Seal of excellence and social performance management: Will they work in the agent-led decentralised microfinance model?

Ramesh S Arunachalam

As concepts, a seal of excellence or social performance management will make good yardsticks to monitor Microfinance Institutions, but there will be practical difficulties in measuring these yardsticks and implementing them

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Social Performance Pathways and Management: What is The Guarantee That It Will Work in Decentralised (Agency) Micro-Finance Models?

Ramesh S Arunachalam

Rural Finance Practitioner

Figure 1 below gives an overview of a typical social performance pathway, and the process of SPM as articulated by expert stakeholders and I quote with adaptation from their work: “The central arrow demonstrates how an organization’s mission is translated into specific social performance objectives. Through the design of operational systems and the design and delivery of services outcomes are achieved in terms of reaching target client groups and meeting their needs. Meeting the needs of target clients leads to the desired changes relating to the social mission. Surrounding this arrow is the social performance management process. This involved monitoring and assessing progress at each stage of the arrow, and the use of information produced feed into improved practice.” [i]

The above process may be clear with regard to traditional (paper) models of micro-finance but when MFIs use the agency and decentralized model, which is what is happening increasingly, at least in places like India, the last mile is not at all visible. Therefore much of what is envisaged above in Figure 1 may not be possible in Figure 2, due to the huge levels of decentralization and lack of clarity with regard to servicing the clients at the last mile

I raise several (starter) questions for SPM advocates and practitioners with regard to the decentralized model and hope they factor these into their frameworks:

ð      When center leaders or others act as agents at the last mile, how can reliable and valid information about products and processes be obtained and used in the SPM assessment?

ð      When end user clients are (themselves) not known as in many cases, what client level data can be obtained and used in the SPM process?

ð      When the monitoring for the last mile stops with the agent, what real assessments can be done with regard to various social performance objectives?

ð      When end use is unclear as in many agent led models, how can client impact be measured?

Thus, under circumstances such as the above, it would be impossible to assess aspects as the following, so critical for SPM:

ý      Who uses and who is excluded from using the MFIs services?

ý      How do the MFIs clients use the MFIs services?

ý      Do MFI services meet their client needs?

ý      Why do some clients leave or become inactive?

ý      Who benefits and how?

ý      What benefits were unexpected?

ý      And several other questions

When one considers these and other questions, the credibility of Social Performance Management, as a sub-field of micro-finance and financial inclusion is seriously at stake…I sincerely hope that the so called practitioners of SPM address real ground level issues rather than merely focus on high level concepts that can at best be called as superfluous…and perhaps even redundant…

Have A Nice Day!

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[i] Social performance management in microfinance: Guidelines by Imp-Act in collaboration with Microfinance Centre, (2005)

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!

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[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.

First Credit Rating, Then Social Performance and Now Seal of Excellence: Time For All of Us To Focus on Ground Realities…

Ramesh S Arunachalam

Rural Finance Practitioner

A friend altered me to a paper being presented at the forthcoming micro-credit summit on a seal of excellence for micro-finance.  I am simply appalled at the number of instruments that key stakeholders in the Indian micro-finance industry seem to be pulling out of their hat to justify the existence and good work done by MFIs...

Surely, it is about time to set the record straight...Read on...

Credit rating has failed to provide an accurate picture of what has been happening on the ground for various reasons – during the period, 2006 – 2009, two of India’s major credit rating agencies gave the highest governance, management and systems rating to an MFI that subsequently got listed. The also argued that the presence of a board comprising of eminent people surely translated to good governance. They were sadly mistaken as it was during this period, that several not so good practices occurred in the same MFI including the granting of a loan by the MFI to its founder MD of Rs 1.6 crores to buy shares in the same company, multiple lending by the MFI and several other aspects. That a nominee director of SIDBI on the board of the company permitted the granting of a related party transaction (above loan) silently is also worthy of mention and the fact of the matter is that most credit rating assignments at that point in time were sponsored (and/or requested) by SIDBI. It must also be mentioned that apparently, the same company, offered ESOPs to several independent directors including nominee directors and again, this practice was neither pointed out nor seriously questioned by the credit rating reports. In fact, there were a huge number of apparent not-so-good practices in the above company – Prof Sriram highlights much of this in his paper in EPW, June 2010 and I have also written about it in detail. That the credit rating reports did not point out these critical aspects surely undermines their objectivity and utility.

The larger point I want to make is that the incentives for credit rating agencies were inappropriate – they were so structured as to keep recommending increased amounts of loans to MFIs and this can be seen in several prominent cases as I have analysed over the last 10 years. Also, at least in India, there was a huge conflict of interest in terms of staff/boards of directors in the credit rating agencies having close relationships with many of the MFIs being rated. Yet another aspect was that, the major credit rating agencies had sister organizations or institutions/divisions in the same Corporate group that were involved with capacity building in micro-finance and therefore, it suited them to recommend higher loans with capacity building. I have done an analysis of several credit rating reports and also followed up who actually did the capacity building – the results are rather startling. And last but not the least, that credit rating could not point out the prevalence of many bad practices including use of agents, ghost clients, frauds and the like (when the MFI annual reports themselves acknowledged these) is a clear vindication of what I have been saying above

Likewise, social performance is a great concept on paper but sadly does not exist on the ground. It is a wonderful to talk about in a workshop in Mumbai or Delhi or Barcelona or Washington but let us get the facts clear – there is nothing like that in operation in India and make no mistake, the ground situation in several of India’s populous micro-finance states including AP, Tamilnadu, Karnataka, Orissa and West Bengal is far from that…

