We have maintained a consistent position that despite all the imperfections of the MFI industry, the AP crisis was brought on primarily by the Ordinance that restricted the ability of MFIs to collect on the loans they had made and the misplaced perception of key stakeholders that this is an unregulated industry, despite 80% of the loans being made by RBI regulated NBFCs. It was (and still is) imperative to remain completely focussed on solving the immediate issues of liquidity and prevention of contagion to other states so that the collateral damage to hundreds of genuine initiatives is minimised and that the lifeline of access for customers is not permanently damaged.
However, now that the RBI has made a call to restore liquidity, we hope that the short-term issues will be managed and it is time to turn our attention to some of the deeper messages from the crisis. We are proposing a 5 point action plan for MFIs to ensure that there is a better acknowledgement of the value of their contributions to the life of a low-income household the next time around:
1. MFIs provide a very useful service to clients by allowing them to manage their cash intra-year between periods of excess income and deficit income. This kind of cash management ability makes a big difference to a low-income household by reducing their need to sell household assets or take on expensive informal loans. In addition to this service however, MFIs must increasingly work hard to build a relationship with the communities that they serve. They must track the financial well-being of every household that they serve. They must hold themselves and their loan officers accountable to this metric. This is imperative if the community has to stand by their side in future crises.
2. Voluntarily and unilaterally cut interest rates to not exceed 8% above cost of bank loans. Our research suggests that this is very much within reach of the efficient entities who have crossed a minimum scale. If for some MFIs operating in remote geographies, operating costs do not justify the 8% benchmark, they must provide clients with instruments that will let them benefit from future profitability for the “equity capital” that they have inadvertently provided to the entity in its early stages via higher interest rates. The experience of Shri Renuka Sugars in making farmers shareholders may be instructive here.
3. MFIs must remember that the only collateral they have in the traditional Grameen-style loans is group cohesion. Collection problems inevitably can be traced to problems in the way loans are originated. MFIs must remain committed to process adherence. Reinforce to the group before disbursing a loan the nature of their responsibility and re-confirm that there is sufficient knowledge and willingness to guarantee, given multiple loans that some group members may already have. This might require some modifications to the traditional way in which Group Recognition Tests (GRT) are performed. MFIs must invest in training their field staff to deal with delinquencies in a mature manner. Have board approved processes for delinquency management that are then routinely audited by your Internal Audit Departments.
4. As the current loan portfolio runs off over the next twelve months MFIs must consider booking new loans into smaller, regionally focussed and well capitalised subsidiaries rather than into the national entity. This will be great for leadership development, better community engagement as well as converting non-diversifiable systematic risk into much more addressable idiosyncratic risk. Convert the national entity into a holding company [http://bit.ly/dH6VKY] purely for the purposes of raising equity capital and holding all the process and technology capabilities.
5. Ultimately however, the real power of financial services to the low-income household can be realised only with a far more comprehensive approach. When MFIs think about their evolution over the next decade, they might want to think about transforming the business model and channel architecture to enable provision of a broader suite of financial services to clients in a way that is customised to meet every client’s requirement; some appropriate combination of savings, loans, insurance and pension.
19 Responses
1. “The AP crisis was brought on primarily by the Ordinance that restricted the ability of MFIs to collect on the loans they had made and the misplaced perception of key stakeholders that this is an unregulated industry, despite 80% of the loans being made by RBI regulated NBFCs.”This is a remarkable statement, suggesting that the MF industry is still in denial. While it is a fact that MFIs are within the ambit of RBI regulation, what the crisis brought out that RBI is inadequate to rein in the profiteering impulses of the sector that would stoop to the level of coercive recovery practices that induced borrower suicides.2. “Voluntarily and unilaterally cut interest rates to not exceed 8% above cost of bank loans”This statement must be some kind of joke. It is well known that the government twisted MFIs arms to cut such a commitment.3. “The real power of financial services to the low-income household can be realized only with a far more comprehensive approach.”This is a tacit admission that MFI impact had been minimal till now due to lack of a far more comprehensive approach.
1. “The AP crisis was brought on primarily by the Ordinance that restricted the ability of MFIs to collect on the loans they had made and the misplaced perception of key stakeholders that this is an unregulated industry, despite 80% of the loans being made by RBI regulated NBFCs.”This is a remarkable statement, suggesting that the MF industry is still in denial. While it is a fact that MFIs are within the ambit of RBI regulation, what the crisis brought out that RBI is inadequate to rein in the profiteering impulses of the sector that would stoop to the level of coercive recovery practices that induced borrower suicides.2. “Voluntarily and unilaterally cut interest rates to not exceed 8% above cost of bank loans”This statement must be some kind of joke. It is well known that the government twisted MFIs arms to cut such a commitment.3. “The real power of financial services to the low-income household can be realized only with a far more comprehensive approach.”This is a tacit admission that MFI impact had been minimal till now due to lack of a far more comprehensive approach.
