Ten practical steps to eliminate multiple, over and ghost lending at MFIs

Ramesh S Arunachalam

The idea of thinking that a credit bureau alone could eliminate multiple, over and ghost lending and usher in responsible micro-finance lending seems very naïve. In fact, this could result in the credit bureau becoming a red herring rather than an actual solution. And unless the systemic issues are addressed, responsible micro-finance lending will remain a distant dream

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Legal Notices to Delinquent Clients and Insolvency Petitions by Delinquent Clients: Where is The Indian Micro-Finance Sector Really Headed?

Ramesh S Arunachalam

Rural Finance Practitioner

It is raining (legal) notices in the Indian micro-finance industry. Please see the enclosed attachment below (Exhibit B) and it is the notice issued by one MFI to a client who owes it Rs 810 (about 16 US $). While I am not sure of the number of clients who have been issued such notices (authoritative sources however put it at around 15000 clients at least), I am really appalled by the behaviour of MFI field staff as evident from this e mail conversation between two fieldworkers of MFI 1 and MFI 2. Read on…Exhibit A…below

 As the e mail (in Exhibit A) suggests, clearly, what is happening on the ground is neither financial inclusion nor poverty alleviation. It is organized money lending as Dr Y V Reddy has remarked.

From the above attachment (I have the originals), it is very clear that codes of conduct don’t work on the ground – much to the chagrin of MFIN and/or Sa-Dhan. Please see adjoining piece, which enumerates some of the reasons for this. The above attachment (Exhibit A) even talks of scars on the face of the clients husband and police complaints and I am not sure that this is the type of financial inclusion that we all wanted in the first place…I leave it to you all to judge for yourselves…

And I do have some unanswered questions here:

a)      Why did the 7 MFIs lend to the same client?

b)      Where was their due diligence? What about the correct lending processes and methodologies that many of them claim?

c)      What about SIDBI and/or banks? Did they not spot this in their field visits?

d)      What about the rating agencies? Did they not spot this and note it in their reports?

e)      Where are the SROs and many of the MFIs are members of either Sa-Dhan or MFIN? What are these associations doing? Why has self regulation not worked?

f)        Is this the inclusive finance we want?

g)      And finally, this is not AP? There is supposedly no govt interference in Tamilnadu in terms of a law or bill. So, how come this is happening? 

h)      Will someone help me find the answers please?

Please also see the legal notice sent by an MFI to a client who owes it Rs 810 – Exhibit B and over 15000 such notices are supposed to have been sent to clients. The notice is in Tamil but the contents are simple: Please pay up or we will take legal action to recover Rs 810 from you...Juxtaposed with Exhibit A above, it is clear that Micro-Finance is now becomming organised and registered money lending.

·         When I went through the 1^st CGAP ToT course on Delinquency in 1998 (With Mr Sanjay Sinha, Mr Ron Chua, Mr Jith was there as an observer and several others), I remember Ms Brigette Helms, Ms Janet and Ms Joyita Mukherjee of CGAP telling us regularly, there are no bad clients, there are only bad loans and institutions alone are responsible for delinquency

·         I would like all of you to remember this…and going by the number of notices and tough measures employed for collection, there seem to be a lot of bad loans that have been made in the Indian micro-finance sector. That is the REAL growth story of Indian Micro-Finance folks. Read on…

From the 2^nd attachment (Exhibit B), it is clear that MFIs are facing serious collection problems in places other than Andhra Pradesh (and the letter alludes to the member neither attending meetings nor paying back properly) and I really hope that people are listening…I have already put out several e mails in this regard and have many more in possession that can stand scrutiny in a court of law.

Very interestingly, I also came across a legal notice by a client’s lawyer to 13 MFIs stating that the borrower YYYYY had filed for insolvency and was unable to pay back the 13 MFIs – Exhibit C

The above raises several issues:

a)      How did these 13 MFIs lend to the same client?

b)      Is this the real method of larger outreach in Indian micro-finance?

c)      What were the banks and SIDBI doing? What were their officers doing?

d)      What were the associations doing?

e)      What were credit rating agencies doing?

f)        Is this what we want in inclusive finance?

g)      Given that many clients are in the process of doing this, where is the Indian MF sector headed?

From the 3^rd attachment (Exhibit C), it is clear that the inclusive finance paradigm used micro-credit to multiple lend to same person several times. The attached notice is to 13 institutions and again, I want people to tune in please. There is strong evidence that clients are starting to do this more and more…

Honestly speaking, the growth story of Indian micro-finance will soon be known as one of multiple lending to shared clients in (same) JLGs, who lack the income sources to repay multiple loans. Now, is that not a sub-prime like situation? Was not Dr Y V Reddy, former RBI Governor, correct in stating that MFIs are registered money lenders and micro-finance is India’s sub-prime?

