Redressing the Imbalances in Power, Information and Resources: The Consumer Protection Legislation Imperative in Micro-Finance…

Ramesh S Arunachalam

Rural Finance Practitioner  

The need for consumer protection in micro-finance arises from a huge imbalance of power, information and resources between consumers and MFIs, with low-income consumers at a great disadvantage. Some specific aspects that contribute to these imbalances are given below:

·         While MFIs/FIs know their products rather well, the individual low income consumer often finds it difficult and/or costly to obtain sufficient and transparent information regarding the various financial products that they access from MFIs.

·         In addition, many of the low income people find MFI financial products naturally complex and/or difficult to assess, even when all relevant information is disclosed.

Imbalances also occur because the entry or exit costs are low for many MFIs, thus allowing (disreputable or fly by night operator) firms to emerge, exploit low income people and vanish. Please recall that industry stalwarts like Mr Vijay Mahajan and others (like Mr Alok Prasad) have often mentioned unregistered fly by night operators as mainly responsible for the present (2010) as well as previous (2005/6) AP micro-finance crisis

Therefore, it is imperative to have consumer protection legislation to help address this (natural) market failure caused by these huge imbalances of power, information and resources. And any such consumer protection law (legislation) for micro-finance should provide clear (non-ambiguous) consumer protection rules regarding the various financial products and services delivered by MFIs/FIs to micro-finance clients.

For this, it must clearly define the scope of micro-finance appropriately and also specify the product and client characteristics apart from specifying models of delivery/institutions and the like. This is very critical and without identifying the scope of micro-finance, neither can products, delivery models, institutions, clients and other aspects be highlighted and therefore, clear-cut (consumer protection) rules cannot be framed

This law must also try to ensure client protection from two perspectives: a) From a product design view point as financial products are services consumed by the client and require their active participation in the production; b) From services delivery perspective as much customer insensitivity can stem from the delivery/institutional model and related aspects.

Last but not the least, the necessary institutional arrangements should be in place to ensure thorough, objective, timely and fair implementation and enforcement of the consumer protection rules. This is a very vital aspect because much of micro-finance is delivered through a dispersed and decentralized model and therefore, institutions tasked with the objective of implementing the consumer protection law must have the wherewithal and resources (physical, managerial and financial) to actually implement the consumer protection law/rules. Otherwise, any consumer protection legislation will also turn out to be as ineffective as the current codes of conduct (regulatory or voluntary), prevalent in Indian micro-finance…

Have A Nice Day!

The Urgent Need For Specialised Consumer Protection Legislation in Indian Micro-Finance…

Ramesh S Arunachalam

Rural Finance Practitioner  

Just after the last Krishna crisis (2005/6), I heard a lot of micro-finance industry stalwarts arguing that codes of conduct along with competition will ensure protection of low income consumers.  However, as the events of the last few years have shown, that has not sadly happened. Two aspects are noteworthy here: (1) Neither has competition between MFIs been able to fully address consumer protection issues on their own; and (2) Nor have codes of conduct for responsible lending (often cited substitute for regulation) been able to improve the business practices of MFIs.

As far as I have seen, in many competitive markets, competition may have been sufficient to ensure that firms succeed by providing consumers with a flood of products and services but practices surrounding the delivery/distribution of these products including access to transparent information has always been under question. Therefore, much more than competition is required to ensure efficient and fair markets and the same applies to micro-finance services for low income people.

Likewise, while codes of conduct were meant to encourage MFIs to follow ethical standards in the treatment of their customers, there are no real substitutes for adequate regulation intended to protect the interests of consumers of micro-finance services. And in the Indian micro-finance sector, self-regulation through such voluntary codes of conduct has been less than effective since institutional capacities of industry associations (MFIN or Sa-Dhan) have often been limited, micro-finance markets are highly concentrated and dominated by a small number of MFIs, the legal framework for micro-finance services is underdeveloped, and available the laws and regulations (like RBI code of conduct for NBFCs) are frequently not effectively applied or enforced. In fact, when the code of conduct was first introduced in 2006, I had a very open mind and felt that it may provide a useful first step, particularly if the regulator (or supervisor) oversees the codes and reports on the effectiveness of the codes. However, that did not happen and it is clear that codes are not sufficient to improve business practices of MFIs and hence, it is imperative for the regulator/government to consider introducing special consumer protection legislation for micro-finance.

