Understanding The Client Acquisition Process in MFIs: Critical Issues for The RBI Sub-Committee

Ramesh S Arunachalam

Rural Finance Practitioner

I had an interesting telephone conversation with a colleague from Netherlands sometime ago. We were talking about multiple lending and shared JLGs/Clients and then, he suddenly asked me a question, “Have you ever thought of how the current set of fast growing MFIs acquire their clients?” Spontaneously, I said, “they perhaps form JLGs” and then realised that I could have made a mistake as my mind went back to the shared JLG/clients model that I had been seeing very often – where a particular JLG and its member clients are serviced by different MFIs on successive days of the week and the same happens to other JLGs in the same village/cluster.

The Concept of Shared JLG/Clients: Table 1 below will illustrate this and let us assume that a cluster of 3 hamlets have 7 JLGs. Each JLG has 5 members and there are 35 members in all – the normal size of a centre

The above is an illustrative case and it highlights how JLGs and clients may be (could be) shared in practice. However, I have personally seen several cases where there are 4 – 7 JLGs in a cluster of villages and at least 3/5 JLGs are shared between MFIs – Mostly with weekly repayment and 1/2 cases with monthly repayments

Therefore, while multiple lending and over-indebtedness are, as cited, a major reason for the present Andhra Pradesh micro-finance crisis, there also seems to be reasonable evidence to the fact that the ‘phenomenon of shared JLGs and clients’ is perhaps an important antecedent factor that deserves attention.  The following questions seem relevant here:

How widespread is this phenomenon of shared clients and JLGs? To what extent do MFIs actually share JLG and clients, across districts in Andhra Pradesh and other States? How much multiple lending actually exists on the ground, from state to state across these shared JLGs and clients? How to resolve this existing multiple lending across shared JLGs and clients? What range of strategies exist – apportioning of JLGs/clients and their loans across MFIs, re-scheduling, re-financing, waivers, debt swaps etc – and how to use these and in what situations and for whom? What CREDIBLE safeguards can be built to prevent recurrence of the shared JLGs/clients and the resultant multiple lending problems in the future?

In my opinion, given the fact that JLGs/Clients are shared through use on successive days by different MFIs as illustrated in Table 1 earlier and also given that this model is somewhat widespread, unless, this problem of sharing JLGs and clients is sorted out, there is a very high likelihood of the multiple lending problem recurring again. So, another key question here is:

How to allocate JLG and clients across MFIs - in a fair and transparent manner - so that the above model of same JLG/clients being used on successive days by different MFIs goes out of vogue in Andhra Pradesh and Indian micro-finance? The issue here is somewhat similar to the concept of de-marketing, talked by Prof Phil Kotler.

While shared JLGs are indeed a problem and deserve a close look, it also seems important to focus on something more fundamental than that – the manner in which MFIs acquire clients (in the first place)

Client Acquisition Process in MFIs: There are several ways in which clients can be acquired by MFIs: a) Green Field; b) Acquisition; c) Joint Venture; d) Simple Reciprocal Arrangement; e) Conversion/Cannibalisation of SHGs and several other strategies. Some of these are explained in Table 2 below:

Thus, the RBI sub-committee may therefore want to ascertain, how the MFIs have grown during the last few years and how they intend to grow in the next few years? Have they formed green field (own) JLGs? Have they acquired JLGs from other MFIs? Have they had joint venture and/or simple reciprocal arrangements to share JLGs? Have they split SHGs (as Dr C S Reddy of APMAS often argues and as currently stated by him in the CGAP blog) to create several JLGs? What other strategies have they used to gather clients at such a fast pace?

These and similar questions certainly deserve an answer and I believe that the client acquisition process is a very crucial aspect that should not be ignored. Without question, we need to ascertain and understand how MFIs have grown during their period of fastest growth and how they intend to so in the future. In my opinion, unless suitable safeguards are built into the client acquisition process adopted by MFIs and unless the present sharing of JLGs/clients is resolved, the problem of multiple lending will re-surface YET again and perhaps on higher scale and at a national level – just as the lessons from Krishna and Kolar crisis continue to haunt us...Therefore, it is imperative for the RBI sub-committee to look at the above issues and come out with practical suggestions on: a) How the existing sharing of JLGs/Clients and the associated multiple lending can be resolved on the ground; and b) How the client acquisition process of MFIs can be re-engineered as to avoid sharing of JLG/clients. Unless these operational issues are sorted out, let us be sure that multiple lending in Andhra Pradesh/Indian micro-finance is here to stay...much to our discomfort.

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