Money & Banking
Microfinance Bill-Part II: Consumer protection issues for the Parliamentary Committee

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).



Simon John

3 years ago

Micro-financing if not regulated well can be a disaster. In a nation like India where the customer demographic for MFIs is large it is imperative that the regulatory authority puts in place a formal guideline for their operations.

Africa is another region where there are a very large number of MFIs and central banks of many countries in the region have put in very structured operating procedures that enable proper monitoring and regulation of the MFI and their Agents. Kenya being one of them, here we have MFIs that team up with Banks at times to ensure that the Agents and the Customers are well protected. Currently there has been a trend of MFIs applying for a banking license and becoming a Deposit Taking Microfinance or DTM.

India should study countries likes these and try and incorporate some of their operating procedures into their existing system.

Dayananda Kamath k

3 years ago

microfinanceing is nothing but organised money lending supported by public money and govt and regulators and absolve them from usurious interest act.why they have to be developed when you have banks. financing should be made availble to those who have a viable project. then only there will be true growth and development. working for statistics will not bring growth and development.

Rajan Alexander

3 years ago

Ramesh: Enlightening as ever. Warm rgds


Ramesh S Arunachalam

In Reply to Rajan Alexander 3 years ago

Thanks Rajan. In fact, many MFIs have admitted publicly that using informal broker agents is a bad phenomenon. So, we have a good consensus here and let us make sure that the law uses that consensus and officially bans all MFIs that dare to use broker agents, who have been the bane of Indian micro-finance and were primarily responsible for the 2010 AP crisis.

Southern grid will benefit from its entry into national grid

National grid will facilitate some of the surplus northern producers to supply power to southern states. However, it is of equal importance for southern states to establish inter-regional links, many of which are under various stages of execution

Three years ago, the consortium consisting of Patel Engineering, Simplex Infrastructures and BS Trans Comm was awarded the contract to build Raichur-Solapur 765kV single circuit line, which they have committed to complete and hand over by 6 January 2014.


This project is estimated to cost Rs1,930 crore and, thankfully, the progress in work has been satisfactory and the same will be handed over to become operational even before the due date. This will ensure connection of the southern grid with the western grid. In effect, truly, the national grid will become operative and southern states, which have been cut off from the mother grid, will no longer be treated as a 'powerless' orphan, needing to pay high tariff, which varied from Rs5.87 to Rs17.50 per kWhr (kilowatt hour), as against the rest of India paying anything between Rs2.38 and Rs3 per kWhr!


It may be recalled that the entire north Indian states experienced a complete power blackout in July last year for several hours. It took hours of work to restore normalcy and return power to homes and industries leading to a great loss in production. Pakistan too experienced a similar power outage couple of weeks ago, though a smaller version, which lasted for a couple of hours!


With the commissioning of this Sholapur-Raichur link, south India will be able to access 3,000MW (it was 2,000 MW before) and the fully integrated national power grid will become operative, bringing relief to the whole country.


In the past, due to the corridor congestion, it was not possible to supply surplus power from northern producers to the southern consumers. This link would make it possible.


It may be noted that the NTPC (National Thermal Power Corporation) did not utilise its full production capacity (5,000 MW was idle) in the last few months as the consumers in the north were unwilling to pay higher tariff (than normal rates) because of the higher cost of imported coal involved in generating the power. In fact, right at this point of time, a great number of thermal units have adequate stocks of coal with them and are in a position to supply power, and looking for consumers!


On the top of this, coal stocks are lying at the pitheads and open warehouses and there are media reports that imported coal being left at the ports by the importers showing reluctance to clear the same due to depreciating value of the rupee. They perhaps, do not realise that demurrage, due to non-clearance of cargo, would be an additional burden that they will have to face.


The southern states cannot become complacent because of the ensuing connection to the national grid. True, this will facilitate some of the surplus northern producers to supply power, but it is of equal importance for them to establish inter-regional links, many of which are under various stages of execution.


These include Wardha-Hyderabad 765 kV double circuit line, Kolhapur (new) Narendra 765 kV double circuit line, Anjul-Srikakulam-Vemagiri 765 kV double circuit line. At a later stage, additional power supply can also be obtained from wind farms for which the government had offered special rebates.


There is therefore, substantial business opportunity for transmission line tower companies to head to the south to seek new avenues of profit.


(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce. He was also associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)




3 years ago

You have not considered the benefit for the politicians by import of coal to run the plants ? Why should they be deprived of their hard earned right? Even this link is inadequate. Unless there is a saturation of grids with special attention to pit-heads where thermal plants could be started there is no hope for we the people of India. These politicians deliberately cultivate starvation of power to fill their coffers.

RTI Judgement Series: PIO asked to get information under Section 5(4) from principal secretary

The CIC directed the PIO of MCD to get information from principal secretary, urban development at GNCTD and provide it to the appellant. This is the 182nd in a series of important judgements given by former Central Information Commissioner Shailesh Gandhi that can be used or quoted in an RTI application

The Central Information Commission (CIC), while allowing a complaint, directed the Public Information Officer (PIO) at Slum and Jhuggi Jhopri Department in Municipal Corporation of Delhi (MCD), to seek information from principal secretary of urban development at Government of National Capital Territory of Delhi (GNCTD) under the Right to Information (RTI) Act and provide to the appellant. The PIO was seeking clarification from the principal secretary of urban development at GNCTD, which was not forthcoming.


While giving the judgement on 7 July 2009, Shailesh Gandhi, the then Central Information Commissioner said, "The Bench directs the PIO of MCD to seek assistance of the principal secretary, urban development at GNCTD under Section 5(4) to obtain the information and supply it to the Appellant. In case the information is not supplied to the Appellant before 30th July 2009 the Commission will consider ordering the compensation to the Appellant."


Delhi resident Amit Kumar Sinha, on 12 February 2009, sought from the PIO information regarding non-receipt of money deposited by him with the MCD. He also complained that his name has not been included in draw for allotment of plot.


In his reply, the PIO said Sinha's name was not in the survey list and hence the appellant was eligible for allotment of plot in draw and his case for refund of Rs7,000 is under consideration before the GNCTD.


Sinha, citing unsatisfactory and false information provided by the PIO filed his first appeal. There was no mention of any order passed by the First Appellate Authority (FAA).


Sinha then approached the CIC with his second appeal.


During the hearing, Mr Gandhi, the then CIC, noted that Sinha had sought information about allotment of plot for relocation. However, the PIO stated that Sinha was not eligible for the allotment of plot.


Sinha also paid Rs7000 in 2002 and wanted to know when his money will be refunded.


The PIO stated that Department had been writing to the principal secretary, Urban Development from 1 July 2008 and sent subsequent reminders to get clarification on the same.


While allowing the appeal, Mr Gandhi directed the PIO of MCD to seek assistance of the principal secretary of urban development at GNCTD, under Section 5(4) to obtain the information and supply it to Sinha. "In case the information is not supplied to the Appellant before 30th July 2009 the Bench will consider ordering the compensation to the Appellant," he said.




Decision No. CIC/SG/A/2009/001305/4012

Appeal No. CIC/SG/A/2009/001305


Appellant                                            : Amit Kumar Sinha

                                                            Narela, Delhi-110040


Respondent                                        : Public Information Officer &

                                                            Assistant Director (SUR)

                                                            Municipal Corporation of Delhi

                                                            Slum and JJ Department

                                                            New Delhi


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