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

October 13, 2011

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?

Ramesh S Arunachalam

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 ).

Let us examine the contents of the NCAER report. The study, “Assessing the Effectiveness of Small Borrowing In India”, sponsored by MFIN, conducted by NCAER and released by Mr Ramesh on 10th October, notes that:

“Though the microfinance industry has achieved phenomenal growth, the seemingly divergent objectives of profit maximisation and helping the poor, have led many to question their motives and practices. Accusations have been raised against them of charging exorbitant interest rates, employing strong-arm tactics and forcing multiple loans on the gullible poor. These accusations culminated in the Andhra Pradesh government imposing an ordinance which led to the establishment of the Malegam Committee by the RBI (Reserve Bank of India). Although the RBI, based on the recommendations of the Malegam Committee report, has announced a set of guidelines, many questions remain unanswered.

“Existing research on MFIs in India suffers from paucity of data on the cost of borrowing by source, the prevalence of multiple borrowing and the interest rates. We are happy that these crucial issues have been dealt in the present report in a comprehensive manner. Some preliminary, indirect estimates of impact of MFI loans on poor households have also been provided. More focused research on the impact is necessary and can be a useful topic for future research. Given the controversy surrounding the MFIs, We hope this report will help in laying bare the facts in an unbiased manner.”ⁱ

Dr Rajesh Shukla, the principal author, goes further and states that the various “questions were fairly addressed in an investigation conducted by the NCAER’s Centre for Macro Consumer Research (NCAER-CMCR)”ⁱⁱ

That being the case, why all this fuss about this NCAER study on small borrowing? Cannot NCAER’s statements be taken at face value, given its reputation? In my opinion, there are two good reasons as to why the MFIN-sponsored NCAER-conducted study on small borrowing will have to be viewed with abundant caution by policymakers and other stakeholders.

First and foremost is the issue of conflict of interest. The sponsor of the study is MFIN, which is the association of for-profit (NBFC) MFIs in India. The operations of MFIN’s member-MFIs have been under a cloud during and after the 2010 Andhra Pradesh (AP) microfinance crisis. Among other things, the NCAER study was (perhaps) commissioned by MFIN to examine issues of multiple lending, over-indebtedness and coercive repayment, etc., in the wake of the 2010 AP microfinance crisis. Now, most of these issues directly impact MFIN’s member-MFIs and they concern the very heart and soul of operations of many of these for-profit NBFC MFI operations, which have burgeoned during the last five years.

In fact, let us now look at some hard data on the MFIN members and how they grew during April 2008 to March 2010—i.e., in the financial years just preceding the crisis:

• 13 of the top 14 MFIs (ranked on the basis of active clients added from April 2008 to March 2010) are NBFCs and all of them are MFIN members. Together, the 13 MFIN members added as much as 13.62 million clients and $2,735 million as gross loan portfolio during the period April 2008–March 2010. That is indeed phenomenal by any standards
•  6 of these 13 MFIN members are Andhra Pradesh-headquartered NBFC MFIsⁱⁱⁱ and they constitute the largest chunk within this group of 13 NBFC MFIs . Together, these 6 MFIN members added about 9.76 million clients from April 2008 to March 2010. During the same period, these 6 MFIN members increased their gross loan portfolio by $2.076 billion. Again, stupendous growth by any means, and  
•  7^iv  of the current 9 board members of MFIN, serve as either chairmen or CEOs^v  in various NBFC MFIs—who are MFIN members and who are among the top 13 NBFC MFIs mentioned above.

The above situation raises several questions:

•  How can a study sponsored by MFIN (which is the association of the 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 the various issues in a fair manner? Without question, is not MFIN an interested party? Is there not a huge conflict of interest in this whole arrangement?
• Given the above track record and performance of MFIN’s members (including those on the board) - in terms of rapid growth in clients and portfolio during April 2008 to March 2010—and also the fact that many in the MFIN flock are/were among the fastest-growing NBFC MFIs in India, can a study sponsored by them be carried without conflict of interest?
•  Now, when a reputed institution like NCAER-CMCR conducts a study on behalf of MFIN, many of whose members (NBFC MFIs) were/are in some ways responsible for the burgeoning growth of Indian microfinance during the last few years that led to the 2010 microfinance crisis in the first place, can the study claim to be a fair investigation of the ground reality?

