Building Safeguards Into the Malegam Committee Report (MCR) Proposal for Using Industry Associations in the Indian Micro-Finance Regulatory Framework

Ramesh S Arunachalam

Rural Finance Practitioner

The Malegam Committee Report (MCR), if accepted as it is by the RBI, has a significant role for SROs (and in the present case, for the Industry Associations) and media reports strongly suggest that the proposals of the MCR may come into force from April 2011. While using SROs (Industry Associations) may seem as a practical step, especially given the scope and scale of supervision required in micro-finance in India, the fact that these industry associations were not even able to implement their respective codes of conduct over the last few years needs to be clearly recognized. And more importantly, this critical aspect must be suitably addressed, in case the RBI is going to rely on the use of industry associations as SROs, in the overall micro-finance regulatory framework.

Here are some suggestions in this regard for the RBI, based on good practices and lessons from global experiences…for what they are worth and what they are not…Read on…

The primary regulator (whoever it is) must have an appropriate oversight program for the SRO/Industry association and thereby ensure that:

·         The SRO has appropriate corporate governance policies and procedures and that it follows them in practice. This is very critical as many institutions have great governance policies and procedures on paper but rarely follow them in implementation.

·         The SRO’s functions and rules cover its regulation/supervision responsibilities and are fair and balanced.

·         The SRO’s regulation, supervision and risk management responsibilities have been met, including that its systems and processes meet appropriate standards. The regulator must also ensure that the SRO has effective compliance, supervision and enforcement programs.

·         Any identified conflicts of interest, within the SRO, have been squarely and appropriately addressed. This is a very critical aspect as there have been huge conflicts of interest in the Indian micro-finance sector and this is one of the main reasons for the Sa-Dhan and MFIN codes of conduct not having been implemented on the ground.

·         Shortcomings or needs that require a response from the SRO are identified and adequately addressed periodically.

In addition, the regulator, through appropriate supervision, must ensure that the SRO continues to meet all the conditions of its license[i] and other obligations imposed on it by law and/or regulation. Some of the main processes that regulators could use in these oversight programs with SROs/industry associations are given below:

Process # 1: Review Corporate Governance Standards in SRO

1.      Ensure that the SRO meets high standards of corporate governance required for being a part of the overall regulatory system and this would include consideration of all aspects including functioning of board of directors (or equivalent), their independence and the like

2.      Ensure that the SRO is responsive to all stakeholders including clients and also meets its public interest/civil society mandate in terms of transparency and disclosure

3.      Ensure compliance and consistency with the law and conditions of license.

4.      Ensure that the SRO’s internal functioning and management systems are consistent with its regulatory mandate and objectives and with overall regulations.

5.      Ensure that SRO rules and processes are fair and balanced, having regard to the interests of all stakeholders and most importantly, that of clients

Process # 2: Periodically Monitor The SRO and Its Reports

1.      Periodic review of the status of SRO’s monitoring and other programs, activities, and financial condition, as well as current regulatory matters.

2.      Provide ongoing supervision and practical advice, to ensure that the SRO is able to discharge its functions effectively. This is especially critical because the industry associations in India have not had any such regulatory/supervisory experience

3.      Help in coordination of activities with an SRO, as may be required

Process # 3: Enable Self-Assessment of its Own Performance and Operations by the SRO

·         Independently review SRO performance in line with its supervisory and related duties

·         Provide input to the SRO and enable it to develop its (own) targeted examination of its performance with regard to supervisory and other duties.

·         Help the SRO establish an objective process of self-evaluation and related measures for assessing its performance.