Therefore, using so called tools of social performance or seals of excellence - merely to justify the existence of such (and especially, For-Profit) MFIs - that sound GREAT on paper but are rarely implemented (or visible) on the ground, certainly does not befit the status of a great industry like micro-finance. And it is about time that we start asking the question as to why, many so called great concepts (like social performance or even principles of Corporate Governance etc) are not implemented on the ground and in the field rather than creating newer and newer tools that may have lesser and lesser relevance to field realities…

And before I sign off, my humble plea is as follows: “The micro-finance industry needs to tackle issues head on and ensure that low-income people get access to a wide range of appropriately designed and delivered high quality financial services at affordable costs. And this does not have to come from MFIs (and For-profit MFIs) alone – and this is a point that needs to be noted carefully and appreciated by various stakeholders like CGAP, MCS and others. Therefore, let us stop creating tools to justify existence of MFIs and rather focus on building a REALLY transparent client oriented micro-finance industry on the ground…that alone will help bring back glory to the beleaguered micro-finance industry...in places like India as well as globally...

Have A Nice Day!

Human Resource Systems in MFIs, Social Performance, Client Protection and Responsible Micro-Finance: What Is The Relationship?

Ramesh S Arunachalam

Rural Finance Practitioner

I have been seeing a very interesting pattern in the present Indian micro-finance crisis with regard to MFI staff. Many places where serious problems  - like multiple lending, frauds, high levels of willful default, use of agents – exist on the ground, a common denominator can be usually found and it is the fact that “Staff” turnover is (has been) very high.

As observed, Staff A from MFI A have usually moved to MFIs B and C (within a short time) and also got promoted through the hierarchy to occupy a much higher position in MFI D. In many ways, I see these (fraud perpetuating moving) staff as the primary cause of the various problems:

1)      They use their past knowledge of other MFIs to enable new MFIs to lend to the older JLGs and cause multiple lending in the areas. Entire branches of older MFIs have been closed because of this as I have observed;

2)      They tell clients to not repay older MFIs and promise them higher/fresh loans from their new/other institution and thereby set the trend for wrong (defaulting) behavior by clients

3)      They get well known center leaders and local opinion leaders to come away with them and act as agents for forming new JLGs, especially by breaking up past JLGs/SHGs and the like.

4)      They collect loan dues of their past MFIs and do not repay these to the concerned institutions. They often abscond with this collected money and move to another area and join to work with a new/other MFI

5)      They network with similar peers and form a nexus ring leader type operation that can sometimes cause large scale problems like witnessed in Vellore, Salem, Karur and other belts of Tamilnadu as well as in many districts of Andhra Pradesh

6)      They are primarily responsible for unleashing local toughies through agents for collecting loan repayments and the like

7)      And Plus more…

So, while a lot has been written about the not-so-good practices in MFIs in this Indian MF crisis, one of the main drivers of the same, in my opinion, is the fact that all and sundry are hired as staff and especially, without sufficient background checks (due diligence) and placed on the job without requisite training and the like. And much of this has happened as the drive to grow quickly and reach scale has prompted many MFIs (and especially, some of the newly established commercially oriented entities) to use all possible methods to achieve the same. Some specific comments are in order here:

The lack of background checks has meant that staff who have committed frauds in one place (MFI) have got into higher positions in other MFIs and naturally, they also re-socialise new staff at the other (new) MFI and attune them towards not so good practices. The lack of background checks also has resulted in people with criminal records entering the MFI roster and moving on from one MFI to another, often engaging in increasing frauds at the various levels…

The lack of training has meant that the staff do not understand the mission of micro-finance or that of the MFI and this has again resulted in the excessive drive towards growth, scale and profits – as a result, several MFIs have moved towards using agents for loan disbursement and recovery and also have lent for purposes, that need not be strictly called as micro-finance {I came across a few cases of illicit arrack (liquor) production and the like}

And a lot of this has to do with the overall incentive system for staff at MFIs – where the unsaid (or widely proclaimed) rule is to either ‘disburse a lot quickly or perish’. No matter how much of denial that MFIs provide with regard to the existence of such incentives on paper, in practical terms, at the grass-roots and branch./field worker level, they are very apparent and this observation was also made to me by a journalist from the international media, who also extensively toured the field areas in India in 2010/2011.

So, the above are some of the issues that the regulators, industry associations, MFIs and other stakeholders must focus on and attempt to redress immediately through various mechanisms 

In fact, before I sign off, I would also like to present the perspective of many genuine MFI staff and draw the attention of the RBI and other stakeholders to dismal working and living conditions of many such staff in the Indian micro-finance industry. In many places, there are no service rules and often, it is very high pressure 24 x 7 work. Also, usually, there are no contracts issued by many institutions and the hiring/firing is done verbally and at the whims and fancy of the superiors. Grievance procedures also do not seem to exist in many MFIs and faced with such a situation, it is hardly surprising that the level of frustration among many genuine staff is rather high. In fact, some (good) staff have crossed the line because of such an environment...and moved towards behaviors such as those listed above...

Given the above situation, it is therefore imperative that the Indian micro-finance industry starts looking inward so as to immediately address the prevalent HR problems and also help build professional and ethical HR systems at (many) MFIs. Until that is done, neither can social performance nor client protection nor responsible micro-finance be achieved in any significant measure…on the ground…

Have a Nice Day!

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!

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[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