Where Angels Prey

Where Angels Prey is a novel by Ramesh S Arunachalam. Please refer to www.whereangelsprey.com for more information

Friday, December 16, 2011

Lessons from the Indian microfinance crisis, an open letter to Andrew Mitchell

Ramesh S Arunachalam

Two crucial aspects in microfinance—client origination/targeting and loan appraisal—have been neglected in favour of unprecedented growth (caused by a desire to fully commercialise microfinance and rapidly enhance access/outreach of such services) and this has resulted in the present crisis

An open letter to the right honourable Andrew Mitchell, UK International Development Secretary, on lessons from the Indian microfinance crisis

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Lessons from the Indian microfinance crisis, an open letter to Andrew Mitchell

December 16, 2011 


Ramesh S Arunachalam

Two crucial aspects in microfinance—client origination/targeting and loan appraisal—have been neglected in favour of unprecedented growth (caused by a desire to fully commercialise microfinance and rapidly enhance access/outreach of such services) and this has resulted in the present crisis

An open letter to the right honourable Andrew Mitchell, UK International Development Secretary, on lessons from the Indian microfinance crisis

Respected Sir,

Good afternoon! I am delighted that The UK Department for International Development (DFID) is launching SAMRIDHI (a programme promoting microfinance and impact investment in India)  in partnership with SIDBI in your esteemed presence (Sir) at 6pm today, the 16th December (Friday) at the British Council Division, Kasturba Gandhi Marg, New Delhi. Much as I wanted to attend the same, I am unable to do so and hence, this open letter Sir for your kind consideration and necessary action.

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Thursday, December 15, 2011

Subjectivity and inconsistencies in microfinance code of conduct assessments

Ramesh S Arunachalam

While there are many contradictions, inconsistencies and subjective interpretations in the CoC assessments which seem to draw the attention away from the real issues, we hope the sponsors and developers of the SIDBI-World Bank COCA tool recognize the fact that it far from being a reliable and valid psychometric measure of code of conduct assessments

While previous articles looked at the award of free points in the code of conduct assessments (COCA) reports and the peculiar findings arising therein, this article looks at issues of subjectivity and inconsistency in CoC assessments with tangible examples.

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The award of free points in microfinance code of conduct assessments

Ramesh S Arunachalam

It is meaningless that the COCA tool rewards mere existence of policy and/or management statements of policy implementation when it should be really looking at solid evidence in support of implementation of the voluntary codes of conduct on the ground

An earlier Moneylife article (Have sophisticated thermometers ever reduced the temperature?) raised the issue of how the fastest growing NBFC-MFIs received higher (better) code of conduct assessments (COCA) scores in relation to the lower growth and not-for-profit counterparts. This peculiar finding has necessitated a close analysis of the eight SIDBI-World Bank sponsored code of conduct assessments found in the public domain (http://www.sidbi.com/micro/codeofconduct.html)

Wednesday, December 14, 2011

How to ensure success of the Great Indian Microfinance credit bureau?

Ramesh S Arunachalam

For better credit reporting and the credit bureau to work, ‘the boards of MFIs’ must be able to re-orient their organizational vision to one of responsible finance—this means they will have to move away from their desire for ‘super fast’ unnatural growth to balanced natural growth and normal profits

Okay, the preceding article summarized issues concerning the Microfinance credit bureau in India. If that is the situation, what then can perhaps make credit reporting better and also a credit bureau to really work in terms of checking multiple, over and ghost lending? In my opinion, there are several things that need to happen and I hope that the RBI, IFC, Omidyar and the microfinance industry work together in ensuring that these happen on the ground…

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The Great India Microfinance Credit Bureau: Questions that beg an answer…

Ramesh S Arunachalam


The establishment and use of a credit bureau in an emerging market like India a very challenging task. If serious efforts are made, it could take several years from initial discussions to regular use of the credit bureau—one that produces reliable and valid credit information reportsin a transparent manner and not just some reports

It indeed very nice to see an increasing emphasis placed by many stakeholders on the use of credit bureaus (and better credit reporting) in microfinance. One such stakeholder is the International Finance Corporation (IFC), “which is holding a ‘South Asia Regional Workshop on Microfinance Credit Reporting’ in New Delhi on 14 December 2011. IFC and co-sponsors Omidyar Network launched phase one of MFI Credit Bureau project in India in June 2009 working closely with MFIN and the existing credit bureaus, as a result of which about 45 MFIs have started reporting to a credit bureau and 55 million client records have beenuploaded as 2011 draws to a close.” (http://www.microfinancefocus.com/ifc-expand-microfinance-credit-bureaus-coverage-india)



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Monday, December 12, 2011

Have sophisticated thermometers ever reduced the temperature?

Ramesh S Arunachalam

The hype of the moment in microfinance is undoubtedly to subscribe to all kinds of code of conducts, client protection principles, social performance and other self-regulating initiatives. To set the record straight, had all the stakeholders really subscribed to these in the first place, there would have not been such a crisis in Indian microfinance

The ongoing Microfinance India Summit has a special session titled, ‘Client protection and Code of Conduct: From principles to practice and compliance’. The session is to be held on 13 December 2011 (1.30 - 3.00 p.m - Breakout Sessions). As the session introducer notes:

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What is said at conferences is very different from what is implemented in practice

December 12, 2011 07:13 AM
 
Ramesh S Arunachalam

It is very easy to talk high flying concepts at conferences and also publicly claim that the same is being applied in practice. In reality, however, much of the intended strategies do not get implemented in microfinance and that is something that conference organizers, industry associations, regulators and stakeholders must take notice

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Sunday, December 11, 2011

The Micro-Finance India Summit 2011

Ramesh S Arunachalam

Social performance is the ‘in’ thing in micro-finance and an entire session is devoted at the Micro-Finance India summit towards the same and a special social performance report is also to be released at the Summit. The Micro-Finance India Summit session is titled, “Beyond the Buzz, Embedding Social Performance within Practiceand the emphasis of the session is described  below

Session Outline: Beyond the Buzz, Embedding Social Performance within Practice

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Saturday, December 10, 2011

The Microfinance India Summit 2011: Bridging The Hiatus, Building Trust?