·         Identify areas of risk in SRO’s operations and suggest strategies for improvement with regard to the same

·         And finally ensure that the SRO itself has a code of conduct that it follows in its own functioning. This is very critical and it has often been a major reason for (industry associations) not being able to enforce their codes of conduct with their respective members

The larger point I am making is that, given that the Malegam Committee Report (MCR) has provided for some level of self-regulation in micro-finance in India, let us try and ensure that there are core criteria to make this self-regulation work and work well. When effective, self-regulation, offers benefits to industry and consumers, but it must be consistent with the overall regulatory framework and accountability must be strong. In fact, accountability is most critical in this context and having good regulatory outcomes, whether legislated or self-regulatory or a combination of both, depends on the government, micro-finance industry, various stakeholders and clients being prepared to become accountable in the overall regulatory structure and framework. Unless this accountability is built into the system, no amount of regulation will help the beleaguered Indian micro-finance industry…

Have A Nice Day!

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[i] I presume that the operationalisation of the MCR report will result in the provision of a license (or official sanction) for acting as an SRO

Introducing a Self-Regulatory System For Micro-Finance in India: PROCESS Issues for Consideration of The RBI and The Malegam Committee

Ramesh S Arunachalam

Rural Finance Practitioner

While the earlier post looked at the substantive policy issues with regard to regulatory reform, significant process issues must also be considered, as outlined below:

Design risks: The authorities should articulate the key drivers for changing the current approach to regulation (say for example, introducing self-regulation as has been done in the Malegam Committee Report which uses the SRO/industry approach as one of its pillars) and should assess the importance of achieving the objectives of reforming the system. Those objectives should be compared to the risks involved in designing changes to the system. Major changes carry risk, and the broader the scope of the planned changes, the greater the risk of problems or even failure. The major risks are:

·         Increased conflicts of interest

·         Ensuring that the SRO/industry association operates with real and effective independence

·         The potential for “regulatory capture” of the SRO/industry association system by regulated MFIs or by one powerful segment of the industry (say for example NBFC MFIs or large MFIs etc)

·         Disruption of standards of regulation and supervision during the transition period because of organizational conflict and uncertainty

·         Reduced standards of regulation and supervision under the new system

·         Overloading the SRO/industry association system with new responsibilities that it does not have time to build the capacity to address. This has to be also seen in the light of the past track record of the SRO/industry association.

·         Excessive interference by the statutory regulator in the governance and operation of SROs/industry associations

·         Failure to design the new system properly, leading to excessive duplication of activities and cost and the like

Transitional risks: Transitional risks are temporary risks that arise from the process of implementing changes in the case of regulatory systems, among a group of organizations. Whenever structural changes are made to a regulatory system (as has been proposed in the MCR), important transitional issues must be addressed. These include ensuring that:

·         Regulatory processes continue uninterrupted, especially supervision of the micro-finance industry players and intermediaries. I am not sure of what is happening in the present period

·         Regulated entities/persons remain within the legal jurisdiction of a regulator at all times.

·         The transition to new institution is as seamless as possible.

·         Dispute resolution mechanisms are agreed to address any unforeseen issues that arise during the transition period.

If major changes are contemplated, the industry and the authorities might consider taking an evolutionary or staged approach to implementation so they minimize the transitional risks involved. I am not sure if any of these aspects are being addressed currently.

Stakeholders’ views: In considering any changes to the present system of regulation, it is important to understand and consider the views of various stakeholders. Stakeholders include a broad range of participants:

·         Intermediaries (banks, MFIs and others)

·         Clients of the above institutions

·         Retail and institutional investors

·         Government and statutory authorities,

·         Existing SROs

·         Stock Exchanges, if applicable

·         Industry associations

·         Other Related regulators

This is indeed a critical issue and I am not sure of what is the degree of support for the changes proposed compared with the resistance to change? Building consensus among the various stakeholders on a “common vision” for the regulatory structure with regard to micro-finance is highly desirable and I hope the RBI/MCR engage and take this process forward quickly

Legal and regulatory risk: If institutions’ regulatory responsibilities are changed in the new structure, plans to minimize legal and regulatory risk are needed. Transfers of responsibilities will likely require (1) transfer of rules from one body’s rulebook to another’s, (2) transfer of responsibility for supervision programs, (3) transfer of experienced officers and staff, and (4) transfer of infrastructure including information