Therefore, without any doubt, policymakers and all concerned stakeholders should view the NCAER study on small borrowings with abundant caution as the very sponsors of the study (MFIN and its member NBFC MFIs) are strongly interested and directly concerned parties on whose operations the sponsored study will ultimately have an impact. Thus, it is hoped that the policymakers and others treat the MFIN-sponsored “Small Borrowing Study” with a great deal of prudence and not take it at face value—mainly because it is a study sponsored by an interested stakeholder (MFIN), the future of whose members (NBFC MFIs) is at stake and is likely to be determined by the same study.

A second reason is that the NACER study uses a less than robust sampling methodology and this perhaps undermines the very objectives it sets out to achieve. Two aspects are relevant here. One, it has arbitrarily focused on five predominantly urban area clusters that are surely not representative, given the research questions to be addressed by the study. If the study wanted to understand and unearth issues related to multiple lending, coercive repayment and over-indebtedness, it should have, in the first place, looked at the national distribution and penetration of microfinance in India and then, chosen an appropriate sampling strategy.

This aspect is even more relevant because multiple lending,over-indebtedness and coercive repayment were/are highly prevalent in areas where clients and joint-liability groups (JLGs) were/are shared across MFIs, with the same clients/JLGs being serviced on alternate days of the week by different MFIs—thereby leading to multiple lending, over-indebtedness and coercive repayment. By default, this implies that such areas would also be witnessing intense competition and near saturation in terms of clients—there is ample evidence for this across India. This being the case, that states like Rajasthan and Uttar Pradesh with nascent microfinance outreach were included certainly did not help the cause of the study. Likewise, that states like Karnataka or Orissa (with significant MFI operations) as well as saturated areas from Andhra Pradesh (districts such as Krishna, Guntur, East/West Godavari, Nellore, Kurnool and Khamman) and Tamil Nadu (Vellore, Namakkal, Karur etc) were excluded also means that the study did not have a sample relevant to one of its main research objectives—that of understanding the prevalence level of multiple lending, over-indebtedness and coercive repayment.

Further, the study looked at rural areas within an 14km radius of the urban area chosen—having worked extensively at the grass-roots in all the five sampled cities (Hyderabad, Chennai, Lucknow, Kolkata and Jaipur) and as a domicile of one of the cities (Chennai), I have no hesitation in stating that the rural households sampled as per the study would be very different from the ‘real’ rural households (across the respective states). In fact, what the study calls as rural households are perhaps better classified as peri-urban households.

Therefore, given the above discussion, the NCAER study certainly falls short of its claim of comprehensively and fairly addressing the various issues that it set out to understand in the first place. And what is extremely sad is the fact that, an institution of the repute and standing of NCAER may now be seen as catering primarily to its sponsor (MFIN) rather than upholding objectivity in its research.

And before I sign off, I want you to read Dr YV Reddy’s (former governor, RBI) recent article^vi  where he reflects with integrity about the operations and regulation of the very same NBFC MFIs (current MFIN members) during/after his tenure as RBI Governor:

“There were early warnings of some prob¬lems in regard to microfinance institu¬tions (NBFC-MFIs) in December 2005 when I was governor of the RBI. There were media accounts of mass agitation against lending and recovery practices, and high interest rates charged in Chittoor district of Andhra Pradesh. The regional director of the RBI requested voluntary restraint on their part in respect of the operational practices being adopted… in March 2006, the district collector of Krishna district in Andhra Pradesh ordered an enquiry into the functioning of NBFC-MFIs there. He subjected some of the institutions to search and seizure and had them sealed by the revenue and police officials. From the RBI, we requested the regional office to call on the chief secre¬tary to the Government of Andhra Pradesh in this regard, and he tried to bring about reconciliation. Since the problem per¬sisted, the RBI held a series of meetings in April 2006. A joint fact-finding survey was suggested by me, and this was done in May 2006. This was followed up by joint initiatives by the Government of Andhra Pradesh in May 2006. This included a code of conduct to be complied by the MFIs. A coordination forum was constituted, and discussions were held from December 2006, and some sort of a resolution was thought to have been achieved in June 2007.

“In brief, the Government of Andhra Pradesh always had discomfort with the NBFC-MFIs, and every effort was made by the RBI to introduce a voluntary code of conduct. In retrospect, perhaps, the trust that RBI placed in these NBFC-MFIs was misplaced.

