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…

First, 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 and high profits (to gain better valuations in investment and go for an IPO, etc) to balanced natural growth and normal profits. Much of the motivation for multiple lending, ghost lending, performance misreporting (as happened at Sahayata) appears to be related to the above and unless that vision is altered, no amount of technology can perhaps prevent multiple lending. Technology was touted as the solution in 2005-06 after the Krishna crisis and you can judge for yourself what it has achieved so far…You may want to a previous Moneylife article on MIS (Establishing standards for effective management information systems for MFIs) which clearly shows that even the most basic issues with regard to an MIS still need significant attention in Indian microfinance—and even among the largest Indian MFIs (microfinance institutions).

That said, even when the boards take the call, the MFI’s senior management must be willing and able to translate the above vision into action by bringing about changes in systems, policies, procedures, processes, staff attitudes, etc. This is very critical as otherwise, ‘intended strategies’ will remain on paper and realized strategies will be very different. It is like what Jack Welch, the famous CEO, commenting on the new breed of strategic planners in the 1980s, once said, “There is no point in developing great plans with lot of effort when you are going to do something else on the ground. Often times, organizations put these well-prepared plans in the shelf and lock them up and get around to doing what they are anyway doing”.  Again, the case of what happened at Sahayata should not be forgotten where its MD and CEO flattered to deceive by first espousing great concepts at the Microfinance India Summit 2010, only to be charged with serious misreporting within a year later (What is said at conferences is very different from what is implemented in practice)

Therefore, once the MFI board and senior management have done what they have to do, then it may be possible to check multiple lending provided:
a.    Internal control systems have sufficient checks/balances to do so;
b.    Internal audits spot multiple and ghost lending exceptions, as and when they occur and recommend/ensure immediate corrective action
c.    MIS provides accurate branch/field level data both from the perspective of the credit bureau (CB) and also in terms of portraying ground level reality, so that multiple and ghost lending can be tracked and dealt with—this is a very critical aspect
d.    Field level frontline are not incentivized on disbursements and they are also made to believe in and work towards responsible finance—where multiple, ghost and reckless lending and use of agents is viewed as a bane rather than boon for the organisation
e.    A related issue here is that MFIs must whole-heartedly decide to adopt greenfield client acquisition processes and do not indulge in other types of (not-so-desirable and fast tracked) client acquisition methods
f.    Bankers exercise appropriate due diligence with regard to multiple and ghost lending, as part of their (notional) supervisory role in discharging their priority sector obligations, and
g.    The central bank ensures appropriate supervision on the ground, with regard to its (NBFC) MFIs, as part of its on-site and off-site supervision obligations stemming from its non-bank supervision duties

This and much more—all with a view to put clients and their situations/needs first—would have to be done to ensure stop page of multiple, ghost and over ending that led to the Indian microfinance crisis of 2010. Therefore, the idea of thinking that a credit bureau alone could eliminate multiple lending seems very naïve—like the experiences with the previous codes of conduct (which were not implemented on the ground), such a view could result in the credit bureau becoming a red herring rather than actual solution, because, it may then distract the microfinance industry and its stakeholders from the real problems (like use of agents and shares JLGs/clients) at the grass-roots…

(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)