The focus of such consumer protection must be on the relationship and interaction between a low income customer and MFI/equivalent delivering similar services. Among other things, such legislation should ensure that MFIs provide low income people (consumers) with:

Ø      Transparent Information - by providing full, plain, adequate and comparable information about the prices, terms and conditions (and inherent risks, if any for the new savings and mutual fund type products) of various Micro-Finance (MF) products and services;

Ø      Choice of Products and Services - by ensuring fair, non-fraudulent, non-coercive, legally valid and responsible/reasonable practices in the selling, advertising and marketing of Micro-Finance (MF) products and services, and collection of payments etc;

Ø      Appropriate Redressal Mechanisms - by providing inexpensive and speedy mechanisms to address complaints and resolve disputes in fair and transparent manner and especially at the local level; and

Ø      Privacy Aspects - by ensuring control over access to personal financial information and its non-use for other (not-so-legal) purposes

In addition, the legislation should also ensure that low income people/consumers have access to programs of financial education that enable them to develop the financial capability and capacity required to understand Micro-Finance (MF) products and services and exercise their rights (and responsibilities) as financial consumers. Such training in financial issues should serve to empower low income people to make wise and informed decisions about their household finances including access to various financial services from various stakeholders and also to plan their financial needs over a lifetime.

However, as the Indian micro-finance experience has clearly shown, financial education and literacy[1] alone cannot, be a substitute for adequate financial consumer protection regulation. While they can help reduce the information and power imbalance of low income consumers with regard to MFIs/FIs that deliver various services, they can do so only to an extent - as they form only a part of the much wider intervention of consumer protection, which needs to be mandated through appropriate legislation. In fact, clear consumer protection legislation for micro-finance is required as Micro-Finance (MF) markets will not work on their own and one needs institutions to regulate and stablise these markets, compensate to losers and provide the safety nets – thus, Micro-Finance (MF) markets can neither be legitimate or, for that matter, efficient, if you don’t have the appropriate regulatory frameworks. And several stakeholders have suggested, the prime justification for regulating financial markets like in micro-finance stems from the need to protect low income people from fraud and misrepresentation, unfair treatment, insufficient information, coercive employees of MFIs, and other things (including the loss of their investments)

Thus, while expanding access to financial services is very critical and is in many ways a fundamental right of citizens in a developing country like India, to help grow the economy in an inclusive manner, both MFIs (as financial institutions) and low income people (as financial consumers) need to be responsible in their use of financial services. That, in a nut shell should be the objective as well as result of any consumer protection and accompanying micro-finance legislation…

Have A Nice Day!

---

[1] I plan to post separately on financial literacy and education from a customer protection perspective.

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!

---

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

Selecting and Appointing Business Correspondents: Critical Issues For Banks…

Ramesh S Arunachalam

Rural Finance Practitioner

While the idea of using business correspondents is perhaps appealing because of various benefits it may seem to provide, as noted earlier in the earlier posts, there are huge risks as well - especially, in the present micro-finance/financial inclusion environment in India (and contexts) where there are many controversies with regard to financial services provided, service delivery methods used, prices charged etc by the outsourced entities (such as BCs). Therefore, it is imperative for banks to have an appropriate due diligence process in selecting their business correspondents (BCs). They must, at all costs, avoid appointing all and sundry as their BCs, just to meet any (internal or regulatory targets), that may be imposed on them from time to time

Specifically, the banks must develop criteria that enable them to assess, prior to selection, a BC’s capacity and ability to perform the various required activities effectively, reliably and most importantly, to a high standard, together with any potential risk factors associated with using a particular BC. Key emphasis must be put on ensuring that the BC is sensitive to the needs and situations of low-income clients and/or excluded segments of the population. The bank must also ensure that adequate client protection measures are in place in the entire scheme of “outsourcing” to BCs and their (internal) auditors must verify the implementation of these in real time.

Among other things, such due diligence should include assessments with regard to the following (not exhaustive by any means):

(1)   Whether the BC is qualified and interested in performing the specified tasks?

(2)   Whether the BC understands and can meet the objectives of the Bank in performing the specified activities?