Ramesh S Arunachalam
The two-day summit is expected to analyze and introspect on the issues that have led to the erosion of trust with/in the sector. Additionally, the summit is to attempt and build consensus on how the sector can move forward

Come November-December and it is microfinance tourism time across the globe and India is no different. We have an annual Microfinance India summit, held at the sprawling five-star Ashoka Hotel in New Delhi annually where the industry stakeholders meet to discuss critical issues pertaining to the microfinance industry! This year’s summit themed as, “Bridging the Hiatus, Building Trust”, will be held on 12 and 13 December 2011.

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Friday, December 9, 2011

Tackling informal collateral and collateral substitutes in Indian microfinance

Ramesh S Arunachalam


The RBI must ensure that informal collateral and/or abusive collateral substitutes do not contaminate microfinance in the future. It should also seriously think on incentives/disincentives that can be set up to eliminate use of informal collateral and/or abusive collateral substitutes, where they exist

Recently the Reserve Bank of India (RBI) issued a circular defining NBFC–MFIs. According to the circular, an NBFC-MFI is defined as follows:



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Thursday, December 8, 2011

Priority sector lending to MFIs—need for adequate supervision

Ramesh S Arunachalam


If the concerned RBI departments could not monitor five of the top 13 NBFC-MFIs that were supposed systemically (very) important, then, how can they be expected to set up supervisory mechanisms for several hundred MFIs as per the proposed Microfinance bill?

If equity was in some ways responsible for the burgeoning growth of Indian microfinance institutions (MFIs), the (huge) amount of (priority sector) debt leveraged by these 13 NBFC-MFIs (in top 14 MFIs) and other NBFC MFIs is another issue here.

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Saturday, December 3, 2011

The special category of NBFC MFIs: Lessons for the Department of Non-Bank Supervision, RBI

Ramesh S Arunachalam
Without question, the present scenario, in the wake of Friday’s circular, places a huge burden of responsibility on the Department of Non-Bank Supervision and the RBI and for the sake of real financial inclusion, we sincerely hope that the department lives up to its roles and responsibilities with diligence, aplomb and efficiency

On Friday (2 December 2011), the Reserve Bank of India (RBI) created a special category of non-banking finance companies (NBFCs)—NBFC–MFI. The RBI must be congratulated for creating this new category as it explicitly recognizes microfinance as an important facet of the larger financial sector.

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Monday, November 28, 2011

Dissecting the mechanics of growth in Indian microfinance

Ramesh S Arunachalam

Let us stop crying over spilt milk but let us not forget what has happened in the past in the desire to achieve scale speedily. Going forward, it would be prudent for the Department of Non-Banking Supervision, RBI as well as proactive MFI boards (like Sahayata and SKS) and other stakeholders to look at growth trends closely

An earlier article in Moneylife (Lessons from the commercial microfinance model in India,) showed how the burgeoning growth of the commercial non-banking finance company (NBFC) model in Indian microfinance—during the period April 2008 to March 2010—perhaps led to the 2010 Andhra Pradesh microfinance crisis, which was the third in a series of crisis situations (the first being Krishna and second being Kolar) in the last six years.

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Wednesday, November 23, 2011

Life after Vikram Akula at SKS Microfinance: Some unanswered questions?

Ramesh S Arunachalam
It seems unlikely that Vikram Akula’s exit will transform SKS Microfinance into a better governed and managed microfinance company. Only time can tell if and whether the exit of Vikram Akula would bring better times to SKS micro-finance, its investors and clients

The board of SKS Microfinance is said to be meeting in Mumbai today and it has been widely speculated that Vikram Akula is all said to resign from SKS Microfinance as its executive chairman. While the reasons for this are not exactly known, it has been suggested that the poor performance of the company during the last quarter has brought increased pressure on Mr Akula to resign.

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Monday, November 21, 2011

Lessons from the commercial micro-finance model in India

Ramesh S Arunachalam

Fresh perspectives and radical (systemic) changes are required for developing an enabling micro-finance regulatory and supervisory mechanism that can really work on the ground for the benefit of large numbers of low income people

Moneylife
reported last week that charges of serious misreporting and mismanagement have again surfaced in the public domain with regard to Indian micro-finance. Specifically, the article reported that Sahayata Microfinance Pvt Ltd, which was the darling of so many investors, lenders and stakeholders had apparently gone astray - with its now suspended CEO and senior management supposedly involved in serious misreporting and mismanagement. (http://www.moneylife.in/article/award-winning-sahayata-microfinance-is-the-latest-to-go-astray/21549.html)

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Friday, November 18, 2011

Award winning Sahayata Microfinance is the latest to go astray

Ramesh S Arunachalam

Charges of serious misreporting and mismanagement again surfaced in the Indian micro-finance. The question is how could a company like Sahayata Microfinance, which was darling of so many investors, lenders and stakeholders go astray

I came across a very interesting news item in a newspaper today:

“Sahayata Microfinance Pvt Ltd has suspended the brass, including its chief executive, on charges of mismanagement. The Rajasthan-based microfinance company has also stopped fresh lending temporarily, to set its house in order. Following the suspension of management and poor performance, rating agency CARE downgraded its non-convertible debentures of Rs 19.5 crore from CARE BB+ to CARE B-. In September some board members pointed out prima facie evidence of the management’s misrepresentation of company performance. The board has ordered a detailed portfolio audit. The investors have placed an interim -management to control operations, to ensure the business continues uninterrupted. The company will resume loan disbursement from December. The board questioned chief executive, chief financial officer and other senior managers on charges of serious misreporting and mismanagement. ... While chief executive was suspended with immediate effect, the CFO and head of operations were stripped of their duties immediately. They were subsequently suspended.” (Business Standard, November 18, 2011,)

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Thursday, November 17, 2011

Who Should Regulate Indian Micro-Finance?

