officer can perhaps manage 1 center meeting per day and this translates to 8 JLGs per day, which makes their caseload in clients/week as 200.

Thus, the above are caseloads that are theoretically possible for nascent and experienced loan officers as I have seen it and I am sure there could be some (marginal) variations to these depending on the context, model and other aspects. In reality, given the adjustments for the terrain/context and other unexpected work, the most optimistic caseload, in my opinion, seems to be 250 - 300 clients for experienced loan officers and 150 – 180 clients for nascent loan officers…

That said, let us now look at some of the case loads based on real time data for 6 MFIs that were the equity leaders in Indian Micro-Finance (because they were the favourites of equity investors) and this data is calculated[ii] from the published data sources like MFI Annual Reports and Mix Market data…

The above table provides some very interesting trends

There was only one MFI (MFI 4) that had a caseload of over 650 in 2006 – around the time of the Krishna crisis and they were, in my opinion, using an agent type methodology, as far as back then.

The other MFIs, barring one (MFI 5), learnt from this MFI 4 on the advantage of using an agent type methodology and that is why, for the rest, we see the caseload increasing over the years – and especially in the years ending 2007 and 2008 the case load is rather heavy. In 2009, the caseloads increased for 4 of the 6 MFIs and the argument here being that the higher case loads were perhaps being managed by using the invisible (hand of) agents.

Specifically, for MFI 3, that had had a very high caseload the earlier year (720 clients per loan officer), there was some corrective (503) in 2009 because, in my opinion that MFI had already started experiencing delinquency in its portfolio due to this and trouble from its agents – as it perhaps went overboard in increasing its field officer caseload from 376 to 760, which is more than double the caseload…again, the flow of equity at a premium to other MFIs and the carrot of (potential) huge equity investments in the future perhaps attracted many of these MFIs to wealth hitherto unseen by them thus far…

These specific numbers aside, the larger point is that whatever be the context, when you have case loads of over 400, I think you must ask questions on how the staff are managing these (unrealistic and heavy) caseloads, especially when using a similar Grameen type methodology…that is the critical aspect…

It is also interesting to note that all of these 6 MFIs grew at a frantic pace between April 2007 and March 2009 when the case loads went up dramatically. Let us look at growth in terms of active clients first and then, by gross loan portfolio:

Growth by Number of Active Borrowers For 6 Equity Leader MFIs:

·    The 6 Equity Leader MFIs grew at a CAGR (over a 4 year period) of 61.19%, adding 12.91 million active borrowers during the period April 2005 to March 2009.

·    Of this, nearly 10.46 million active borrowers (or 81.03% of the total additional active borrowers covered from April 2005 – March 2009) were added during the period of April 2007 – March 2009.

·    This is equivalent to the 6 MFIs adding 0.44 million active borrowers (or 4, 35,971 active borrowers) every month, during the 24 month period.

·    And this is equivalent to each MFI adding 0.072 million clients (or 72661 active borrowers) every month, which is certainly a lot of active borrowers!

·    The above number translates to about 2389 new clients (or about 479 new JLGs or 69 new centres) to be added every day by EVERY MFI (on the average) and that is a huge ask, under any circumstances…

Ask some one who has worked at the grass-roots level and you will surely understand that sourcing clients and developing JLGs (Joint Liability Groups) and Associated Centres’ does take a lot of time…and that is why I would rate the above as very, very rapid growth...by any standards…

Growth by Gross Loan Portfolio For 6 Equity Leader MFIs:

·    The 6 Equity Leader MFIs grew at a CAGR (over a 4 year period) of 88.92%, adding US $ 2.68 billion as gross loan portfolio during the period April 2005 to March 2009

·    Of this, a whopping US $ 2.18 billion (or 81.21% of the total portfolio increase from April 2005 – March 2009) was added during the period of April 2007 – March 2009. That is significant by any standards and is the equivalent to the 6 MFIs adding portfolio worth US $ Million 90.81 (or Rs Million 4177) every month, during the 24 month period. Again, this is a staggering growth statistic, at least for me...

Further, it is interesting to note that the 6 equity leaders also received significant equity infusions during the same periods or a little later as shown in graph below

And of course, as noted above, these Equity Leader MFIs received significant equity infusion during the period April 2007 – March 2009 (US $ 228.87 million) and also thereafter during the period, April 2009 – July 2010 (US $ 287.88 million). The comparative data and specific data on number of active borrowers and gross loan portfolio for the 6 equity leader MFIs along with equity investments is given at the end of this post.

And also, the financials of the 5 of these 6 MFIs are given below, as calculated by Intellecap in the 2010 inverting the pyramid report…

As you can see, the connection between flow of equity[iii], growth of MFI in terms of number of active clients and gross loan portfolio and increased caseloads is no simple coincidence.

That said, several key questions arise here and I leave you with these…

·   How did the staff of these MFIs manage such higher caseloads? What (or who) helped[iv] them in managing such unusually high caseloads?

·   Especially, given that they were adding many new loan officers who could not function at peak performance (capacity), how did these MFIs manage to increase client caseload as significantly as shown in table earlier?

·   What (tangible) changes were made to the operating model to enable this? Were the changes as per the law? Specifically, were agents formally or informally appointed and did their invisible hand share the caseload of the loan officers? That needs to be better understood…

·    What other changes/shortcuts were employed in client acquisition, loan disbursement and loan repayment collection to facilitate management of such high caseloads?

·    What was the impact of all these changes on clients and their well being? That is very critical and again needs to be clarified

·    Overall, given that the KYC norms and RBI outsourcing guidelines came into force during the above periods, how did these MFIs manage the higher caseloads in wake of new staff, burgeoning growth, enhanced regulatory requirements and the like?

Ladies and Gentlemen, I leave you with these questions to ponder and reflect and all that I can say is that I have a very uncomfortable feeling about the Indian micro-finance business model…and its vision, growth strategies, operational methodology and the like...I leave it to you to judge for yourselves...

Adios!

Have a great weekend!

PS: Please note that I have refrained from identifying individual MFIs because the intention is not to malign them. Rather, the objective is to learn from this crisis so that we can take appropriate corrective action going forward...Thanks for your understanding on this...

---

[i] Sometimes, the moment you refer to a link, it gets taken off and apologies, if that has happened. Also, the objective here is not to identfy or pinpoint any one MFI but the above example is merely provided as an illustration of MFIs that perhaps take the most out of their employees...

[ii] To the best of my knowledge, the data is correct but apologies if found otherwise, but I think not likely as I have tried to use some internal consistency tests and they worked well for the set of data given above. Thanks for your understanding and even if changes would be there, in my opinion, they should be marginal and not make a material difference to the caseloads

[iii] Data subject to caveats mentioned in specific posts on equity, done in November and December 2010

[iv] And especially, given the fact that technology has, at best, been piloted and not taken to scale in many places in Indian micro-finance. In fact, if you go back and see the organizations that won the CGAP award for technology, many of these technologies have not been operational for a rather long time now…not because they are obsolete technologies but because they lacked the sound business case in the first place and could not be taken to scale