All of the above process issues will also have to be considered and dealt with by the RBI and the Malegam Committee before finalizing the regulatory and supervisory arrangements for Micro-Finance in India…

Introducing a Self-Regulatory System For Micro-Finance in India: SUBSTANTIVE POLICY Issues for Consideration of The RBI and The Malegam Committee

Ramesh S Arunachalam

Rural Finance Practitioner

The Malegam Committee Report (MCR) has proposed a self-regulatory mechanism, through SROs/Industry Associations, as part of its four pillar approach. While the idea is fundamentally a good one, when ever one considers introducing a new self-regulatory system (or for that matter, reforming such an existing system), a number of important issues must be addressed. These are highlighted in the present post and hope the RBI and/or the Malegam committee looks into some of these issues.

Basically, the concerns include both (1) substantive policy issues on the design of the self-regulatory system and (2) process issues that arise in implementing self-regulatory reform. We take up the former in this post and look at the latter (process issues) in a separate post.

And policy makers should consider the following substantive policy issues in addressing whether self-regulation is appropriate for the concerned micro-finance markets and, if it is, how the system should be designed.

National Strategy for Development of Micro-Finance: What is the government’s (and prime regulators) strategy for developing the nation’s micro-finance industry? Any strategy should consider the structure and competitive position of the micro-finance industry, nationally, regionally and internationally. A strategy should encompass the following:

·         How to ensure that the industry best supports economic development?

·         How to enable the industry to foster market development, competition, and innovation to better meet the needs of clients in micro-finance?

·         How to alter/raise/revise standards of regulation and conduct to ensure that clients and other stakeholders (including investors and other participants) are treated fairly?

·         How to improve integrity of the micro-finance market in general?

·         How to achieve an appropriate cost level for regulation of the micro-finance industry?

• How to ensure that the MFIs, FIs and various stakeholders have the business focus, competitive positioning, systems, and governance standards required to succeed in their missions?

·    Commitment to self-regulation: Do clients, investors, lenders, MFIs and other stakeholders have a sufficient degree of confidence in self-regulation to make the system viable, both today and going forward? Are the members of the SROs/industry associations committed to the concept of self-regulation, and are they prepared to invest the requisite time and resources? Do the regulatory authorities believe that use of self-regulation in the micro-finance industry is indeed appropriate?

·    Size and complexity of micro-finance industry: Does the micro-finance industry need, and can it support, multiple layers of regulation as has been proposed in the Malegam Committee Report?

·    Effective and efficient regulation: What approaches, according to the authorities and industry stakeholders (including clients), are likely to deliver the most efficient and effective regulation of the micro-finance industry? Do the benefits of self-regulation outweigh the potential extra costs and disadvantages? What about the issue of regulatory efficiency and costs - is it likely to be significant? Finally, can the conflicts of interest that arise be managed appropriately?

·    Regulatory priorities and key risks: The authorities, MFIs and other stakeholders should determine and agree on what regulatory issues and risks (the MCR lists several risks and provides some suggestions to tackle them) need to be prioritized. Does the existing system adequately address those issues and manage those risks? If not, how should the system be reformed to respond more effectively to the issues, and what role should SROs/industry associations play? This should particularly look to address in practical and feasible manner, some of the key issues that have caused the present day micro-finance crisis. With all due respect, it is the blog writer’s humble opinion that some of the proposed solutions in the Malegam Committee Report do not meet the criterion of practicality and feasibility.

·    Fairness and consistency: In choosing a particular SRO/industry association structure, the fairness and the consistency of regulation for different segments of the micro-finance (for profit, mutual benefit and not-for-profit) and larger financial services industry need to be maintained. This means that players in different segments of the industry that offer similar services should be treated equally. This is critical and the omission of not-for-profits and other legal forms in the MCR can perhaps be addressed at the SRO/Industry association level, even if the banking regulation act cannot absorb regulating these legal forms. This again requires close analysis and redressal perhaps

·    Funding: Who should pay for the cost of regulation? While industry players may fund government regulators to a significant degree in many countries, can MFIs and other stakeholders do that in the present context? Which groups of MFIs/stakeholders should fund a self-regulatory system, and how should the costs be allocated among groups or members of a group? Those issues are invariably contentious but need to be addressed as well and this is again something that has not been exhaustively dealt with in the MCR

·    Legal framework: Does or will an SRO/industry association have sufficient powers to perform the responsibilities allocated to it? If not, is changing the applicable/related laws possible in practice and feasible from an implementation sense?

