On most of the significant policy issues—implementation of Basle III, NBFC regulation, gold loan companies, securitisation guidelines, etc, all that we have in the policy are datelines for policies to be announced by the RBI. There is more in the offing than we have in the policy, reducing the much-awaited policy to be trailer for a movie to hit the screens
The financial markets in general anxiously wait for this—the Reserve Bank of India’s (RBI) Monetary Policy. The market looks for signals towards policy making by the RBI. However, but for the reduction in policy rates by 50 basis points (bps), on most of the significant issues where banks would like to see direction of policy by the RBI, the policy says—“to be announced”. On most of the significant policy issues—implementation of Basel III, NBFC regulation, gold loan companies, securitisation guidelines, etc, all that we have in the policy are datelines for policies to be announced by the RBI. Therefore, there is more in the offing than we have in the policy, reducing the much-awaited policy to be trailer for a movie to hit the screens.
The Nair Committee’s far-reaching recommendations about priority sector treatment, particularly putting a limit of 5% to bought deals, securitisation and on-lending by banks to the priority sector, has not yet been accepted by the RBI. The policy says that the report has been placed on website of the RBI for comments, and that the RBI will take an action after examining feedback. If there was an immediate prospect of the report being adopted, usually, the policy would have said so. Therefore, it seems, though it may be a pure speculative thought, that the immediate prospect of the report being adopted and implemented, is thin.
Abolition of pre-payment penalty on floating rate home loans:
Contrary to practices in international markets, most home loans in India are on a floating rate basis and it is surprising to many that Indian home lenders continued to charge pre-payment penalties on home loans over the years. Pursuant to the Damodaran Committee recommendations, the policy now declares that in case of floating rate loans, there will not be any pre-payment penalties.
This will usher in two things—first, the home loan market will become far more transparent than it is today. Second, banks will also possibly have some temptation to offer fixed rate loans products, and seek to compensate themselves with a pre-payment penalty. Regrettably, the fixed rate loan market has been completely absent in India. There is a separate mention of constitution of a working group for fixed rate products.
Detailed guidelines about pre-payment penalties are to be issued by the RBI shortly.
Basel III implementation:
By end of April 2012, the RBI will come up with a schedule for implementation of Basel III in the country.
It is notable that Basel III makes several significant modifications over the present approach of Basel II. First of all, apart from the stance of Basel II which is on capital adequacy, Basel III introduces liquidity requirements too—both on short run as well as medium run. In addition, Basel III introduces a counter-cyclicity buffer as also redefines Tier 1 capital.
By end-May 2012, the RBI will also publish its guidelines on liquidity risk management by banks, in tune with Basel standards on liquidity risk management.
Measures pertaining to NBFCs:
The securitisation guidelines have been on the anvil for almost two years now—in the meantime, two drafts have been issued.
The policy says that by end of April, the guidelines will be finalised. We have already commented on the likely shape of the new guidelines—our comments may be found at Microfinance Focus.
(Vinod Kothari is internationally recognised as an author, trainer and expert on specialised areas in finance, including securitisation, asset-based finance, credit derivatives, accounting for derivatives and financial instruments, microfinance, etc.)
If SHG version 2 is pushed through without a proper and objective understanding of how the SHG Bank linkage program currently functions at the grass-roots (and the path that it has traversed in the past), it could become a recipe for disaster as has happened with much of Indian microfinance lately…
I recently heard it through the grapevine that SHG Bank Linkage program version 2 is to be rolled out, beginning this month. According to official sources that requested anonymity, the new avataar of the SHG Bank Linkage Program (called as SHG version 2), is to be piloted in 30 districts. I am rather perplexed that this is happening so suddenly and without, the necessary stock taking of version 1 of the SHG Bank Linkage program. In my opinion, the SHG Bank Linkage program (as it is currently implemented) suffers many serious shortcomings that would need to be addressed before another expensive experiment begins in India.
Talking about experiments, I have a very innocent question—what is the relationship of version 2 of the SHG Bank Linkage program to the National Rural Livelihood Mission (NRLM), which is supposedly spending huge amounts of public money towards building peoples’ institutions at the grass-roots? Readers of Moneylife may recall that yet another program for revitalizing peoples’ institutions is already underway in the guise of co-operative reforms. And all of them are trying to achieve almost similar (if not the same) impact at the grass-roots. Therefore, I sincerely believe that much can be gained from convergence of these different efforts to build local peoples’ institutions at the grass-roots. Without any doubt, the “powers that be”, must look towards achieving this mandatory convergence so that—mistakes are not multiplied and—synergistic benefits accrue to the country
If preventing duplication and ensuring convergence is one aspect, a second crucial issue is learning from past experience. Take the case of SHG Bank Linkage program version 2. If indeed it is to be rolled out as a pilot in 30 districts beginning January 2012, it is about time that we had a serious and honest evaluation of the SHG Bank Program (version 1) so that not only appropriate lessons are learnt (going forward) but more importantly, they are also (subsequently) factored into the design of SHG bank Linkage program version 2. Otherwise, we stand to lose precious public money as has happened over the last 60 years in several such programs. And self-evaluation by NABARD or its funders/donors or SHG promoting institutions or related partners/stakeholders will not constitute a fair assessment of the SHG Bank Linkage program (version 1) as there is so much conflict of interest. Therefore, I do hope that NABARD, which has pioneered the SHG Bank Linkage program, will facilitate a candid evaluation by a neutral (and eminent) group of people so that real problems are identified and dealt with and critical issues are not swept under the carpet, as has usually been the case.