Ramesh S Arunachalam

Lack of a proper regulatory framework, including lack of proper supervision had played an important role in the disorderly growth of the NBFC MFIs

A recent news item stated that, “In its report ‘Trend and Progress of Banking in India 2010-2011’, The Reserve Bank of India (RBI) states that if State Governments start enacting their own legislations to regulate microfinance institutions (MFIs) including the ones regulated by the Reserve Bank, there will be plurality of regulation leaving scope for regulatory arbitrage. The responsibility for regulating NBFCs has been given to the Reserve Bank, thus, empowering it to regulate the NBFC- MFIs. If other States also come out with legislation similar to the Andhra Pradesh Government, it will raise concerns not only about multiple regulations but also about client protection, as borrowers would then be subject to different regulations. If there are separate regulations governing NBFC-MFIs in individual states, the task of regulation by the Reserve Bank of MFIs operating in more than one State will become even more difficult. This may also impact the business of MFIs, which are operational in more than one State, it says.” (RBI against State Govt regulating microfinance institutions,)

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Friday, November 11, 2011

Complaints of low-income MFI clients must be resolved at the earliest

Ramesh S Arunachalam
If complaints of low-income MFI clients are resolved at the earliest, it would help avoid another crisis, as was seen in 2010

During the peak of the crisis, I remember Suresh Gurumani, the then CEO of SKS Micro-Finance, responded to my post in the micro-finance practice a Yahoo discussion group by saying that one of the most important tasks that he had accomplished at SKS (when has was there), was the establishment of toll-free number where low-income consumers could file their complaints. While I am not sure how the initiative has worked on the ground, it is imperative to follow-up on the idea for several reasons given below and it would be great if the proposed micro-finance bill explicitly brings in the following aspects—concerning complaints and consumer protection mechanisms—as part of the overall regulatory and operational architecture for micro-finance in India.

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Tuesday, November 8, 2011

Will the Micro-finance Bill address real ground level problems?

Ramesh S Arunachalam


The micro-finance bill must provide a clear pathway to preventing occurrence of the various problems so that crisis situations can be avoided in the future 

It is great news that finally the draft micro-finance bill will be introduced in the winter session of Parliament. While undoubtedly, the regulatory architecture for Indian micro-finance needs urgent attention, the efforts to have some framework should not result in the adoption of a regulatory mechanism that does not serve the real problems at hand. That is something that the various stakeholders must ascertain even as they evaluate the draft micro-finance bill so that appropriate features are introduced into it.

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Tuesday, November 1, 2011

Responsible Indian microfinance in India: Still a pipedream year after crisis

Ramesh S Arunachalam

The self-help group & bank- linkage model has been touted as the panacea for solving the current crisis facing Indian microfinance. But this linkage model faces a number of issues that need urgent attention

The Indian microfinance crisis continues and there seems no sign of real revival on the ground. Of late, we have been hearing that a savings-led model may have prevented the recent (ongoing?) Indian microfinance crisis! I am not sure that a mere savings-led model would have prevented the crisis and here is why.



 
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Wednesday, October 26, 2011

MFI savings mobilisation: Should they get an okay for tapping into public deposits and low-income clients?

Ramesh S Arunachalam

MFIs should not garner deposits from low-income customers. The RBI, which will become the sole Indian microfinance regulator, also feels so—and there are a number of facts that support the apex bank’s view

There is an ongoing debate on whether MFIs (microfinance institutions) in India should be allowed to access savings from low-income people and/or access public deposits. While opinions range from a strong ‘yes’ to an absolute ‘no’, the debate has reached an emotional high with many stakeholders openly arguing for letting MFIs access savings of low-income people. However, a recent article in Mint suggests that (http://www.livemint.com/2011/10/18190834/RBI-against-letting-MFIs-colle.html), the RBI (Reserve Bank of India), which is to become the sole regulator of microfinance in India, has argued against letting MFIs garner savings from low-income people. It was a huge relief to read this, and without any doubt, the RBI is ‘spot on’ when it says that MFIs should not be permitted to access savings of low-income people.


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Monday, October 24, 2011

Has MFIN, one of the self-regulatory bodies in Indian microfinance, been accountable for its actions and statements?

Ramesh S Arunachalam
The MFIN enquiry initiated in February 2011 (on governance & transparency) is still not in the public domain. The MFIN-sponsored NCAER study, that suffers several serious shortcomings, makes one wonder whether MFIN can function as an objective association—without conflicts of interest—and as an effective self-regulatory body for Indian microfinance

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Sunday, October 23, 2011

Bordercrossing Books: “The Journey of Indian Micro-Finance”

October 22, 2011 in Andhra Pradesh Microfinance Crisis, Book Review | Tags: , , , , , |

Book Review by

Ramesh S. Arunachalam, 2011: The Journey of Indian Micro-Finance: Lessons for the Future. Chennai: Aapti Publications.

The microfinance crisis in India which broke out in fall 2010, first imperiling numerous borrowers and then an entire industry, is the most fundamental event in the world of microfinance since the Nobel Peace Prize in 2006. In hindsight, it may even turn out to be the defining moment of microfinance history – never before has the dark side of microfinance, and the vulnerability of the industry, been so brutally exposed to a global audience.