I leave you to judge things for yourself…

Have a Nice Day!

Analysis of APMAS April 2010 Study on Effective Interest Rates: Further Evidence For Multiple Borrowing in Andhra Pradesh…

Ramesh S Arunachalam

Rural Finance Practitioner

Please recall that as per the AP governments ordinance, MFIs were required to provide calculations on their effective interest rates to their borrowers and file this information with the Government of Andhra Pradesh (GoAP). It was during that time that news items appeared where several of the media did report that the GoAP had reportedly said that MFIs were INDEED charging high effective rates from micro-finance borrowers. Several MFIs refuted the same and a little after this, this writer requested APMAS (a credible national MF support organization headquartered in AP) for its data on effective interest rates, that had been mentioned in various quarters, including the media. APMAS had apparently conducted the study in 8 clusters in Andhra Pradesh in April 2010 as per details given later. In response to the writer’s request, APMAS sent the study to the writer via e mail[i].

As per sheet titled MFI loan consolidation, in the file attached[ii] to APAMS e mail, the following were the details of the study and in this first part, we look at evidence from the study for multiple borrowing. In the 2^nd part, we look the aspect of effective interest rates and that will be posted separately.

STUDY DETAILS:

A) The study was carried out in 8 Clusters and The Name of Clusters, as Mentioned in the APMAS Sheet were:

KamareddyCluster - Kamareddy mandal  (DurgaBhavani SHG of Sarampalli Village), Parigi Cluster - Sulthanpur Village, LBNagar, Aluru Cluster - Aluru Mandal, Gunthakal Cluster -  Uravakonda Mandal, ODC Cluster - Nallacheruvu Mandal, Piler Cluster - Rompicharla Mandal and Kamareddy Cluster -  Domakonda Mandal (Janagama, Muthyampet villages)

B) Total Number of Members as given in the MAIN[iii] MFI Loan Consolidation APMAS Sheet.

There were 53 Members and they had taken 70 loans (1.32 loans per member) in all

C) Total Loan Amount

The Total Loan Amount (as Mentioned in the APMAS Sheet) to all 53 members in 70 loans was

Rs. 936, 000

D) The following 12 members appear to have had 28 Loans totaling Rs 402,000, as Mentioned in the APMAS Sheet and the details[iv] are given below:

1.      Hameeda, Rs.40000/-  (4 Loans from BASIX, Sharemola, SKS and Spandana) – She had to make loan repayments of Rs 3700 for the 4 loans every month - 3 of these are weekly payments spread over a Loan Term of 50 weeks and 1 is a monthly payment spread over a Loan Term of 11 months. The charges and other fees collected are being analysed in the next post on effective interest rates.

2.      Shyamala, Rs.30000/- (3 Loans from Sharemola, SKS and Spandana) - She had to make loan repayments of Rs 2700 for the 3 loans every month – all 3 of these are weekly payments spread over a Loan Term of 50 weeks

3.      G. Padmamma, Rs.24000/- (2 Loans from Asmitha Microfin Ltd. And Spandana Spurthi Financial Ltd.) - She had to make loan repayments of Rs 2160 for the 2 loans every month – both of these are weekly payments spread over a Loan Term of 50 weeks

4.      P.Nagamani, Rs. 24000/- (2 Loans from Maxwell and Asmitha) - She had to make loan repayments of Rs 2160 for the 2 loans every month – both of these are weekly payments spread over a Loan Term of 50 weeks

5.      Vanajamma, Rs.52000/- (3 Loans from BASIX, Sharemola and Spandana) - She had to make loan repayments of Rs 4800 for the 3 loans every month - 2 of these are weekly payments spread over a Loan Term of 50 weeks and 1 is a monthly payment spread over a Loan Term of 15 months.

6.      Jamrtuth, Rs.40000/- (2 Loans from Future Finance and Share Mola) - She had to make loan repayments of Rs 3700 for the 2 loans every month - 1 of these is a weekly payment spread over a Loan Term of 50 weeks and 1 is a monthly payment spread over a Loan Term of 12 months.

7.      Dilshad, Rs.40000/- (2 Loans from Future Finance and Share Mola) - She had to make loan repayments of Rs 3700 for the 2 loans every month - - 1 of these is a weekly payment spread over a Loan Term of 50 weeks and 1 is a monthly payment spread over a Loan Term of 12 months.

8.      Beebeejan, Rs.40000/- (2 Loans from Future Finance and Spandana) - She had to make loan repayments of Rs 3700 for the 2 loans every month - - 1 of these is a weekly payment spread over a Loan Term of 50 weeks and 1 is a monthly payment spread over a Loan Term of 12 months.