(3)   Whether the BC’s has the financial soundness, managerial capacity and all other resources in adequate measure to fulfill its obligations and successfully perform its role as a BC and the various (outsourced) activities? and

(4)   Whether the BC has the reach, resources and capacity to meet any special needs of the envisaged clients and/or the bank?

In case the bank has any special needs - such as servicing geographically dispersed/disadvantaged clientele and/or performing any special activities for them – the reach, capacity and resources of the BC must specifically be assessed with regard to such activities and they should not be outsourced to a BC who does not meet these criteria. That is critical and making the assumption that the BCs will over time acquire the expertise has, many a time, proved costly, in similar situations

Further, if a BC fails, or is otherwise unable to perform the outsourced activity, it may be costly or problematic (for the bank) to find alternative solutions. Transition costs and potential business disruptions should thus also be considered as well as the larger (regulatory and other) implications of not being able to complete such activities

Lastly, additional concerns may exist if the BC to be appointed is to service a remote and/or communally sensitive area (Nizamabad in AP is one such example). In such areas, in case of an emergency or extraordinary situation, the bank may find it more difficult to implement appropriate responses in a timely fashion. Therefore, senior management of the bank may also need to assess the local or special conditions that might adversely impact the BC’s ability to perform the various tasks effectively for the bank.

While the above provide some guidelines with regard to assessing BCs and choosing those who meet the various criteria in terms of resources, capacity, goal congruence and other aspects, the key point that should not be missed is the aspect of doing due diligence. Banks have been very naïve in choosing their partners and have consequently, found themselves in rather precarious situations. Therefore, it is sincerely hoped that they follow a proper process of selecting BCs so that there is a pareto optimal situation for all stakeholders concerned…

Have A Great Day!

Effective Interest Rates and Other Practices in Indian Micro-Finance: It Is About Time That RBI Conducted A Nationwide Study

Ramesh S Arunachalam

Rural Finance Practitioner

The issue of interest rates has always been hotly debated and I, for one, am not for capping interest rates of MFIs as servicing the last mile in micro-finance is indeed costly. That said, we however need to be absolutely transparent about interest rates in micro-finance and here is where I really appreciate the work of MF Transparency. However, as I travel through the field, my sense has been that there is a huge difference between intended and realized interest rates (both for nominal and effective interest rates). Part of the issue has been the use of the agent led model but even otherwise, I believe that there are huge differences between the intended and realized interest rates and please also recall that the media (in AP) had reported huge effective interest rates for some MFIs, after they had submitted data to the AP government, which were later explained away using the classic data error/data conversion concept.

Please recall that the RPCD division of the RBI did a great study on interest rates and the MFI model in Orissa in 2006. Therefore, I would like the RBI to do a national study on interest rates, agent models, shared JLGs/clients, on-going/prevalent multiple lending and the like – unless, it is done by the RBI, establishing their prevalence would be impossible and without that, corrective action cannot be taken. I would also urge RBI to video record the data and documents so that, there is absolute transparency and clarity on the ground situation. Otherwise, the MF industry, will continue to be in a denial mode which is okay but will not help us tackle the problems at hand.

Please read the tables on interest rates at the end of this post, taken directly from the e mail sent by APMAS and being used with their permission. I did not put up the individual calculations earlier but am doing so now (after randomly verifying some of the data which have been correct) and I have the exact file sent by APMAS via its e mail for proof. While I am no expert on calculating interest rates, I have cross-checked the calculations and they seem correct prima facie, to the best of my knowledge. Experts globally can use the same data set and come to their own conclusions. As always, I have protected the individual identity of the MFIs as well as their clients but that is also available for verification by RBI or MoF if required

Before, I sign off, I would like to relate a story from the Wizard of The Id

There was a king who was at battle with the enemies and one day, he was sitting in his chamber, when a soldier walked in and said:

“Your highness, Sir Rodney has come in with the Battle Report”

The kind told the soldier:

“Send him inside”

Sir Rodney walked into the Kings Chamber and as he was doing so, the King told him:

“Before you start sniveling you mush face, let me remind you of an old Roman custom. Bearers of Good News were rewarded with Wine and Wealth. Bad News brought unmentionable suffering to the bearer. So what is the Battle Report”

Sir Rodney to The King:

“Your Highness, I am tickled pink to tell you that your worthless fiefdom, mucky swamplands and unruly peasants are now the Responsibility of the Enemy”

I hope that the moral of the story is clear and the Indian micro-finance industry and its stakeholders begin to act to rectify the fast eroding ground situation…

Have a Great Week End!