Naturally, these events have attracted a host of opinions and analyses ranging from simply blaming the Andhra government for bringing down a healthy industry, to accusing MFIs of having become worse than loan sharks. And yet, so far, we understand very little of why India’s vast microfinance sector went so far astray. Thankfully, people like Ramesh S. Arunachalam are out to change this.

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Friday, October 21, 2011

Trident Microfin is under a Corporate Debt Restructuring plan: How can Kotak Bank slap a legal notice on the microfinance institution?

Ramesh S Arunachalam
 
According to certain media reports, Kotak Bank has slapped a legal notice on Trident Microfin for a dishonoured cheque. But the microfinance institution is under a CDR plan. This is a peculiar case—and there are a number of legal issues and questions surrounding this move

In the last couple of days, we have had news releases that claimed that “Kotak Bank has slapped a legal notice on Trident” (Kotak Mahindra Bank slaps legal notice on Trident, 19 Oct, 2011, PTI ), which is part of a CDR (Corporate Debt Restructuring) plan. And we have had various stakeholders condemning the action already. Moneylife decided to look into the various (legal issues and questions) surrounding this peculiar happening where a company committed to a corporate debt restructuring (CDR) has been apparently sent a legal notice.


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Wednesday, October 19, 2011

MFIN-NCAER study: Here’s the proof that microfinance agents are thriving in Tamil Nadu

Ramesh S Arunachalam

The MFIN-sponsored NCAER study has acknowledged the role that microfinance agents are playing in places like Hyderabad and Jaipur. Curiously, Chennai does not find a mention in this study. Here’s some concrete evidence to the contrary

Yesterday (18th October), we had written on how microfinance agents have spread their tentacles far and wide across the country, and how they are breeding resentment against MFIs (See:MFIN-NCAER study unearths agents’ role in microfinance, but does not find these middlemen in Chennai). We had also written on how the MFIN-NCAER study acknowledges the presence of these middlemen, but the report has a number of loose ends.

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Tuesday, October 18, 2011

MFIN-NACER study unearths agents’ role in microfinance, but does not find these middlemen in Chennai

Ramesh S Arunachalam

Agents have spread their tentacles far and wide across the country, and they are breeding resentment against MFIs. The MFIN-NACER study acknowledges the presence of these middlemen, but the report has a number of loose ends

As the Ministry of Finance and the RBI (Reserve Bank of India) are trying to solve the Indian microfinance regulatory puzzle, there is further evidence on the use of agents in Indian microfinance. The question to be asked then is whether and how the proposed Microfinance Bill will prevent use of such middlemen in the future.

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Saturday, October 15, 2011

The National Rural Livelihood Mission (NRLM) should take charge of dry-land farming now

Ramesh S Arunachalam

For implementing the inclusive growth agenda, it is crucial to prop up agriculture, the soft underbelly of our economy. Here’s what can be done

Inclusive growth is an area that we have been talking about for a few years now, but integrating agriculture into the Indian economy has been rather difficult for many reasons. Agriculture continues to be the soft underbelly of the Indian economy and unless the millionsi  involved in Indian agriculture are enabled to participate meaningfully in the growth process of the country, inclusive growth will remain an elusive dream in India. Let us make no mistake about that!

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Thursday, October 13, 2011

The RBI and the Ministry of Finance should view the MFIN-sponsored NCAER study on small borrowings with a great deal of caution

Ramesh S Arunachalam

Can a study sponsored by MFIN, the association of for-profit NBFC MFIs and conducted by NCAER to enquire into the operation of MFIN’s own member-NBFC MFIs—on aspects such as multiple lending, over-indebtedness and coercive repayment—address various issues in a fair manner?

Yesterday (12th October), Moneylife had written on how the Union Minister for Rural Development, Jairam Ramesh had said that MFIs (microfinance institutions) are not any sort of panacea and how the findings of a NCAER (National Council for Applied Economic Research) study does not provide a robust defense of MFIs (See: Microfinance institutions not the answer for poverty alleviation, says Jairam Ramesh ).

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Wednesday, October 12, 2011

Microfinance institutions not the answer for poverty alleviation, says Jairam Ramesh

Ramesh S Arunachalam

Union Minister for Rural Development, Jairam Ramesh, released a joint study by NCAER (National Council for Applied Economic Research) and CMCR (Centre for Macro Consumer Research) on ‘Assessing the Effectiveness of Small Borrowing in India’ at New Delhi on 10th October. According to Mr Ramesh, MFIs (microfinance institutions) “are not answers to poverty alleviation and certainly not the panacea they like to see themselves asi

While Moneylife will be doing a detailed critique of the NCAER study (sponsored by the Microfinance Institutions Network, MFINii ), its methodology and findings separately, certain aspects of the study, based on material currently available in the public domain, deserve to highlighted:

First, it is very interesting to note that the minister’s interpretation (of the NCAER study findings) runs counter to the views of Dr Rajesh Shukla (Director of NCAER-CMCR), as expressed in two prelaunch articlesiii . In these articles, Dr Shukla argues, “An alternative source of finance like microfinance has come as a breakthrough… MFIs attempt to alleviate the deplorable situation of the poor and require freedom to operate”iv .

On the contrary, after releasing the report, Mr Ramesh said, “the findings of the study did not provide a robust enough defense of MFIs vis-à-vis the self-help groups (SHGs).” The real comparison of MFIs should be with moneylenders (the informal sector) and not SHGs, he noted. He further added, “There was hype governing some of the MFIs. They set out to claim that they are solving India’s poverty problems. If they were modest in their ambitions, the vehemence with which their critics struck back would have been even much lesser… vehemence of backlash was directly proportional to the exaggerated nature of the claims of many of these institutions.” He made this statement at the release function while referring to the recent fracas in the functioning of MFIs in Andhra Pradesh.v


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Saturday, October 8, 2011

A workable microfinance & financial inclusion policy: How can it be formulated?