This is an excellent observation and suggestion black board. It’s however not to be assumed that the MFIs were not doing all these things and many more, the only issue which I see is the measurement of their goodwill. There may be many a skeptic who would see the 5 mantras as jokes or as a retrospective assessment of the MFI activities (also trying to mean that MFIs are in acceptance mode). But skeptics were always there and would continue to be there and less said about them the better.
The MFIs should institutionalise their goodwill and all these 5 mantras should act as a Risk Management tool rather than to project themselves as goodwill agents since whatever you do the skeptics would try to find something negative.
A few comments:1. Where are the goodwill of MFIs? From what I see it is confined within the industry and PE and venture capitalists active investor classes of the industry. 2. So lets not assume MFIs “were not doing these things and many more”. Then to reinforce these as recommendations would be redundant. 3. You tend to paint all sceptics with the same brush. There are two broad categories – the first skeptical of micro-finance itself as a sector . The second is skeptical of only existing MFIs and not MF as a poverty alleviation tool. The majority of us sceptics however fall under the second category who feel the present MFIs have not only lost their soul but incapable or not willing to change. Why do we come to this conclusion? Lessons of the past obviously haven’t been learnt as the same “mistakes are repeated again and again. Ramesh Arunachalam in his blog posting “Down The Memory Lane: Why Did The Krishna District Micro-Finance Crisis Occur in 2005/6?” ( http://microfinance-in-india.b…) illustrates such a conclusion. Consequently, we sceptics believe for micro-finance to regain its soul, the present lot of MFIs must be destroyed to rebuild the sector again under a new paradigm
Dear Rajan,
I would not like to paint as a skeptic, all those who are posing themselves as Crusaders unless they start feeling that everything and anything done by the MFIs is wrong. I truly agree with you that there should be destruction, but not of MFIs but of business models. There is no new or old paradigm but only a shift which is required. There could be excesses, neither am I a perpetuator nor an authority to decide that these are excesses. I think there should be fresh beginnings and now is the time. That’s how Creation continues.
Hi Venkateswaran
1. My inspiration comes from the Great Mahatma who advice us to look at the face of the poor to determine social relevance of our actions. Accordingly, from a livelihood perspective, my bottom line is fairly simple. If MF is touted as a poverty alleviation tool, does it or does it not function as one? If they don’t and they in particular pull down even the not-so-poor into the vortex of poverty, then I am prepared to publicly flaunt myself as a crusader against MFIs, nothwithstanding, whatever the jibes I attract for doing so. I am sure many of the critics or sceptics as you prefer to call us, do so for similar rationale.
2. Someone once said that nearly all men can withstand adversity. If you truly want to test a man’s character, give him power. We saw this decade what power did to this bunch of MFIs. It made them souless. It is true that business models embedded in the theory of planned behavior, can certainly make a difference in the sense of imposing some sort of artificial behavioral control. For souless MFIs I suppose that’s one effective method to somewhat rein in their regressive traits that has led to this present crisis i.e. as sort of a damage limitation strategy. I feel self efficacy, based on social cognitive theory, is however much more a superior alternative. So whats the latter? Inner convictions and beliefs spontaneously moulding behaviour that produce outcomes aligned to those desired. The prerequisite to self efficacy is what I call a soul. We must be the change we wish to see in the world. The only change we see in the present bunch of MFI leadership is the intense desire to amass wealth using the face of the poor as a fulcum and in the process, crushing them. They showed no capacity for self-restraint – no institutional character worth the salt. This is why, they should be destroyed.
3. Regarding fresh beginnings, someone once said “you may have a fresh start any moment you choose, for this thing that we call ‘failure’ is not the falling down, but the staying down.” By constantly repeating the same mistakes, these bunch of MFIs did not just fall the first time but preferred by choice to stay down. So my question, why invest in these false Messiahs of the Poor? Isn’t it a better idea to promote a fresh lot??
4. If MFIs believe only superficial “shifts” will get them off the hook, then they are living again denial. If we take stock of all signals emanating from the government, it is easy to see that the policy environment for financial exclusion is going to change and change radically. MFs occupied the primier place in strategy till now. The sooner MFs as an industry stop deluding themselves that this status will continue, the better they can adapt in a new policy environment where they are going to be only one among many in a mix of elements.