Peculiarities of Micro-Finance Assets and Practical Regulatory and Supervisory Lessons For Governments, Central Banks and Donors Involved in Building Inclusive Financial Systems …

Ramesh S Arunachalam

Rural Finance Practitioner

Micro-finance loan assets have several peculiarities that need to be carefully considered while devising regulation and supervisory arrangements – irrespective of whether MFIs (different legal forms) or Business Correspondents (various types of legal entities) are involved in the last mile intermediation. While much of what I am talking about applies to the Indian context very well, the same general principles can easily be used by governments, central banks and donors in other environments as well…Read On…

Unique Characteristics of Micro-Finance and Associated Problems:

First, MF loan assets tend to be predominantly small in amounts but large in number. Second, while the transactions are also small, they are however numerous (repetitive) and most often, predominantly cash oriented – this makes it difficult to trace the source as well as end use. Third, the geographic diversity is huge and these assets tend to be spread over remote rural areas and/or urban slums that make it rather difficult to physically locate them. Therefore, establishing the identity of the micro-finance borrower and hence, the loan asset becomes rather difficult. Fourth, while many of the lenders ask for KYC documentation, it must be noted that what is provided is far from accurate. Therefore, it is very easy for an MFI to show the same assets for different lenders and re-deploy the (surplus) funds in other activities like real estate and the like. I have solid documentary evidence of this happening in India and a lot of this was highlighted as far back as May 2005, in the (now infamous) paper of Thorat and Arunachalam (2005)

Thus, as noted above, these peculiarities can cause serious problems in supervision of micro-finance assets and especially, those who buy these securitized assets must be very careful as there is a good chance that the may be no real persons at all with the associated assets or the assets themselves may have been hypotheticated or pledged to other lenders

Some Practical Strategies For Regulation/Supervision:

Ensure Exclusivity of Micro-Finance Assets: Thus, the only way to safeguard against the above is to ensure the exclusivity of micro-finance assets to specific lenders and that is something that only the regulator can mandate via regulation and ensure through supervision. As per this, each MFI will have to exclusively earmark certain number of whole branches/units across its portfolio and geographies to respective lenders. And this should not be done on a geographic basis as then it may be unfair to some lenders – rather allocation of branches should be done in a fair manner using stratified (by quality of branches) random sampling methodology to ensure that all lenders get a somewhat equal share of excellent, good and ordinary branches. This will ensure equitable distribution of portfolio at risk across the lenders

Mandate A Consortium Approach For Lending To Large MFIs: Further, the lenders will also have to take a consortium approach to lending to the MFIs (at least for those MFIs that have portfolio greater than US $ 100 Million or Rs 500 crores). This will prevent MFIs from setting off one lender against another and also ensure that the micro-finance market is less of a borrower-dominated market. If one were look at the instances in the years 2007 – 2010, there are a number of cases from India where MFIs set off one lender against another and this led to dilution of terms and conditions, including monitoring and supervisory arrangements. In my opinion, a lot of the present problems in India are due to such aspects.

Again, “consortium lending” is something that only the regulator can mandate via regulation and ensure through supervision. And make no mistake, no lenders forum (even those established through the responsible micro-finance project) can ensure consortium lending because by their very nature, the lenders are fierce competitors for the available large and medium sized MFIs. Therefore, only a regulatory diktat can ensure this on the ground.

While lenders typically use rating agencies prior to sanctioning a loan, in this case it is the consortium that must choose a credit rating agency, which among other things must be REALLY independent in terms of not having any other relationship to the larger micro-finance industry and the MFI being rated – especially, the rating agency must not have a sister concern that is involved in capacity building and/or be a part of a larger Corporate group that has such interests in the micro-finance industry. Also, ratings for the same MFI must be rotated among the mainstream rating agencies so that repeat ratings do not become a wrong incentive (or an incentive for providing a higher rating grade). And raw data collected as part of the ratings must be made available for verification by the supervisors auditor and lenders’ internal auditors, as and when required. This may not at all be used but this has to be provided by the rating agency to the consortium of lenders