Ramesh S Arunachalam

India needs a microfinance policy that is holistic, futuristic and yet practical in terms of satisfying unmet ground-level financial needs of low-income and excluded people. It should be developed through a truly bottom-up and democratic process with widespread stakeholder input and consultations

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Friday, October 7, 2011

Microfinance industry: Where is the self-help group-bank linkage model headed?

Ramesh S Arunachalam

The SHG-bank linkage model is ideal for providing credit at the grass-roots level for weaker sections of society and for poor women. However, a few issues need to be addressed to make the model more comprehensive

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Tuesday, October 4, 2011

Indian microfinance crisis: What can international agencies like CGAP learn from it?

Ramesh S Arunachalam

The Consultative Group to Assist the Poor could not spot the inherent weaknesses in the commercial microfinance model that it was unabashedly promoting. This is a reason for self-introspection by its board, senior management and other stakeholders involved in its governance. CGAP, as an institution, should become more accountable to low-income people, whom it exists to serve in the first place

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Monday, October 3, 2011

Microfinance securitisation: Impact of client-acquisition strategies and other factors

Ramesh S Arunachalam
A number of chinks need to be ironed out during the process of microfinance securitisation. The RBI needs to look into these while finalising its draft guidelines on this subject

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Friday, September 30, 2011

MFI corporate governance norms: How can these be put in place?

Ramesh S Arunachalam

It is great for banks to appoint many nominee-directors to MFI boards, but they must act responsibly on the ground

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

Ramesh S Arunachalam

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

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Wednesday, September 28, 2011

Microfinance industry must speak in a collective voice in PIL before Madras HC

Ramesh S Arunachalam

MFIs, banks, SIDBI and respective industry associations must be given a fair chance to implead themselves into the Public Interest Litigation filed at the Madurai Bench of the Madras High Court

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Tuesday, September 27, 2011

Indian microfinance credit bureau: Why is it not fully operational yet?

Ramesh S Arunachalam
The microfinance credit bureau has not been set up yet due to lack of strong leadership, no serious regulatory support, unrealistic targets, lack of reliable ground-level data, IT issues and lack of focus on execution
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Saturday, September 24, 2011

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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Friday, September 23, 2011

Proposed Microfinance Bill has to look at the centre leader as a microfinance agent

Ramesh S Arunachalam
Centre leaders have tremendous local knowledge and significant local support in villages; they are opinion leaders and can develop extreme familiarity with the microfinance concept, processes and procedures

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Tuesday, September 20, 2011

Should for-profit companies be permitted to act as business correspondents for banks?

Ramesh S Arunachalam
DFIs and banks, including SIDBI, have miserably failed in their due diligence of NBFC MFIs, and expecting them to do this with regard to the business correspondent model is somewhat naïve. The RBI should undertake an examination of the grass-roots realities before implementing the new initiatives for financial inclusion
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Monday, September 19, 2011

The need for due diligence for business correspondents who deliver financial services to low-income people

Ramesh S Arunachalam
The business correspondent model offers a unique possibility for mainstream low-income financial services. But recent experience has shown that there are huge risks as well, which is why it must be regulated carefully
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Tuesday, September 13, 2011

Redeeming the Indian microfinance industry requires MFIs to put their clients first

Ramesh S Arunachalam

Low-income people want appropriate products and quality service and MFIs which focus on meeting client needs in an ethical manner will be the most successful in the long-term

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Monday, September 12, 2011

Establishing standards for effective management information systems for MFIs

Ramesh S Arunachalam

A good MIS is absolutely necessary for MFIs to manage the interface with clients and conduct activities/processes in a manner that is efficient, effective and transparent

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Saturday, September 10, 2011

Tackling the burgeoning agrarian crisis in India

Ramesh S Arunachalam

Farmer suicides are a tragic indication of the seriousness of the widespread indebtedness caused by imperfections in the agricultural sector that must be corrected urgently. Good recommendations and well-meaning schemes are available on paper. But making them work for a large majority of the poor and marginal farmers is critical

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Thursday, September 8, 2011

Re-engineering financial inclusion in agriculture is key to promoting inclusive growth

Ramesh S Arunachalam

Proper financing of agriculture must enable and facilitate a wide range of innovative solutions that will strengthen the primary producer that is critical for fighting poverty in Bharat

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Tuesday, September 6, 2011

National Rural Livelihood Mission: Understanding the vulnerability of low-income groups

Ramesh S Arunachalam
If NRLM has to succeed in raising the livelihood of poor rural people, where previous programmes have failed, it is necessary to involve low-income producers in the design and implementation of various programmes, as only then can the structural causes of poverty be substantively tackled

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Saturday, September 3, 2011

Financial inclusion of sugarcane farmers in modern-day India

Ramesh S Arunachalam

In some ways, financing arrangements today penalise the small producer for mistakes of other parties. There is an urgent need to make financial products for low-income people client-sensitive and responsive

Wednesday, August 31, 2011

Microfinance institutions should be permitted to transform into banks as it will help them improve services and reduce costs

Ramesh S Arunachalam
Before allowing MFIs to become banks, the Reserve Bank of India must ensure that these institutions are equipped with adequate due diligence and sound KYC policies and procedures

Monday, August 29, 2011

How and why did microfinance agents become a part of the Indian microfinance business?