9.      Ammaji, Rs.37000/- (2 Loans from Future Finance and Share Mola) - She had to make loan repayments of Rs 3450 for the 2 loans every month - - 1 of these is a weekly payment spread over a Loan Term of 50 weeks and 1 is a monthly payment spread over a Loan Term of 12 months.

10.  Naseeba, Rs.30000/- (2 Loans from Spandana) - She had to make loan repayments of Rs 2700 for the 2 loans every month – both are weekly payments spread over a 50 week loan term

11.  Laxmi, Rs.22000/- (2 Loans from Share Microfin and SKS) – She had to make loan repayments of Rs 1980 for the 2 loans every month - both are weekly payments spread over a 50 week loan term

12.  S.Yadamma, Rs.23000/- (2 Loans from Spandana and SKS) - She had to make loan repayments of Rs 2060 for the 2 loans every month - both are weekly payments spread over a 50 week loan term

The above details are summarized in Table below:

E) The Total Loan Amount, of 12 Borrowers with (28) apparent Multiple Loans, as mentioned in the APMAS Sheet, is Rs.402,000  

ð      This constitutes almost 42% of the ‘sample’ loans in terms of total loan amount of Rs.936,000

ð      In terms of number of loans, this constitutes, almost 40% of the number of loans (28 out of 70).

ð      It must be noted that both of these are rather significant…

ð      The average number of loans for the 12 borrowers is 2.33 loans per borrower, much higher than the all sample average of 1.32 loans per member

F) The MFIs Who Had Lent Money to all the 53 members, as mentioned in the APMAS Sheet are:

ð      Asmitha

ð      Basix

ð      Dove

ð      Future Finance

ð      L&T Finance Ltd.

ð      Maxwell

ð      Share Microfin

ð      Share Mola

ð      SKS

ð      Spandana

The break up of institutions for the 28 (apparent multiple lending) loans given to 12 borrowers is as follows

ð      Asmitha, (2 Loans)

ð      Share Mola, (6 Loans)

ð      Share Microfin, (2 Loans)

ð      SKS, (4 Loans)

ð      Spandana, (7 Loans)

ð      BASIX, (2 Loans)

ð      Future Finance, (4 Loans)

ð      Maxwell, 1 Loan)

Thus, as per the APMAS study (MFI Loan Consolidation Sheet), it appears that there is significant multiple borrowing and again, the trends from the study {if an accurate representation of (widespread) ground reality} reinforce other available data on multiple borrowing (Study by Prof Rajalaxmi and Prof Srinivasan, 2009; Study by CMF and sponsored by BIRD, 2010; several other studies in Kolar and reports in Media).

In summary, the results of the above study, certainly reinforce the call for an objective and rigorous study - by the RBI and/or other regulators - on extent to which multiple loans have been actually provided by MFIs to clients on the ground in AP and other parts of India… This is an issue that is certainly worthy of further research and gauging its spread across the Indian micro-finance industry is going to be very critical to solving the present micro-finance crisis. We also need to ascertain whether the so-called phenomenal growth story of Indian micro-finance in years 2005/6 – 2009, is indeed one of multiple borrowing, shared JLGs and shared clients. As Indians and stakeholders in micro-finance, it is imperative that we understand this… and it is our right to do so…

And while doing the suggested research, the RBI may want to also look at questions such as the following:

ð      The above 28 loans apparently lent to 12 borrowers constitute 42% of the total loan amount of Rs 936000 and account for 40% of the total 70 loans, both of which are quite significant numbers (from a sample perspective). This being the case, it would be useful to know how these loans are they accounted for with regard to priority sector lending, by the MFIs concerned and the associated banks? It would be interesting to know whether there any (legal and /or other procedural) violations here?

ð      What is the role of the MFIs/Commercial Banks in all of this and how much are they (each) responsible for this kind of a situation?  Why did this occur in the first place?

ð      What are the implications for banks reporting under extant priority sector norms? Given the present situation, should MFIs be eligible for such priority sector lending? What are the implications for the (draft?) V K Sharma Committee report on priority sector lending in India?

ð      What are the implications for NATIONAL (Country) outreach data on access to financial services (loans) and what is the consequent impact with regard to financial inclusion and MDG targets in India?

ð      How can such happenings be prevented in the future?

ð      Given that this has happened and is happening right under the present so-called self-regulatory framework (like MFIN’s and Sa-Dhan’s Codes of Conduct), will self-regulation work in Micro-Finance? Is it a good idea in the first place?

ð      Or Should RBI, as this writer has been saying, time and again, like a broken record, completely take over Micro-Finance?

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[i] Copy of e mail is available with attachment and can be shared, if required and appropriate, after takeing necessary permissions from APMAS

[ii] File was named, MFI Loan Consolidation Rev and was apparently created 24^th April 2010.

[iii] There was a 2^nd sheet with a fewer number of loans with the name MFI Loan consolidation 2 and that was not used as it appeared to be a copy sheet created for various analysis.