Make High Quality Randomised Loan Portfolio Audits Mandatory On An Annual Basis: While many of the banks and lenders are going in for loan portfolio audits and the like (I myself participated in the development of loan portfolio audit toolkit that is prominently used in India and other countries), much of the principles used in all these toolkits will have to be changed significantly, especially, in line with lessons from the present Indian crisis. And mainly, client level sensitivities and the prevalence of decentralized models/agents and their practices will have to be factored in specifically. Further, loan portfolio audits are seldom effective in the absence of a transparent MIS that is integrated across geographies, products and clients groups and that again needs to be ensured on the ground (please see following post with regard to MIS at MFIs: http://microfinance-in-india.blogspot.com/2010/11/understanding-state-of-management.html). Also, loan portfolio audits must be conducted by people who are not only independent evaluators but also seen to be independent in terms of having no other relationship with the concerned MFI (or the larger micro-finance industry), at least over the previous 3 years. And finally, there is a critical need for ensuring statistically valid random sampling of an MFIs portfolio while conducting such an audit and that again needs to be implemented on the ground. All of this can be ensured only by regulation and it is hoped that the regulators will do that and also ensure implementation through appropriate supervisory arrangements. While credit rating agencies could also conduct the loan portfolio audits, they must adhere to the transparent terms set out for portfolio audits above and also that mentioned for credit rating agencies earlier.

Make It Mandatory For MFIs to Provide An Annual MIS and Systems Audit Report: Another issue that needs to be made mandatory by regulators is the requirement of an annual MIS and other systems audit – to be certified after due examination by regulator/supervisor empanelled professionals and I will make a separate post on what process should be followed for such certification to be effective. This must form part of the annual filing of returns along with the aforementioned annual loan portfolio audit certificate

Have One Credit Bureau with A Unique ID Linkage: Lastly, while credit bureaus are very useful, the regulatory authority must own the credit bureau. However, the central database should be available for use (on a lease basis) for the different credit bureau service providers. MFIs can link up to different credit bureaus service providers to submit the data but all of this information will have to go into the regulator established central database. Likewise, all concerned industry stakeholders should be able to access this data at a cost of course, subject to various terms and conditions. And it would be great if the credit bureau architecture piggyback rides on unique national IDs for each individual, accessing a micro-finance loan. Only then, can the micro-finance assets become really traceable and accounted for in the complete sense and the real impact of financial inclusion efforts be transparently and objectively determined…

Have A Great Day At Work!

Understanding The Role of Wholesale Lenders Like SIDBI in The Present Indian Micro-Finance Crisis: Some Unanswered Questions…

Ramesh S Arunachalam

Rural Finance Practitioner

As I have been traveling in the field and seeing first hand for myself, the HAVOC caused by the agent led micro-finance model in India and especially, in the near micro-finance saturated states, I was always confronted by some basic questions:

ð     Where did the MFIs get the funds to grow as fast they did?

ð     How did wholesale financiers (DFIs and Banks) provide so much funds to MFIs and yet allow the kind of not-so-good practices that are currently prevalent on the ground?

ð     Are they in some ways responsible for the kind of (not-so-good) practices (like use of agents), which we currently find in Indian Micro-Finance?

The idea is neither to blame anyone nor find fault with any institution. The objective solely is to learn from past experiences and ensure that similar things do not happen on the ground again in the future. This is especially critical because the same wholesalers and banks may be involved in implementing important micro-finance projects (like the Responsible Micro-Finance Project with The World Bank) and large scale projects with a huge micro-finance component (like DFID’s Poorest States Inclusive Growth Program)

I have already written a lot about equity investors and banks in Indian micro-finance and while equity investments may have enhanced the confidence of lenders, there is no doubt that MFIs were able to leverage their enhanced equity to a great extent – thanks to the generosity and enthusiasm of Banks and DFI lenders like SIDBI, which was one of the real stars in the Indian micro-finance growth story of the last few years.