Ramesh S Arunachalam

It is important to understand that MFIs co-opted local leaders as agents in their desire to grow rapidly, to cope with the costs of servicing the last mile and maximize profits

Thursday, August 25, 2011

Can the marriage of MFIs with banks be a sustainable option out of the microfinance crisis?

Ramesh S Arunachalam
There is a feeling among bankers that the acquisition of MFIs could strengthen the functioning of these institutions and enable the much-needed funds infusion. But any such takeover would first require an assessment of the portfolio of these MFIs

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Friday, August 19, 2011

Never waste a crisis: Some suggested incentives for the proposed microfinance bill

Ramesh S Arunachalam
Linking the implementation of norms and safeguards to availability of priority sector lending can minimise the risk of failure while improving the protection of the interests of clients and investors

Thursday, August 18, 2011

Implementation safeguards against notorious agents are an imperative for the proposed microfinance bill

Ramesh S Arunachalam

While macroeconomic changes are essential to iron out the chinks inherent in the industry, a close look is needed to look at the ground realities and the current agent-led decentralised microfinance model



Wednesday, August 17, 2011

Independent India@65: Inclusive growth for Bharat remains an elusive dream

Ramesh S Arunachalam
Achieving inclusive growth continues to be the biggest challenge for our country, as it concerns integrating 600 million people living in rural India and several million living in urban slums, into the mainstream economy, in a fair manner

Sunday, August 14, 2011

Who should regulate the microfinance sector?

Ramesh S Arunachalam
There are far too many serious issues that require attention so that they are not repeated again and the Reserve Bank of India or some central institutions cannot undertake this task as they do not have the resources or the local presence


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Thursday, August 11, 2011

A number of short-term issues need to be tackled expeditiously for resolving the Indian microfinance crisis

Ramesh S Arunachalam
The time to act decisively has come now. The RBI, Ministry of Finance, the Andhra Pradesh government, MFIs and other stakeholders must get into mission mode and set a number of checks and balances in place to overcome the huge unfolding crisis which is likely to completely distort or destroy the low income rural economy


Tuesday, August 9, 2011

What went wrong with Indian microfinance?

Ramesh S Arunachalam
For starters, here are some questions for SIDBI’s board and senior management so that they can initiate the task of learning from their past experience

Sunday, August 7, 2011

SIDBI must rework its microfinance strategy

Ramesh S Arunachalam
Merely increasing funding for microfinance, without learning from past mistakes, will not solve the microfinance crisis. As one of the biggest lenders to the microfinance sector, it is up to SIDBI to develop necessary safeguards to ensure that the industry it helped create, does not collapse under the weight of its sometimes over-enthusiastic support for MFIs


Thursday, August 4, 2011

Crucial to have the right members on the Microfinance Development Council

Ramesh S Arunachalam

The proposed Council to advise the government on the microfinance business should have proper representation from among all the stakeholders who will be alert to the task, while those who have specific business interests should be avoided



Tuesday, August 2, 2011

Four ways to improve the regulation of compensation at MFIs

Ramesh S Arunachalam

The compensation of senior management must be worked out by an independent remuneration committee constituted of knowledgeable members, and this process must be seen to be transparent and fair


As I wrote in the article on the Moneylife website yesterday, the regulation of compensation at microfinance institutions (MFIs) needs to be improved. In this report, I have outlined four strategies that the stakeholders in the Indian microfinance industry (regulators, bankers, investors, credit raters and others, like the associations of MFIs) should seek to achieve in our own little ways. These are practical things to try and implement on the ground, to ensure that processes in the governance of compensation at MFIs become transparent and are indeed perceived to be fair. (Read, "Regulating the compensation awarded to bosses of MFIs".)

Monday, August 1, 2011

Governance of compensation awarded to bosses of MFIs

Ramesh S Arunachalam

The senior management of these institutions that claim to be serving the poor, receive unusually high payments which is not determined through an explicit process

Compensation is indeed a very sensitive and critical aspect of governance in MFIs and it has serious implications for the detailed regulatory guidelines being prepared by the Reserve Bank of India (RBI) and the microfinance bill being drafted by the Union Ministry of Finance (MoF).


Friday, July 29, 2011

Who is an independent director? Who should be treated as an independent director in NBFC MFIs?

Ramesh S Arunachalam
MSME and Rural Finance Practitioner

It is critical to define the criteria for independent directors and implement this strictly in the interests of good governance; otherwise we could be in for a ‘blind date’ with yet another crisis

Thursday, July 28, 2011

Governance of MFIs: Time to implement ‘connected lending’ provisions of RBI circular of 2007

Ramesh S Arunachalam
MSME and Rural Finance Practitioner

Is it appropriate for a company, established to provide access to finance to low-income people, to lend to its promoter and managing director to buy shares in the same company at par value?


Tuesday, July 26, 2011

Local level supervision is critical to ensure consumer protection in microfinance

Ramesh S Arunachalam
MSME and Rural Finance Practitioner

Self-regulation in the microfinance business has not worked for various reasons. Most importantly, it involves the distribution of small sums, almost totally in cash, to people who are vulnerable, and in areas so widely spread out that it is quite impossible to ensure fairness on a day-to-day basis


Saturday, July 23, 2011

Establish standards for MFI independent directors as first step to ensure good corporate governance

The RBI and the Union Finance Ministry must provide clear guidelines on the appointment, roles, compensation and evaluation of independent directors for microfinance companies, critical for effective and ethical operations


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Friday, July 22, 2011

Increasing frauds, internal lapses at MFIs: Need to strengthen supervisory arrangements to protect the poor

Ramesh S Arunachalam

A long list of instances of failures of microfinance institutions holds several important lessons for the RBI and the finance ministry on the regulation and supervision of the sector

Wednesday, July 20, 2011

Does a five-star board guarantee good corporate governance?