Mr. Alexander,
In the context of your call for destruction of the MFIs to make MF regain its “soul”, please consider the following.
The first question that comes to mind: “what do we really know about the problem?” There is little credible evidence on the MFIs’ role in causing suicides. Instead of trying to sincerely understand the causality behind the desperate act of suicide, the government took to finding a convenient scapegoat in the form of MFIs. Crops failures have affected AP, and other credit sources comprise bulk of household liabilities, but these facts are ignored. Even the “pressure” in MFI model is usually put by other group members, and occasionally by loan officers visiting once a week. Even after the MF sector came to a grinding hault after Ordinance was passed, the suicides have continued in AP.
Second, when you claim that commercial micro finance sector is bad, I must ask: “compared to what?” The search for unmitigated successes among comparable efforts is futile. In terms of costs/efficiency, rural lending programmes are either disasters like IRDP, or in the same range as MFIs (like SHG-Bank linkage programme – once you add subsidies and administrative costs borne by clients). In terms of effectiveness/impact, micro credit has small but positive impact . on most households. It is an imperfect solution, but is that really news? You compare the reality of micro finance sector against some absolute standards (eg. “the soul”) that exist in your mind. Such standards exist in my mind as well, but should I expect the world to immediately fit those standards, and call for drastic action if that doesn’t happen? Of course, the same argument cannot be made for illegal conduct, which requires swift response, but such conduct is rare.
Third, if changes are required, we must ask: “at what cost?” It is difficult to accept that “improvement” is possible only at the cost of destroying the commercial micro finance sector. This is the view you have taken, and the AP government seems to share it. The Ordinance is indeed the proximate cause of the crisis in AP, and even if the justifications offered are accepted, the “solution” seems worse than the problems. Similarly, the issue of interest rates and profitability cannot be addressed through brute force, because the institutions may relent under pressure but could then focus only on low hanging fruits, thus maintaining their returns and hurting the inclusion agenda.
MFIs have created value by scaling the group-based lending model, easing credit constraints and making positive impact on many households. The question is: how can we build on this limited but significant success? To me it seems there is no alternative to letting the sector evolve and improve gradually, with constructive regulatory stewardship, as well as decisive but sharply focused action against illegal conduct.
Your intentions appear positive, and you seem keen to see action, but consider putting some pressure on your assumptions and think again about the implications of what you are proposing. The authors of blog post use available evidence, recognise issues in the sector, and recommend constructive action. Isn’t this approach more reasonable?
Suyash
Hi Suyash!Like your spirited style of communication but here’s my reactions:You ask “What do we know of the problem?” I just completed 30 years in the development sector, in several roles including a big chunk of it, working directly at the grass root as experience. We have watched from inception the evolution of these for-profit MFIs monsters with great disdain for quite some time. It’s not just the problem of suicides. As a livelihood specialist, I have still not come across any example of petty businesses who can afford such high interests and yet sustain it viably and if there are some exceptions come across, their net impact is creation of inflationary effects, which in turn is often materially significant for the local economy, particularly on poorer sections who depend on products and services financed by MFs. I do hope the RBI enquiry on MFIs would also look closely at the links between interest rates and inflation. On the problem of suicides, this is what Vijay Mahajan, President of M-FIN and promoter of Basix told New York Times: “In their quest to grow, they kept piling on more loans in the same geographies…That led to more indebtedness, and in some cases it led to suicides.” So if even Mahajan doesn’t rule out it, why is that much of MF industry is still in denial? Others like Akula also admit MF induced suicides but deflect the blame to “rogue MFIs”, strangely without naming them. In my post “Rogue Micro-Finance Companies: Naxalites have no confusion who they are”, I argue it is the 6 MF biggies who command a high plausibility to be the rogues rather than smaller MFIs. For most other questions you raised please to my reactions to Mr. Venketeswaran.
This is an excellent observation and suggestion black board. It’s however not to be assumed that the MFIs were not doing all these things and many more, the only issue which I see is the measurement of their goodwill. There may be many a skeptic who would see the 5 mantras as jokes or as a retrospective assessment of the MFI activities (also trying to mean that MFIs are in acceptance mode). But skeptics were always there and would continue to be there and less said about them the better.
The MFIs should institutionalise their goodwill and all these 5 mantras should act as a Risk Management tool rather than to project themselves as goodwill agents since whatever you do the skeptics would try to find something negative.
