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

MFIN was formed in 2009 after the Kolar (Karnataka) crisis. Since, then, a lot of water has flown under the microfinance bridge in India. It is in this context that the Hindustan Times (20 October 2011) news item quoting MFIN’s CEO, Alok Prasad, assumes tremendous significance. The article noted, (http://www.hindustantimes.com/business-news/CorporateNews/Microfinance-body-admits-goof-ups/Article1-759651.aspx), “MFI Network (MFIN), an umbrella body of non-banking finance company (NBFC) microfinance institutions (MFIs) that also seeks to serve as a self-regulatory body, admitted that the sector erred in chasing a high growth trajectory at the expense of corporate best practices as it went for coercive methods in loan recovery while keeping interest rates two or three times that of banks.” According to this news article, “Where the MFIs went wrong was in growing too rapidly, lured by the business opportunity, without paying much thought to execution or hiring the right kind of people. And there was a disconnect between the headquarters and the field agents,” MFIN CEO Alok Prasad told HT.”

Indeed, while MFIN needs to be appreciated for its candid (although, late) admittance of what went wrong in Indian microfinance, it also seems appropriate to look at what MFIN has really done to defuse the microfinance crisis in India and the extent to which it has been accountable for its statements and promised actions.

First, please recall that after the 2010 microfinance crisis in Andhra Pradesh (AP), MFIN announced that it would enquire into the suicides in AP, using independent researchers/stakeholders. It is almost a year and we have heard nothing about this report. What has happened to MFIN’s study on suicides is a question that certainly begs an answer. As Prof Sriram notes in an article in Mint (http://www.livemint.com/2011/10/21004414/An-incomplete-story-from-the-m.html?h=B), “It is also a bit intriguing that MFIN has gone to town with this (NCAER Small Borrowing Study) report claiming that all is well with microfinance, while it is shying away from releasing another important study that it had commissioned in AP. This report on the suicides of microfinance clients was done by a credible researcher. Possibly, the findings are not convenient for MFIN to make the report public?”

Second, MFIN ordered an enquiry into the governance and transparency deficit of select MFIs after an Economic Times (ET) investigation in early 2011. As noted in ET (4 February 2011), (http://articles.economictimes.indiatimes.com/2011-02-04/news/28433279_1_mfin-microfinance-institutions-network-shareholding-pattern), “Four days after an ET investigation outlined the deficit in governance and transparency in a shareholding vehicle typical to microfinance institutions, the Microfinance Institutions Network (MFIN) has set up a committee to look into those charges. A statement on Thursday by MFIN, an association of for-profit micro-lenders, said that based on the study’s findings, disciplinary action could be taken. According to Vijay Mahajan, president of MFIN, the inquiry is against three MFIs—Share Microfin, Spandana Sphoorty Financial and SKS Microfinance. The ET investigation centred around the governance of the shareholding vehicle, called mutual benefit trusts (MBTs), in these three companies. MFIs used MBTs, in which poor women were shareholders, to transform themselves from NGOs to for-profit entities. The MFIN statement said: ‘The inquiry will address concerns raised by the media and other stakeholders, vis-à-vis the appropriateness of processes followed during the course of these transformations and the evolution of the shareholding pattern of these entities.’ An MFIN board member Samit Ghosh, the founder of Ujjivan, said there is a possibility that any of the three can be expelled if found guilty. The committee is also expected to draft guidelines for good governance of MBTs. The members of the inquiry committee will be announced on Friday. It is expected to have a banker, an auditor and a retired bureaucrat. The committee will have 30 days to submit its report. Alok Prasad, CEO of MFIN, says the association had been discussing the move for the past three days.”

What happened to this enquiry (and draft guidelines for good governance) is another question that begs an answer.

Third, the MFIN-sponsored the NCAER small borrowing study, that was recently released on 10th October. The NCAER study suffers several limitations as outlined in several previous Moneylife’s articles (given below):

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

(a) http://www.moneylife.in/article/microfinance-institutions-not-the-answer-for-poverty-alleviation-says-jairam-ramesh/20513.html;

The RBI and the Ministry of Finance should view the MFIN-sponsored NCAER study on small borrowings with a great deal of caution
 
(b) http://www.moneylife.in/article/the-rbi-and-the-ministry-of-finance-should-view-the-mfin-sponsored-ncaer-study-on-small-borrowings-with-a-great-deal-of-caution/20566.html

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

(c) http://www.moneylife.in/article/mfin-ncaer-study-heres-the-proof-that-microfinance-agents-are-thriving-in-tamil-nadu/20717.html

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

(d) http://www.moneylife.in/article/mfin-ncaer-study-unearths-agents-role-in-microfinance-but-does-not-find-these-middlemen-in-chennai/20674.html.