Ramesh S Arunachalam
Rules and regulations are not enough. They must be implemented. Sadly, recent episodes have shown that even independent directors stayed silent when rules were violated
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Saturday, July 16, 2011

Learning from experience: The key to drafting a good microfinance bill for India

Ramesh S Arunachalam

There are critical lessons from the crises we have suffered over the past two decades, that the authorities will do well to learn from, as they plan the course ahead for the microfinance sector


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Wednesday, July 13, 2011

Early Lessons From the Indian Micro-Finance Credit Bureau Initiative: Aspects to Look Into While Finalising the Proposed Micro-Finance Bill

Ramesh S Arunachalam
Rural Finance Practitioner

It has almost been several months and the credit bureau for micro-finance is nowhere in sight – at least for the outsiders. This depressing (credit bureau) situation can be explained by several challenges that make setting up of a credit bureau, for low income people, especially complex in emerging markets like India. So what then are the challenges? Here are some aspects that I have identified through the credit bureau saga...Read on...

·         Lack of strong and committed leadership to ensure that credit bureau is indeed functional within the stipulated timeframe – several deadlines have gone by and we keep hearing threatening statements (I even saw one today that the credit bureau would be operational soon) that credit bureau is ready and will be operational. It has been getting ready from Dec 2009 and objectively analyzing why these deadlines have constantly shifted would surely help us understand the real issues better.

·         The credit bureau initiative has no serious regulatory support what-so-ever – I have not seen one statement from the RBI affirming the validity of the on-going credit bureau efforts and wonder what role will the RBI have in ensuring data integrity, especially given the proliferation of agents, multiple loans to shared JLGs and clients and also the lack of a unique ID. The ground situation is so messy that I doubt that any meaningful data will go into the credit bureau and I hope that the RBI looks into the various issues ASAP so that it is not caught on the wrong foot later.

·         Absolutely unrealistic targets which means that quick wins and early results are not possible to show. This gets further exacerbated by the micro-finance industry’s underestimation of data quality and information technology issues which are dealt with later. Quick wins provide a great momentum and that has not been possible in the Indian scenario. This is what makes the credit bureau a real Red Herring! From Dec 2009, when MFIN has been formed to date, I have seen a number of public statements on when the credit bureau is likely to be ready and used and I would like some one to get into the reasons for the shifting goal posts. I, for one, feel that this is occurring because of lack of proper data at the grass-roots and also the use of the decentralized agency model at the grass-roots (please see following post: http://microfinance-in-india.blogspot.com/search/label/Micro-Finance%20Agents)

·        Lack of reliable ground level data. A number of issues affect data quality in micro-finance and especially in India. There are both structural problems (agency models, shared JLG, shared clients) and bad credit-granting practices (over-lending, multiple lending, successive greening etc). Among the data issues observed are: lack of unique identifiers (people in villages especially can have the same names and initials); lack of location identifiers (e.g., village/street names and building numbering, especially in rural areas are hugely duplicated); unavailability of key credit information (e.g., especially because of the highly prevalent agency model); and poor data quality of available information (e.g., huge errors in data entry, data manipulation, frauds as you have been reading etc).

·         A range of information technology issues. Different IT-related constraints prevent the smooth establishment of a credit bureau. Among the IT issues observed are: the very lack of a standardized core MIS system at the MFI level; weak IT infrastructure within MFIs (branches not connected to headquarters, etc.); basic IT commodities not available or not reliable (e.g. unstable power supply; slow or unreliable Internet connections); hardware and software provisioning issues (e.g., limited availability of hardware brands and models to ensure quick and efficient processing of very large volumes of repetitive data that characterize micro-finance); and lack of experienced service providers for infrastructure setup and maintenance.

·         Design is often haphazard and not using accepted standardized best-practices. The problem is further compounded because MIS at the MFI level is not upto commonly accepted standards. Please see my post on MIS given earlier: (http://microfinance-in-india.blogspot.com/search/label/MIS)

·         The lack of focus on execution to overcome lack of implementation capabilities. I also see no serious effort what-so-ever by the micro-finance industry to overcome the implementation bottlenecks. All I get to hear is, “the job is very difficult as this is a low income financial services industry and therefore what the industry has achieved so far is commendable”.  What I find very strange is that the industry is low tech when it suits itself and especially, in terms of basic data and technology but a path breaker and innovator when it comes to the Governance of Compensation (Please see excellent article by John and Rajshekar in the Economic Times, dated Feb 2011).

All of the above issues do indeed make setting up a credit bureau in an emerging market like India an extremely challenging task – if serious efforts are made, it could take 3 or more years from initial discussions to regular use of the credit bureau (that produces reliable and valid credit information reports and not just some reports). So, folks, tune down your expectations…and I hope that the powers that be, who argue that a credit bureau will solve all problems in Indian micro-finance, do look into the above and other issues of practical relevance. I would also like the DFIs and commercial banks to come out and vouch safe the integrity and quality of the data being supplied to the credit bureau by MFIs – in terms of data integrity, internal consistency and physical compatibility with client existence and records and they must make themselves accountable and responsible for the quality and integrity of such data. Unless, all of the above are done, the credit bureau will just remain another idea like the multiple Codes of Conduct, supposedly operational on paper in the Indian micro-finance industry for a long time now!

Cheers

Have a Nice Day!

Client Sensitive Products Rather Than Interest Rate Subsidies or Loan Waivers Can Help Further Cause of Real Financial Inclusion in Agriculture

Ramesh S Arunachalam
Rural Finance and MSME Practitioner

Even as the search for a micro-finance law to enhance financial inclusion continues, there are very small things, which if done, can stablise the inclusion of large number of low income people (farmers) and prevent them from getting excluded again.