Without doubt, in my analysis, the single largest financier of the MFIs was/is SIDBI and the data given below are very revealing. A close look at this data suggests that SIDBI had abandoned its slow growth trajectory somewhere in 2007 and in fact, turbo charged the growth of the Indian micro-finance industry by 2008. The data given below are self-explanatory…

 

At this juncture, let me clarify that SIDBI’s work in the Indian micro-finance industry is phenomenal and I have greatest regard for their contribution to the micro-finance industry and the development sector prior to 2007. I would also rate them as one of the most responsible institutions prior to 2007. However, their role from 2008 onwards raises a lot of discomfort and I hope that the New Chairman of SIDBI (who has just taken charge recently) does a dispassionate and objective analysis of - what happened and why in - the SIDBI Micro-Finance Saga. The idea is not blame or penalize any of the officers, many of whom are very committed and have great talent and knowledge – however, the time is surely ripe for SIDBI as an institution to introspect and learn from its past experiences. This is something that I would to reiterate again

And accordingly, with all humility and utmost sincerity, I provide some starter questions (not exhaustive) for the New Chairman, so that he can initiate the task of learning from the past experiences at SIDBI/SFMC:

1.      Fast Growth Strategy: Why did SIDBI’s micro-finance portfolio grow at the frantic pace at which it grew? Who (Senior Management or Board or Who Else) authorized this strategic change and especially, given SIDBI’s very conservative approach prior to 2007 and Why? How did SIDBI hope to manage its very fast growing SFMC (SIDBI Foundation for Micro-Credit) portfolio? What mechanisms were in place at SFMC and were they adequate? Was there a proper risk analysis of the above fast growth strategy and were the PROS and CONS evaluated?

2.      Due Diligence At SFMC: What due diligence was employed at various levels to expand the SFMC micro-finance portfolio several fold, both cumulatively as well as individually? How were credit decisions made (at SFMC) on an individual case by case basis for the larger loans sanctioned to MFIs? What was the lead time for such sanctions and what due diligence was followed and was it sufficient?

3.      Process Adopetd For Higher Loans: Given that SIDBI was not used to sanctioning loans in excess of  Rs 100 crores to individual MFIs (at least until 2004), what process was adopted in the subsequent years when loans worth or in excess of Rs 300 crores were sanctioned to individual MFIs? Were they sufficient? Were there any conflicts of interest? On what basis were such higher loans sanctioned by SIDBI to the MFIs?

4.      Monitoring By SIDBI/SFMC: How did SIDBI monitor the end use of its loans? If so, did it not sense the early warning signals with regard to huge and rising indebtedness, rampant multiple lending, ghost clients and the like at the field level? Was it aware about the use of agents in the Indian micro-finance market and the prevalent decentralized micro-finance model? Were the monitoring mechanisms adequate and what do field level reports indicate with regard to the above practices? Were any lessons learnt from the crisis in Krishna (2006), Kolar (2009) and other places and were they applied in practice to the credit program at SFMC in reality? In the wake of its rapidly burgeoning portfolio, how did SIDBI/SFMC assure itself of the deployment of its funds in REAL micro-finance assets?

5.      Equity Investments and SIDBI Nominee Directors: Given that SIDBI has made equity investments in several MFIs, what did SIDBI’s nominee directors do on the board of MFIs and what mechanism was in place at SFMC/SIDBI to monitor their roles/work on the MFI boards? Did they not alert SIDBI to the various not-so-good practices prevalent on the ground? Were there any conflicts of interest in terms of nominee directors being offered/granted ESOPs and the like, by the concerned MFIs?

6.      Implications for Future Projects: Given what has happened on the ground and especially in Andhra Pradesh, Tamilnadu and other states, what are the implications for the responsible micro-finance project of SIDBI to be conducted in cooperation with the World Bank? What is the guarantee that things will indeed be responsible on the ground, this time around? What safeguards are there in this SIDBI-World Bank project and what safeguards need to be built into it to ensure that enthusiastic senior management does not derail the natural and responsible course of the so-called responsible micro-finance project?

These and other questions become very relevant as institutions like SIDBI intermediate public funds and having seen the HAVOC that micro-finance agents have created on the ground, I cannot help but ask the above questions. I hope SIDBI’s management takes these in the right spirit[i] and introspects with integrity…And that alone should be able to provide practical guidance to the perfectly timed SIDBI-World Bank “Responsible Micro-Finance Project in India”…

Have a Nice Day!

---

[i] The idea is neither to blame anyone nor find fault with any institution. The objective solely is to learn from past experiences and ensure that similar things do not happen on the ground again in the future.