First, in many contexts, most SROs/industry associations often have the statutory authority to perform their regulatory responsibilities, but they can also obtain or reinforce jurisdiction by specific contracts with its members. Second, because SROs/industry associations are private bodies, the countries’ civil code legal systems will also need to be examined for any limits that they may place on SRO’s/industry associations rule-making authority or regarding the extent to which the regulator can delegate activities to an SRO/industry association. Both of these need to be looked at by the MCR in the present context and addressed accordingly.

Some obstacles may however be addressed rather easily: (a) by relying on SROs/industry associations mainly to supervise compliance with regulations (this is a critical aspect of regulation versus supervision); (b) by designing effective working agreements; and/or (c) through MOUs to clarify the role and working relationships of SROs/industry associations with the regulator.

·    Supervision of an SRO/Industry Association: Does the regulator have the powers and the capacity to effectively oversee an SRO/industry associations operations? In some cases, a more limited role for self-regulation may be appropriate; for example an SRO/industry association that is mainly made responsible for supervision of compliance with regulations set by the regulator.

These and other issues will have to be looked at by the RBI and the Malegam Committee before finalizing the regulatory and supervisory arrangements for Micro-Finance in India…

PS: The above paper is based on various ideas and resources available and there are far too many resources to mention here but they are all gratefully acknowledged

Making Micro-Finance Associations More Effective as Self-Regulatory Organisations: Lessons From The Indian Experience

Ramesh S Arunachalam

Rural Finance Practitioner

A lot of questions have been raised about the effectiveness of micro-finance associations as Self-Regulatory Organisations (SROs). While it is true that these associations may have tried hard, the fact of the matter is that this self-regulation has not worked and here are some reasons why. It would useful for the RBI and The Malegam Committee to look at some of these aspects and address them, as the Malegam Committee Report (MCR) does provide a fairly important role for micro-finance associations as SROs. The various reasons are briefly highlighted below:

(1)   To be effective, MF associations that act as SROs must have a common set of public policy objectives including the enhancement of market integrity, market efficiency and client/investor protection with regard to micro-finance;

(2)   They must be actively supervised by government regulators and in the present instance by RBI, IRDA and other such regulators;

(3)   They must have (official) statutory regulatory authority and/or authority delegated by the government regulator(s). This would give them the much-required legitimacy and this is a very critical aspect because, then the SROs will act (on behalf of the government regulators and also) along with them in maintaining decorum and order in the micro-finance industry

(4)   They must establish simple and practical rules for MFIs and individuals to follow and this must be subject to their official regulatory authority and it should also be in line with the objectives in the larger regulatory framework;

(5)   They should monitor compliance with these rules, without any conflict of interest and irrespective of whether the member MFI is a pioneer, founder, largest MFI and the like;

(6)   They must have the official authority and more importantly, administrative will to discipline MFIs and individuals that violate these rules. Clearly they must show intent to self regulate rather than provide a lip service;

(7)   While they should have industry representatives on their Boards and also ensure that industry representatives have a meaningful role in governance, the board must have the equivalent of independent directors from civil society and/or official regulators. That alone will make them more accountable; and

(8)   They must maintain structures, policies and procedures intended to ensure that all conflicts of interest between their membership (commercial) and regulatory activities are appropriately managed.