A few comments:1. Where are the goodwill of MFIs? From what I see it is confined within the industry and PE and venture capitalists active investor classes of the industry. 2. So lets not assume MFIs “were not doing these things and many more”. Then to reinforce these as recommendations would be redundant. 3. You tend to paint all sceptics with the same brush. There are two broad categories – the first skeptical of micro-finance itself as a sector . The second is skeptical of only existing MFIs and not MF as a poverty alleviation tool. The majority of us sceptics however fall under the second category who feel the present MFIs have not only lost their soul but incapable or not willing to change. Why do we come to this conclusion? Lessons of the past obviously haven’t been learnt as the same “mistakes are repeated again and again. Ramesh Arunachalam in his blog posting “Down The Memory Lane: Why Did The Krishna District Micro-Finance Crisis Occur in 2005/6?” ( http://microfinance-in-india.b…) illustrates such a conclusion. Consequently, we sceptics believe for micro-finance to regain its soul, the present lot of MFIs must be destroyed to rebuild the sector again under a new paradigm
Dear Rajan,
I would not like to paint as a skeptic, all those who are posing themselves as Crusaders unless they start feeling that everything and anything done by the MFIs is wrong. I truly agree with you that there should be destruction, but not of MFIs but of business models. There is no new or old paradigm but only a shift which is required. There could be excesses, neither am I a perpetuator nor an authority to decide that these are excesses. I think there should be fresh beginnings and now is the time. That’s how Creation continues.
Hi Venkateswaran
1. My inspiration comes from the Great Mahatma who advice us to look at the face of the poor to determine social relevance of our actions. Accordingly, from a livelihood perspective, my bottom line is fairly simple. If MF is touted as a poverty alleviation tool, does it or does it not function as one? If they don’t and they in particular pull down even the not-so-poor into the vortex of poverty, then I am prepared to publicly flaunt myself as a crusader against MFIs, nothwithstanding, whatever the jibes I attract for doing so. I am sure many of the critics or sceptics as you prefer to call us, do so for similar rationale.
2. Someone once said that nearly all men can withstand adversity. If you truly want to test a man’s character, give him power. We saw this decade what power did to this bunch of MFIs. It made them souless. It is true that business models embedded in the theory of planned behavior, can certainly make a difference in the sense of imposing some sort of artificial behavioral control. For souless MFIs I suppose that’s one effective method to somewhat rein in their regressive traits that has led to this present crisis i.e. as sort of a damage limitation strategy. I feel self efficacy, based on social cognitive theory, is however much more a superior alternative. So whats the latter? Inner convictions and beliefs spontaneously moulding behaviour that produce outcomes aligned to those desired. The prerequisite to self efficacy is what I call a soul. We must be the change we wish to see in the world. The only change we see in the present bunch of MFI leadership is the intense desire to amass wealth using the face of the poor as a fulcum and in the process, crushing them. They showed no capacity for self-restraint – no institutional character worth the salt. This is why, they should be destroyed.
3. Regarding fresh beginnings, someone once said “you may have a fresh start any moment you choose, for this thing that we call ‘failure’ is not the falling down, but the staying down.” By constantly repeating the same mistakes, these bunch of MFIs did not just fall the first time but preferred by choice to stay down. So my question, why invest in these false Messiahs of the Poor? Isn’t it a better idea to promote a fresh lot??
4. If MFIs believe only superficial “shifts” will get them off the hook, then they are living again denial. If we take stock of all signals emanating from the government, it is easy to see that the policy environment for financial exclusion is going to change and change radically. MFs occupied the primier place in strategy till now. The sooner MFs as an industry stop deluding themselves that this status will continue, the better they can adapt in a new policy environment where they are going to be only one among many in a mix of elements.
Mr. Alexander,
In the context of your call for destruction of the MFIs to make MF regain its “soul”, please consider the following.
The first question that comes to mind: “what do we really know about the problem?” There is little credible evidence on the MFIs’ role in causing suicides. Instead of trying to sincerely understand the causality behind the desperate act of suicide, the government took to finding a convenient scapegoat in the form of MFIs. Crops failures have affected AP, and other credit sources comprise bulk of household liabilities, but these facts are ignored. Even the “pressure” in MFI model is usually put by other group members, and occasionally by loan officers visiting once a week. Even after the MF sector came to a grinding hault after Ordinance was passed, the suicides have continued in AP.