[iv] The charges and other fees collected for these loans are being analysed in the next post on effective interest rates. Hence, they are not mentioned here.

Multiple Loans to Shared JLGs/Clients by MFIs: How Widespread is this Phenomenon, Why Has it Happened and Is it the Major Cause of the Present AP Crisis?

Ramesh S Arunachalam
Rural Finance Practitioner

Recently, Microfinance Focus circulated a document[i], supposedly from SERP and Mr Vikash Kumar of Microfinance Focus, the editor, in an e mail to the author, confirmed that this document is indeed from SERP. Irrespective of the source of the document, it is an interesting one as it lists around 123 cases of ‘people’ supposedly affected by MFI loans. A close look at the document suggests that there are at least 46 cases of supposed multiple loans having been provided to clients by MFIs (mainly). And in a little less than 50% of these 46 cases, the respondents are said to have committed suicides and in the rest of cases, harassment by MFIs for repayment is cited a major issue.

At the outset, I would like to make it clear that I am not implying any CAUSALITY what-so-ever - pending a scientific study and/or the proposed independent enquiry (as mentioned in the Microfinance Focus Item) or even judicial enquiry (as supposedly told by Mr Aloke Prasad of MFIN to the media) – between MFIs loans and clients suicides. That said, I however have several fundamental questions pertaining to MFI processes in the granting of multiple loans (which I am not stating as necessarily a bad thing prima facie) to the same client. In fact, I stayed away from debate on whether multiple financing of same client by different MFIs is good or bad practice. I am also not sure how widespread it is but available data seems to suggest that it could be significant (there are several studies, reports and field assessments available).

Therefore, it is imperative that the RBI sub-committee and/or regulators try to obtain answers (through independent and objective sources) to questions such as (but not limited to) the following:

1.     Multiple Loans: How widespread[ii] are these multiple loans to the same client by different MFIs and others, especially in Andhra Pradesh? What is the average level of indebtedness of these micro-finance clients, with multiple loans from MFIs and others? Is it as high as many recent reports seem to indicate – in ranges of Rs 1,50,000 to Rs 2,00,000 or even more? Is it higher 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?

2.     Sharing of Clients and JLGs: How extensive is the sharing of JGL clients across MFIs[iii]? 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.     Loan sanctioning process: What was the overall process by which the various MFIs sanctioned additional loans to the same borrower(s)? Who made the actual decisions of loan sanctioning and disbursement? Was the sanctioning authority aware of other loans that had to be paid back by the borrowers? If yes, what rationale was used to sanction the (additional) loan? If not, what does it say about the due diligence process at the concerned MFIs?

4.     Purpose of loans: For what purposes were the additional loans supposedly (and as per records) sanctioned by different MFIs to the same client (s)? Was there any utilisation check to determine if the loans sanctioned for ‘Y’ purposes were indeed used for the same purpose? This has significant priority sector implications as well.

5.     Credit policy aspects: 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? If credit policy was not followed, were there internal audits and did they reveal the same? If credit policy was followed, what does the policy say in terms of additional loans being sanctioned to clients who already have multiple loans from other institutions? Does it 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?

6.     Loan repayment and sources: 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? Based on this, was it possible for the client to repay all outstanding loans from that source (livelihood or total household income or whatever be the source etc)? For source of repayment indicated, how did it fare in reality? Was the source used for repayment in reality? Is there enough 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’?

7.     Recovery processes: As per the credit policies of the various MFIs, what were the processes to be followed for recovering the loan from clients? Were these followed in reality? What about issues of recovery harassment by concerned MFIs that has been widely reported? Do the concerned MFIs follow the commonly adopted Zero PAR policy? If yes, was this applied to the present cases and what was the resultant impact on the clients?

8.     Overall Impact on Client: 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?

9.     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?

10.  Implications for Micro-Finance: 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?

11.  Implications for Priority Sector Lending: 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?

I think it would be healthy to know facts as per questions above and it would also be useful to understand the process by which multiple financing takes place, before arguing its merits/demerits. Therefore, it is imperative that the RBI sub-committee and Regulators understand the actual situation behind these multiple loans as I see this as the fundamental cause of the present problems in Andhra Pradesh – in fact, in my opinion, the present Micro-finance crisis in Andhra Pradesh and India cannot be solved, until and unless the issues of the supposed (excessive) multiple lending and resultant (high) level of indebtedness and (large) scale of sharing of JLGs/clients is practically sorted out...

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[i] http://www.microfinancefocus.com/news/2010/10/29/exclusive-54-microfinance-related-suicides-in-ap-says-serp-report/

[ii] It would be very useful for the RBI sub-committee to look into the spread of this phenomenon and provide some estimates of its real extent, through appropriate sampling.

[iii] Same as ii above