Along with the core characteristics outlined above, MF association SROs also need to carry out a variety of other activities that are consistent with their mandate to enhance market integrity, market efficiency and client/investor protection. These activities would need to include the provision of: (1) Consumer redressal services for the end user clients; (2) Dispute resolution services for and among their members; (3) Client literacy and education for end user clients as well as educational services for staff of their members in special areas like gender etc; and (4) Reliable and valid market data for their members and other market participants.

Within the above broad continuum of services and characteristics, MF associations as SROs can then start to occupy a unique position and play an important role, using their official regulatory authority as well as their special relationships with government regulators and their members. I hope that the RBI and Malegam Committee look at this aspect closely and work out the relevant details…

Have a nice day!

Micro-Finance Conferences: The Need To Introspect with Integrity...

Ramesh S Arunachalam

Rural Finance Practitioner

Yesterday, I received a mailer that invited me to register for a National micro-finance, being held by Sa-Dhan and FICCI, at Ashoka Hotel, New Delhi on March 15th and 16th, 2011. The conference, according to the brochure, aims to create a space for dialogue between policy makers, MFIs and community leaders. The theme of this years conference is “Re-Engineering Micro-Finance: Need for New Products and Policies”. Prof Yunus is to be the Chief Guest at the conference and he is expected be there for both the days.

While I appreciate the efforts taken by Sa-Dhan, I must also state that there are far too many (national) conferences in Indian micro-finance…We had one in November 2010 and we are having another one in March 2011 and I am sure we will have a couple more through the year in July and November 2011 again…

Going by the number of conferences over the years, I dare say that, had only the real issues been discussed in these conferences, neither would “The AP crisis” have happened nor would we find ourselves in the marco mess (in the words of Mr Al Fernandez) that we are currently facing…

I want to rewind to the NABARD High Level Policy Conference held in New Delhi in May 2005. I liked the conference as Dr Thorat made it very clear on Day 1 that we were not here just to pat ourselves on the back but rather, as he would call it, “Introspect with Integrity”. I still remember Mr C S Reddy raising a large number of uncomfortable but valid questions on Day 1 about the SHG program. And the debates were of very high quality. On day 2, just before lunch, Dr Thorat and I presented a paper on “Institutional/Market Failures in Micro-Finance” which took a critical look at the various happenings in micro-finance, especially in Andhra Pradesh. The paper and presentation really got everyone excited (literally) and we had the presenters for the next session also discuss this paper rather than focus on their own presentations. Without naming the presenters, I would like to state their punch line made in their presentations:

Presenter A, Commercial Bank: None of our partners are like what was made out in the presentation. All of our partners use technology and have very good MIS systems and our due diligence indicates that their portfolio and practices are sound, unlike what has been made out in the paper

Presenter B, MF Association: Things are not as bad as made out to be and many of the cases pointed out in the paper are nothing but aberrations…they are the exceptions rather than the rule

This is why I appreciate Ms Moumita Sen Sarma, who was the first person to stand and say in the open that, “much of what is said in the paper is very true and it is time that the micro-finance industry pulls out the skeletons from the cupboard”

Sadly that never happened and over the years, the malaise has spread far and wide – from Krishna to Lucknow to Kolar, culminating in what we see as the present micro-finance crisis in India and AP specifically.

So, as the Sa-Dhan National micro-finance conference is to get underway, I want to raise several issues that, I hope, the conference can candidly focus on:

First and foremost, the scope of current practice is rather narrow. While the intentions in terms of the report of the Financial Inclusion committee and other policy/stakeholder pronouncements (including past conference pronouncements) may have been to provide low income clients with access to a wide range of need based financial services, in reality, the present paradigm has mainly led to the proliferation of credit and primarily consumption loans, although there have been some small production/livelihood loans. There has also been the added dimension of merely opening savings accounts, many of which appear to lie dormant today. And an important fact that the present efforts have low outreach with regard to vulnerable groups - and especially, people involved in agriculture - also needs to be recognized. Two other aspects stand out here in terms of access: (a) lack of suitable and affordable and risk management services; and (b) lack of appropriate livelihood financing.