Whether these limitations are because of poor sampling, conflicts of interest and/or otherwise innocent is something that I leave the readers of Moneylife to judge.

Nonetheless, Moneylife’s views were also subsequently echoed by Prof Sriram who noted in an article (http://www.livemint.com/2011/10/21004414/An-incomplete-story-from-the-m.html?h=B) that “the report falls short of its objectives because of three aspects:

1)    The study was funded by the Microfinance Institutions Network (MFIN), an industry body representing only commercial MFIs. MFIN is an interested party and has been defending the “deeds” and “misdeeds” of the members through the crisis, and would be interested in whitewashing MFIs;
2)    The study was conducted in the urban centers of Jaipur, Lucknow, Chennai, Kolkata and Hyderabad. While the report claims that 70% of the respondents were “rural”, the sampling plan indicates that the “rural” areas were at a maximum distance of 14km from the urban settlement. This is not an inclusive study—it is a study on small borrowing in urban India. While the report refers to “a raging controversy over the role and anti-poor activities of MFIs in India, especially those operating in Andhra Pradesh (AP)” and the three contentious issues namely “usurious interest rates, strong-arm collection tactics, multiple lending and compensation received by top management” as a background for the study, the sample selection is not representative of the problem geographies—Telangana and coastal districts of AP from where reports of borrower suicides were reported. Thus, the findings of the study that there were few instances of multiple borrowing—and where found, it was associated with informal finance and not MFIs—and indicating that there were no strong-arm tactics do not cut much ice. The findings do not come from the same area where the problems existed. Moreover, Jaipur and Lucknow are not great centres of microfinance. The choice of these centres could be justified for an exploratory study and not an evaluative one. These two locations distort the numbers and the conclusions significantly in justifying the role and behaviour of MFIs; and
3)    The vehemence with which the report defends MFIs is problematic, as the objective of the study was to assess the effectiveness of small borrowing. While there are the usual disclaimers that conclusions are drawn on the basis of data from the five clusters, this disclaimer is weak because each time a conclusion is drawn, it is placed along with the problems identified in AP.”

And last, please  recall statements made by MFIN’s Chairman (Vijay Mahajan); MFIN’s CEO (Alok Prasad) and the Chairman of one of MFIN’s largest members (Dr Vikram Akula of SKS), at the height of the crisis—they talked of  ‘Rogue MFIs’ or ‘Fly by Night Operators’ as the ones responsible for the 2010 Andhra Crisis (http://microfinance-in-india.blogspot.com/2010/11/who-are-rogue-mfis-that-have-supposedly.html). This seems directly out of tune with the recent candid admittance of (MFI) guilt by MFIN’s CEO, Alok Prasad. Also, the hard data available and provided below (based on data available in the public domain and the mix-market database) suggests that it is the 13 MFIN members (all NBFC MFIs) who grew at a burgeoning pace during the years (April 2008-March 2010) preceding the 2010 AP crisis (See: The RBI and the Ministry of Finance should view the MFIN-sponsored NCAER study on small borrowings with a great deal of caution).

These are just a few instances and there are many more such happenings, statements and actions where MFIN has not been accountable but the idea is not to find fault with MFIN! However, the issues that arises now are (a) How to make MFIN more accountable for the statements that it makes and the actions that it promises to undertake?, and (b) How to ensure that MFIN and other self-regulatory organisations (SROs) function as responsible and  reliable pillars in the overall microfinance regulatory framework?

Apart from the study on suicides which is yet to be made public, the findings of the MFIN enquiry initiated in February 2011 with regard to governance & transparency are not available in the public domain, despite a promise by MFIN to do so within 30 days. These coupled with the ‘not-so-objective’ MFIN-sponsored NCAER study (that suffers several serious shortcomings) and burgeoning growth of many MFIN members during the years preceding the crisis, makes one wonder—whether at all—MFIN can function as an objective association (without conflicts of interest) and an effective self-regulatory body for Indian microfinance. This question is especially crucial given that the Malegam Committee Report (MCR) lists SROs as one of the major pillars in its regulatory framework.

As usual, I leave it to you all to make your own judgment(s) and sincerely hope that the regulators and concerned authorities looking into creating a regulatory architecture for Indian microfinance take notice of what has been happening amongst self-regulatory organizations (SROs) like MFIN.

 (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).