Second, when you claim that commercial micro finance sector is bad, I must ask: “compared to what?” The search for unmitigated successes among comparable efforts is futile. In terms of costs/efficiency, rural lending programmes are either disasters like IRDP, or in the same range as MFIs (like SHG-Bank linkage programme – once you add subsidies and administrative costs borne by clients). In terms of effectiveness/impact, micro credit has small but positive impact . on most households. It is an imperfect solution, but is that really news? You compare the reality of micro finance sector against some absolute standards (eg. “the soul”) that exist in your mind. Such standards exist in my mind as well, but should I expect the world to immediately fit those standards, and call for drastic action if that doesn’t happen? Of course, the same argument cannot be made for illegal conduct, which requires swift response, but such conduct is rare.
Third, if changes are required, we must ask: “at what cost?” It is difficult to accept that “improvement” is possible only at the cost of destroying the commercial micro finance sector. This is the view you have taken, and the AP government seems to share it. The Ordinance is indeed the proximate cause of the crisis in AP, and even if the justifications offered are accepted, the “solution” seems worse than the problems. Similarly, the issue of interest rates and profitability cannot be addressed through brute force, because the institutions may relent under pressure but could then focus only on low hanging fruits, thus maintaining their returns and hurting the inclusion agenda.
MFIs have created value by scaling the group-based lending model, easing credit constraints and making positive impact on many households. The question is: how can we build on this limited but significant success? To me it seems there is no alternative to letting the sector evolve and improve gradually, with constructive regulatory stewardship, as well as decisive but sharply focused action against illegal conduct.
Your intentions appear positive, and you seem keen to see action, but consider putting some pressure on your assumptions and think again about the implications of what you are proposing. The authors of blog post use available evidence, recognise issues in the sector, and recommend constructive action. Isn’t this approach more reasonable?
Suyash
Hi Suyash!Like your spirited style of communication but here’s my reactions:You ask “What do we know of the problem?” I just completed 30 years in the development sector, in several roles including a big chunk of it, working directly at the grass root as experience. We have watched from inception the evolution of these for-profit MFIs monsters with great disdain for quite some time. It’s not just the problem of suicides. As a livelihood specialist, I have still not come across any example of petty businesses who can afford such high interests and yet sustain it viably and if there are some exceptions come across, their net impact is creation of inflationary effects, which in turn is often materially significant for the local economy, particularly on poorer sections who depend on products and services financed by MFs. I do hope the RBI enquiry on MFIs would also look closely at the links between interest rates and inflation. On the problem of suicides, this is what Vijay Mahajan, President of M-FIN and promoter of Basix told New York Times: “In their quest to grow, they kept piling on more loans in the same geographies…That led to more indebtedness, and in some cases it led to suicides.” So if even Mahajan doesn’t rule out it, why is that much of MF industry is still in denial? Others like Akula also admit MF induced suicides but deflect the blame to “rogue MFIs”, strangely without naming them. In my post “Rogue Micro-Finance Companies: Naxalites have no confusion who they are”, I argue it is the 6 MF biggies who command a high plausibility to be the rogues rather than smaller MFIs. For most other questions you raised please to my reactions to Mr. Venketeswaran.
I completely agree with your conclusion (point #5) that a more comprehensive approach to microfinancial services is needed in India and throughout the developing world. Though “microfinance” should entail comprehensive services such as loans, insurance and savings, it currently is primarily the provision of credit for the poor.
Until MFIs realize that they must bundle these other products with their credit schemes to the poor, I am afraid that we may see more mini-implosions of the microfinance sector as we did in AP.
If people we deem “credit-worthy” have access to other services, why do we not offer the same to the poor? The likes of Grameen and SKS have proven that microfinance is a viable and sustainable business model which also addresses a social need — and I hope that other industries (insurance, for example) take note of this latent opportunity as well and customize products for the poor.
I completely agree with your conclusion (point #5) that a more comprehensive approach to microfinancial services is needed in India and throughout the developing world. Though “microfinance” should entail comprehensive services such as loans, insurance and savings, it currently is primarily the provision of credit for the poor.
Until MFIs realize that they must bundle these other products with their credit schemes to the poor, I am afraid that we may see more mini-implosions of the microfinance sector as we did in AP.
If people we deem “credit-worthy” have access to other services, why do we not offer the same to the poor? The likes of Grameen and SKS have proven that microfinance is a viable and sustainable business model which also addresses a social need — and I hope that other industries (insurance, for example) take note of this latent opportunity as well and customize products for the poor.
While these steps would help, only a nationwide regulation would bring in legitimacy to MFI
While these steps would help, only a nationwide regulation would bring in legitimacy to MFI