Let me start with an example and I hope that all commercial banks and (any) MFIs involved in this space attempt to redress the same. I also hope that the RBI looks into this issue so that the tripartite contract farming products become more sensitive to the needs of the low income clients and are indeed fair to them

Let us take the case of sugarcane farming (while the problems mentioned here affect all farmers, the effect on marginal/small producers is much higher as they do not have diversified sources of income), which illustrates the need for available livelihood financial products to be made more client sensitive and responsive. Sugarcane financing is typically undertaken through contract farming in India, with tripartite agreements between banks/MFIs, sugar factories and clients.

For arguments sake, let us say that a marginal sugarcane farmer has 1 acre of land and normally, 35000 sugarcane setts (seeds) can be planted in this area. Assuming a germination of 60%, the farmer will have to gap fill the remaining 40% setts again, if he/she is to get a decent yield. Population is the key to getting a good yield but to maintain population, the farmer has to gap fill and often unilaterally bear the cost. And more often than not, for a variety of reasons beyond the farmer’s control, the setts supplied do not germinate fully.

For example, 35000 setts are typically planted in an acre. Each sett has 2 eyes and this makes it 70,000 eyes in 1 acre of land. Each eye grows to become a shoot weighing approximately 1 kilo in 11/12 months, depending on the variety. If 70,000 eyes germinate (100% germination) and each of them reaches 1 kilo in 11/12 months, then the farmer gets a yield of 70 tonnes per acre. If there is 60% germination, then the yield is 42 tonnes per acre (70000 setts x 60% germination x 1 kilo = 42 tonnes) and so on. Therefore maintaining the sugar sett population, at a high and optimal level, is very crucial to getting a good yield.

As part of the arrangement in contract farming, the farmer gap fills the sugar cane setts (in case of poor germination) and he/she bears the cost of poorly germinating seeds, which is typically added to the loan. Thus, the farmer bears the burden despite the fact that poor germination often occurs because of poor setts supplied by the sugar factory {mainly due to supply of more than mature setts or immature setts or setts from a ratoon (2nd cycle) sugarcane crop and often caused by factors beyond the farmer’s control}.

Please note the fact that the cost of gap filling is always invariably borne by the small producer, even if poor seeds (setts) have been supplied by the sugar factory. The sugar factory is the key player here because it decides which farmer’s crop will go for seed, when it will be cut and supplied and the like. Therefore, under the tripartite arrangements, the onus for quality of setts (seeds) are almost entirely that of the sugar factory.

Likewise, there are many other instances in sugarcane cultivation, where the small producer is hit quite badly and there are several examples of other problems given below:

  • Supply of poor fertilizer and related inputs by factory,
  • Delays in supply of fertilizer which means that the farmer may have to apply the same at an inappropriate time,
  • Cane cutting by factory when the sugarcane is overripe (beyond 12 months),
  • The cut cane being allowed to lie on the ground and lose moisture and sugar content as a result of which there is considerable weight loss and consequent yield and revenue loss for the small farmer (This is a serious problem for small producers as the contractors arranged by the sugar factory for transporting the cane from the farmer’s field to the sugar factory insist on bribes/bata and “Bakshish” to lift the cane. If producers do not comply, they leave the cut cane to dry in the field and this can seriously reduce the yield and return for the farmers.).

While several other problems can be listed, the larger point is just a simple one – the financial product is simply not sensitive to the needs of the small farmer and it perhaps even penalizes him/her for the ‘wrong doing’ of other parties. Poor seed supplied by the sugar factory could cause lower germination but gap filling cost is always that of the farmer. The machines in the sugar factory could have been stopped (due to failure/fault) and as a result, the cane of the small farmer cannot be unloaded and thus, not weighed at all – there are many cases, where the small farmer has lost almost 50% of weight and resultant revenue because of lorries not being weighed for 3/4 days.

Now, despite all these (human-made) odds, the small farmer/producer has to repay the loan with interest. And if they cannot, they (This is true for all types of small producers including silk weavers in Kanchepuram or Malda/Murshidabad, different kinds of artisans across India, fishers in the south Indian peninsula and several others) become ‘untouchables’ and get excluded from the formal system – often never to get re-included again and left to the mercy of the ‘infamous’ money lenders

And often times, MFIs/Banks use the joint liability group mechanism to ensure that the loan gets paid by guarantors, even if the yield from the sugarcane crop is not sufficient to cover the loan. In some ways, the above financing arrangement is outrageous as it penalizes the small producer for mistakes of other parties in the arrangement which reduce yield and revenue.

The fair thing to do would be ensure sharing of the risk and also such costs among the three parties – producer, sugar factory and financier – this will enable alignment of incentives and ensure that there is congruence in all actions and inputs.

Similar analysis can be provided for other kinds of small producers – the key lesson here is that finance (livelihood or micro-credit), as it currently exists, is not at all fair to the client or producer. Hence, finance must focus on fair and quality servicing and attempt to be sensitive to the client needs and design and deliver products that are fair and useful to them. More of improper finance could only be disastrous and this is one of the main reasons as to why we see a cycle of inclusion and exclusion among low income clients and newer programs being initiated time and again, from days of the erstwhile IRDP.

As a beginning, the RBI must take up the cause of low income sugarcane farmers who perhaps number several million in number in India – a single client sensitive financial product would ensure that a large number of low income people are indeed prevented from getting excluded here. And the same analysis to ensure fairness to clients can be initiated with a variety of crop related financial products for low income people. These rather than any interest rate subsidy or subvention or loan waiver would serve the cause financial inclusion better.

Cheers

Have a Nice Day!