“In May 2007, a formal circular was issued to all the NBFCs, expressing the con¬cerns of the RBI and hoping for responsible conduct. Amidst other things, the circular stated:

• The RBI had been receiving several complaints regarding levy of excessive interest and charges on certain loans and advances by NBFCs.
• Though interest rates are not regulated by the RBI, rates of interest beyond a cer¬tain level may be seen to be excessive and can neither be sustainable nor conforming to normal financial practice.
  Boards of NBFCs are, therefore, advised to lay out appropriate internal principles and procedures in determining interest rates and processing and other charges.

“In retrospect, given the track record, the RBI should have insisted on enforcea¬ble regulation and not been content with an advisory role.

“About this time, a working group was constituted in the RBI to prepare a model Money Lender’s Act. Some states wanted NBFC-MFIs to be brought under the model law. At that time, our opinion was that the NBFC-MFIs were committed to a code of conduct consistent with the interests of the weaker sections. Hence, the RBI ex¬empted them from the proposed model law. In retrospect, our assumption about the commitment of these institutions to the stated values was wrong.

“I invited Nobel Laureate Muhammad Yunus to visit the RBI and I had the occa¬sion to discuss this matter. He gave his un¬equivocal opinion that for-profit MFIs are no different from moneylenders. While I had respect for that opinion, on the basis of the assessment we made at that time we con¬tinued to trust in a reasonably defensible operating procedures of the NBFC-MFIs. Ob¬viously, we were wrong in our assessment.

“I must admit that, post-retirement, I have realised these mistakes. There has been time to introspect about past mistakes. There has been an academic orientation that has enabled me to study the develop¬ing situation. I have been able to be quite close to field conditions and the reality. I have been accessible to people and have been able to observe events; whereas when holding public office we tend to meet and hear interested parties rather than the silent majority.”^vii 

Kudos, Dr Reddy, your honest recognition of the mistakes made with regard to regulation of NBFC MFIs is much appreciated. I hope that all policymakers, including the RBI and Ministry of Finance (MoF) stand up and take notice of Dr Reddy’s learning with regard to NBFC MFIs. And it is in this reflective context, I rest my case and leave you all to judge for yourselves the true value of the MFIN-sponsored NCAER study on small borrowing in India.

 
ⁱCited from “Assessing the Effectiveness Of Small Borrowing In India by Rajesh Shukla, Prabir Kumar Ghosh and Rachna Sharmar (2011) (Sponsored by Microfinance Institution Network (MFIN), Page V
  ⁱⁱCited from “Don't blame Micro-finance for the situation of poors; requires freedom to operate”, by Rajesh Shukla, (http://economictimes.indiatimes.com/opinion/guest-writer/dont-blame-micro-finance-for-the-situation-of-poors-requires-freedom-to-operate/articleshow/10296010.cms)
  ⁱⁱⁱ1) SKS Microfinance Private Limited; 2) Spandana Sphoorty Financial Limited; 3) Bandhan; 4) SHARE Microfin Ltd; 5) Equitas Micro Finance India; 6) Bhartiya Samruddhi Finance Limited (BASIX); 7) Asmitha Microfin Ltd (AML); 8) Grama Vidiyal Microfinance Ltd; 9) Ujjivan Financial Services Pvt. Ltd; 10) Grameen Financial Services Pvt Ltd (GFSPL); 11) Trident Microfinance; 12) Arohan Financial Services Ltd; and 13) Satin Creditcare Network Limited (SCNL)
  ^iv1) Bhartiya Samruddhi Finance Limited (BASIX); 2) Bandhan; 3) Asmitha Microfin Ltd (AML); 4) Arohan Financial Services Ltd; 5) Satin Creditcare Network Limited (SCNL); 6) Ujjivan Financial Services Pvt. Ltd; and 7) Equitas Micro Finance India
  ^vOr equivalent senior management position
  ^viMicrofinance Industry in India: Some Thoughts by Y Venugopal Reddy ( Economic Political Weekly, vol xlvi no 41, October 8, 2011)
  ^viiCited from “Microfinance Industry in India: Some Thoughts”, by Y Venugopal Reddy (Economic Political Weekly, vol xlvi no 41, October 8, 2011)

(The writer has over two decades of grassroots and institutional experience in rural finance, MSME development, agriculture and rural livelihood systems, rural/urban development and urban poverty alleviation/governance. He has worked extensively in Asia, Africa, North America and Europe with a wide range of stakeholders, from the private sector and academia to governments).