We need to not only recognize these basic facts but also (more importantly) understand why these intended strategies have been narrowly realized on the ground? That is very critical as only then can product innovations (as the theme of the conference suggests) be actually delivered at scale.

Second, it would be useful if the conference comes up with practical strategies to deliver quality credit - e.g., post harvest and post production financing and general approaches to financing marketing of goods and services offered by low income people - that will reduce risk and vulnerability of low income clients and give them more choices. This needs greater emphasis in the context of agriculture as well, which is home to a large number of India’s poor

Third, it would very appropriate if the conference looks at how financial services can be used to strategically drive higher rewards, better remuneration and greater power down the value chain towards the benefit of low income producers? In other words, the conference needs to carefully examine and support financial services that increase the bargaining or staying power of low income people. That would be a very useful initiative indeed.

Finally, the conference would also need to look at how to create a better ecosystem so that the above efforts really succeed?

  

Apart from the above substantive comments, I would also like to argue the case for having more regional conferences rather than competing national conferences in Delhi - which seems very far removed from the actual micro-finance action. In my opinion, it may be more appropriate to hold several regional conferences annually, exploring critical local and regional issues in detail and then, cumulating this in a sort of a national round table – which perhaps guarantees flow of information from the grass-roots to the policy makers and other stakeholders…Wishing the conference and the participants, all the very best for their deliberations…

Cheers

Have a Nice Day

MFIN Requests for Formulation of Comprehensive Package for Micro-Finance Sector in India...

Ramesh S Arunachalam

Rural Finance Practitioner

It is reliably learnt that MFIN, the association of for-profit micro-finance institutions in India, has sought the assistance of Shri O P Bhatt - the well known and highly respected Chairman of India’s largest commercial bank, The State Bank of India – in formulating a Comprehensive Package for the micro-finance sector. This is indeed a very welcome happening!

According to this letter written by Shri Vijay Mahajan, Chairman, MFIN, “In the past week, the situation on the ground in AP has not improved, and in many ways, only deteriorated even further.  In this light, I am writing to you to seek your leadership and intervention to help put together a sensible, comprehensive package to help put the MFI industry on a stable footing, ensuring that the excesses that the sector has witnessed in the past few years are squeezed out, and that the sector moves to a new equilibrium where it can be a productive contributor to financial inclusion in the country.”

While the spirit of this letter is surely appreciated, we also need to look at some of the specific points, which are given as under:

As the letter notes (pages 1 and 2),

“The cornerstones of any comprehensive package for the MFI sector must include:

1. On the part of the MFIs

1. A clear sizing of the multiple lending problem in AP, and the setting aside of sufficient funds from the MFIs in the state, to help in restructuring such multiple loans for distressed households.  This needs to be done in a systematic, transparent and collaborative manner, so that the mechanics of this restructuring are visible to all stakeholders

2. A reduction in interest rates, and changes in loan recovery practices, so that rates are neither usurious nor opaque to borrowers, and recovery methods are not coercive

2. On the part of the banks

1. Given the enormous liquidity pressure that the current situation in AP has caused, there is a need for loans to selected MFIs to be restructured, to ensure that there is a recognition of the real problem being faced on the ground. This needs to be done in a judicious and selective manner, keeping in mind the points made in item 1 above

2. Continuation of re-finance to the MFI sector, with additional with all the necessary checks and balances and due diligence, including items such as transparency, governance and other hygiene factors, including the essence of AP government's views on these matters. Stopping the credit flow at this time would be exactly the wrong thing to do, and will only exacerbate the crisis, and increase the ultimate exposure to the banking system itself. “

The following are comments with regard to the above and it would be interesting to see if the concerned stakeholders do accommodate some of the views/comments given below:

Multiple Lending (Point 1a, Highlighted in yellow above):

While the idea to size up the real extent of the ‘multiple lending’ phenomenon is appreciated, a caveat is in order: the exercise must not be limited to Andhra Pradesh (AP) alone. While one could start with AP, this exercise has to include other states as well. Not looking at the already prevalent (and perhaps significant?) multiple lending phenomenon in other states (especially in their saturated and rapidly growing areas) is surely akin to ignoring a time bomb fast ticking away – therefore, the stakeholders, who are to discuss and decide on this ‘Comprehensive Package’ must surely look towards ascertaining the extent of multiple lending, shared JLGs (Joint Liability Groups) and shared clients in so far as MFIs are concerned, both in AP as well as the rest of India. The need for a national exercise (AP first and other states later) also makes ample sense when one considers the fact that many of MFINs MFIs have pan Indian operations.

