Allowing MFIs, that use informal broker agents, to operate is bound to be disastrous, as can be seen from the 2010 AP microfinance crisis. This is one of the most pressing issues in customer protection in Indian microfinance space that needs to be addressed with urgency by the Parliamentary Committee in the MFIDR Bill (2012)
Even as policymakers are trying to solve the Indian microfinance regulatory puzzle through the Micro-finance Institution Development and Regulation Bill (MFIDRB), 2012 (MFIDR Bill 2012), let us look at a specific field-level problem that led to the 2010 Andhra Pradesh (AP) microfinance crisis and ask the question as to whether and how the MFIDR Bill (2012) will prevent the use of the notorious broker agents in Indian micro-finance in the future.
In fact, many people have brought up the aspect of broker agents driving Indian microfinance but their (loud) voices seem to have fallen on deaf years. Several stakeholders including regulators have not even acknowledged this serious (agent) phenomenon. And those who accepted the fact that agents did exist, described it more as an aberration. However, to the best of my knowledge, agents appeared to be more of the norm in Indian microfinance—at least in the years preceding and succeeding the 2010 AP crisis.
The e-mails in circulation among MFIs clearly demonstrated that the use of agents in Indian microfinance was significant in the years before and after the 2010 AP crisis. Likewise, the code of conduct assessment reports sponsored by SIDBI also acknowledged the use of agents by some of the fastest growing NBFC MFIs. Some stakeholders have concurred with my view that it is the widespread use of agents—to turbo-charge growth, create efficiencies, increase profits and the like as per the dictates of the commercial micro-finance model—that led to the 2010 AP crisis in the first place. In fact, State of the Sector Report, 2010, (page no.37) and knowledge portals such as Microfinance Focus (MF) have made a strong mention of these (broker) agents.
Why is the agent phenomenon so important to tackle? In my opinion, there are several aspects that make it mandatory for the MFIDR Bill to have safeguards against broker agents:
(i) These broker agents very dangerous and extremely powerful in that they not only can get new clients for the MFIs; they can also make these clients disappear (quickly) from an MFI’s horizon;
(ii) They can shift clients from one MFI to another seamlessly and thereby cause irreparable damage to the MFI’s overall portfolio, growth strategy and reputation;
(iii) They are capable of (suddenly) stopping client repayments, just at the flick of a finger;
(iv) They can physically intimidate clients as they often have the backing thugs and criminals (locally).
In fact, these agents have been the real secret behind the burgeoning growth of (much of) Indian microfinance prior to the 2010 AP crisis. Once created by the MFIs in search of fast growth and greater efficiency, these agents have also proved to be the bane of Indian microfinance, as was evident during the 2010 AP micro-finance crisis!
Basically, there are two types of agents that I have seen: centre leaders and local political honchos. Each has a distinct background and they possess different characteristics. The roles performed by them (as micro-finance agent) are also very different. And of course, each of these agent types brought their own share of the problems to the Indian micro-finance industry. Therefore, given the above, it is imperative that the Parliamentary Standing Committee on Finance (PSCF), which is looking at the MFIDR Bill, ensures that there are necessary mechanisms to deal effectively with broker agents and their operations as otherwise, crisis situations (similar to the 2010 AP microfinance crisis) could easily recur.
While, without any doubt, agents caused problems on the ground, there is also no escaping the fact that these problems were (in fact) exacerbated by a weak internal audit department in many MFIs. Such departments often reported to senior and/or line management, who had very little incentive to hear about systemic flaws in operations that they managed and oversaw—this is the classic conflict of interest problem. Rarely have I seen internal audit departments report to the board (as they should) and this conflict of interest in reporting to the CEO or COO has often prevented their effective functioning. I know of an internal auditor who quit a growing MFI (it is one of the largest MFIs in India today) when he came to know that the very agents that he had uncovered in the field had (in fact) been appointed with the concurrence of his senior managers. This is a real incident that happened in 2005–2006 in AP during the Krishna crisis.
Therefore, with very little internal audits (in real time), many of the MFIs took a more withdrawn approach to grassroots functioning in their quest for growth and greater efficiencies — this can be seen from the fact that case loads for MFI loan officers increased very significantly from the 200/300 clients range per loan officer to sometimes even as high as 600/900 clients. In other words, the centre leader and other types of agents took the decentralized model to its extreme resulting in really high case loads, and this led to several problems including increasing frauds, multiple, over and ghost lending, coercive repayments, diversion of funds, and the like.
In fact, on the basis of my interaction with various types of agents, I think I have now understood the evolutionary process that (first) led to the use of agents in Indian microfinance. The aspects of “needing to build scale quickly,” the “pressure to reduce interest rates,” and the “desire to maximize profits and share values” look like the major reasons that pushed the Indian microfinance industry to using agents (through a decentralized model) in a big way.
To summaries, without question, there has been increasing (widespread) evidence with regard to the use of agents in Indian microfinance. However, the industry and key stakeholders continued to be in denial mode, often pretending that there was nothing wrong – until, of course, the 2010 AP microfinance crisis erupted and the cat was finally out of the bag.
I hope that the PSCF looking into the MFIDR Bill takes these ground realities into consideration and ensures that the MFIDR Bill has adequate and clear legal mechanisms to unequivocally ban all MFIs that use broker agents (as described above) and similar intermediaries. Allowing such MFIs, that use informal broker agents, to operate is bound to be disastrous, as can be seen from the 2010 AP microfinance crisis. This is one of the most pressing issues in customer protection (in Indian microfinance) that needs to be addressed with urgency by the PSCF in the MFIDR Bill (2012).
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