Further, the proposed exercise must also look at the root causes (rather than symptoms) for this multiple lending in complete earnest as only then can it be prevented in the future. Make no mistake, if this is not done, multiple lending will spread its tentacles again. Therefore, without the above, any package is doomed to fail as crisis will re-appear later (just as it did in AP^[1]) and one cannot be in fire fighting mode, every now and then...

Therefore, while the idea of sizing up the multiple loans to clients is long overdue, the exercise, if it is to be credible, must surely look at this phenomenon as per questions given below:

1.    Multiple Loans: How widespread are these multiple loans to the same client by different MFIs and others, in Andhra Pradesh as well as other states? What is the average level of indebtedness of these micro-finance clients, with multiple loans from MFIs and others? Is it different in MFI saturated areas or fast growing areas or urban areas or coastal areas? Given the level of indebtedness and the livelihood options available to these clients, what assessment can be made with regard to the appropriateness of the multiple loans sanctioned (in terms of loan absorption capacity of the concerned client) by the different MFIs? How does the overall loan amount (for the multiple MFI loans) to a single (and same) client relate to any regulatory ceiling for classification as a micro-finance and/or priority sector loan? What are the regulatory implications for MFI and Banks, especially in terms of priority sector lending aspects? How can multiple lending be prevented in the future and what role can education/literacy of clients play in this regard?

2.    Sharing of Clients and JLGs: How extensive is the sharing of JGL clients across MFIs? Is the reported trend of the same JLG being used by different MFIs on successive days true? If true, what are the implications of the same for the outreach data provided by MFIs and the priority sector lending data submitted by the banks to RBI?

3.    Credit Policy and Loan Sanctioning/Repayment: How does this sanctioning of (additional) loans to a borrower with several other loans from several institutions, relate to credit policies of the various MFI’s concerned? Do these credit policies approve, disapprove, encourage and/or discourage of an additional loan to the borrower, who already has several loans outstanding to other institutions/people? How does the credit policy view a client with multiple loans – as a serious credit risk or as a good client to whom many loans can be provided? What was the overall process by which the various MFIs sanctioned additional loans to the same borrower(s)? Is there anything in the process that encourages multiple lending? How did these MFIs hope to recover the money from the same client who had several other loans with several institutions? Was there a genuine assessment of the source(s) of repayment for the client? Is there any evidence in support of the claim that ‘additional (multiple) loans are generally sanctioned (sometimes, in sequence) so as to enable the clients to repay prior loans’?

4.    Role of Banks: What is the role of the concerned banks in this whole aspect of multiple lending to same clients? Were concerned banks aware of the same? Did they approve it and/or encourage it or were they completely negligent/indifferent? What does this say about the due diligence process at banks and their responsibility towards priority sector lending as per RBI norms and circulars?

5.    Implications for Micro-Finance/Priority Sector Lending and Impact on Clients: What implications does multiple financing of same clients by different MFIs have for the growth (achievements) of MFIs in the recent years? What implications does it have for the outreach and other data provided by MFIs to regulators and/or other agencies? What implications does this multiple financing of same clients by different MFIs have for priority sector lending and the statistics provided therein by the commercial banks to RBI? What implications does it have given the fact that most bank loans to MFIs are indeed public deposits? What has been the overall impact of these simultaneous multiple loans to clients (and their families)? What has been the resultant impact in the respective villages and rural economy?

That said, let us look at the 2^nd part of the same point in the letter which says that, “This needs to be done in a systematic, transparent and collaborative manner, so that the mechanics of this restructuring are visible to all stakeholders”.

This point is very well taken and Shri Vijay Mahajan needs to be congratulated on taking leadership as far as this is concerned.  However, there are several genuine questions here:

1.    Can MFIs alone be expected to do this sizing of multiple loans in an objective manner through the self-regulatory mode? This is especially relevant given the past track record of MFIN and Sa-Dhan, both of whom, despite being well intentioned, have been unable to enforce their respective codes of conduct (which in fact did refer to the multiple lending problems) with regard to their respective members.

2.    If MFIs cannot do it alone, then, which stakeholders should be involved and why? This is the most critical aspect here

3.    Should there not be a role for The RBI in all of this as they are the main regulators for the NBFC MFIs (i.e., MFIN members)? What about roles for the Ministry of Finance and/or other regulators/supervisors including State Governments, who are also concerned stakeholders? What about participation of DFIs (like NABARD AND SIDBI), commercial banks, donors and investors? What about Sa-Dhan and its member MFIs including those in AP? And most importantly, what about client interest groups?

Interest Rates and Loan Recovery Practices (Regarding Point 1b):

As many MFIs provide door step service, the idea of reducing interest rates seems therefore rather inappropriate, especially because the nascent and smaller MFIs may not be able to do so and may even get competed ‘out’ by the larger ones. The key for MFIs would be to look inward and see where and how they can reduce costs (through efficient processes) and pass this on genuinely to the customer, so that the rates are affordable and reasonable for the client as well as sustainable for the institution. The more important point here is transparency in communicating the (effective) interest rates and this is where the aspect of client education and literacy again comes in – as many clients have said that they do not understand it, for example, when a field worker says that, their (MFI) loan costs 15% interest (on flat basis). Sometimes, clients also just read into the number and assume that 15% flat is lower than say, 20% reducing balance.

There is however very little that is mentioned about the changes to be made to loan recovery practices (so that they are not coercive)...one would need to wait and watch the specific details of this aspect before commenting further. Indeed, this issue of coercive recovery is perhaps also closely linked to the multiple lending phenomenon (given above) and the process by which it happens

Loan Re-Structuring for MFIs (Point 2a):

This is a very valid point and needs to be selectively and judiciously done, on a case by case basis, as the letter argues.

Re-financing of MFIs (Point 2b):

The letter talks of the need to continue “re-finance to the MFI sector, with all the necessary checks and balances and due diligence, including items such as transparency, governance and other hygiene factors, including the essence of  AP government's views on these matters. Stopping the credit flow at this time would be exactly the wrong thing to do, and will only exacerbate the crisis, and increase the ultimate exposure to the banking system itself. “

Again, the specifics need to be spelt out and the implementation/enforcement mechanisms for the above checks and balances must be clearly elucidated. Otherwise, we would be back to square one as has happened in Andhra Pradesh, when after the 2005/6 crisis, several promises (including in writing) were made, only to be broken later...

Three final comments are in order with regard to the proposed package. First, while I see a lot for the MFIs in this comprehensive package, I see very little for the clients including their (very difficult) situations. That seems rather strange because MFIs always talk of the potential impact of loss of access to (MFI) financial services for clients and this has been a major argument at every policy forum. That being the case, it is indeed strange that the proposed MFI package treats the very clients, on which the MFIs subsist, in a rather indifferent manner. Second, I still do not get to understand as to why MFIN and Sa-Dhan are doing different things for the same problem and doing these independent of one another – this really perplexes and confuses me. Finally, the most important player for MFIN and its MFI’s is The Reserve Bank of India – that the RBI’s name does not even figure in the letter seems rather strange...

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[1] The 2010 AP crisis was preceded by a crisis in AP in 2005/6 and strikingly similar issues came up then and were to be addressed by MFIs but in reality, that did not happen and that is why we have the 2010 crisis.