The need for an objective evaluation is best exemplified in the words of Dr YSP Thorat, former chairperson of NABARD, who used to repeatedly argue during his tenure, "We need to introspect with integrity as far as the SHG Bank Linkage program is concerned".
Likewise, as a former director of the Reserve Bank of India (RBI) argued in an e-mail to this writer,
“It would be useful to focus also on the sarkari and the bank-linked SHG programme that was pioneered by NABARD. Their number is very large and so are the amounts involved. The sarkari SHGs are also getting large amount of bank loans under government pressure, and the lines between the two are getting blurred to the disadvantage of the genuine and healthy non-government SHGs. The state-sponsored SHGs are widely sponsored by local party functionaries, who rake off a part of the loans they broker, and there is a strong widespread impression that these loans don’t need to be repaid. How widespread this is, and how it has affected the health of the whole movement remains to be documented.”
My own personal experience of the SHG Bank Linkage program in the southern states suggests that the famous micro-finance agents—who caused the 2010 AP Microfinance crisis and also led to the downfall of the decentralized commercial NBFC-MFI model are now slowly but surely gaining a foothold of the SHG Bank Linkage program, as well. And please note that agents are just a tip of the iceberg and there is so much more happening there in terms of burgeoning growth of not-so-good practices.
Therefore, I hope that an honest evaluation will ultimately happen soon and in a subsequent article, I shall attempt to raise some critical questions on the SHG Bank linkage program (version 1) that would need to be answered by such an evaluation. Make no mistake. If SHG version 2 is pushed through without a proper and objective understanding of how the SHG Bank linkage program currently functions at the grass-roots (and the path that it has traversed in the past), it could become a recipe for disaster as has happened with much of Indian microfinance lately…
(Ramesh Arunachalam has over two decades of strong grass-roots and institutional experience in rural finance, MSME development, agriculture and rural livelihood systems, rural and urban development and urban poverty alleviation across Asia, Africa, North America and Europe. He has worked with national and state governments and multilateral agencies. His book—Indian Microfinance, The Way Forward, is the first authentic compendium on the history of microfinance in India and its possible future.)
Two crucial aspects in microfinance—client origination/targeting and loan appraisal—have been neglected in favour of unprecedented growth (caused by a desire to fully commercialise microfinance and rapidly enhance access/outreach of such services) and this has resulted in the present crisis
An open letter to the right honourable Andrew Mitchell, UK International Development Secretary, on lessons from the Indian microfinance crisis
Good afternoon! I am delighted that The UK Department for International Development (DFID) is launching SAMRIDHI (a programme promoting microfinance and impact investment in India) in partnership with SIDBI in your esteemed presence (Sir) at 6pm today, the 16th December (Friday) at the British Council Division, Kasturba Gandhi Marg, New Delhi. Much as I wanted
Therefore, it becomes clear that the above not-so-appropriate practices were changed only due to the 2010 crisis and herein lies the most important lesson from Indian microfinance that DFID should not ignore:
b) Likewise, on loan appraisal, the Ujjivan COCA report says:
“At present, information pertaining to income, expenses as well as indebtedness of the clients used for credit analysis is what is self reported by the clients. Given the profile of its clientele, it may not be possible for the organization to obtain documentary evidence of the income, expenses and indebtedness.” (http://www.sidbi.com/micro/COCAUjjivan.pdf, page 11)
Sir, this is the omnipresent reality in microfinance as MFIs typically work with poor clients in the informal sector. Some MFIs use tools (like housing index, asset means test, PPI tool) to estimate the income levels of the clients. But it is impossible to get the exact information from a poor household operating in the informal sector.
The only way to get a better insight on the loan absorption and repayment capacity of the clients is to invest in a long-term relationship with them. However, this requires considerable time and may not deliver the best financial results for the MFI in the short term (but from a longer term perspective, the clients will be better off and that is what ultimately matters). And, most importantly, this calls for a strict “no” to use of unauthorised agents in client origination and targeting so that a good direct relationship can be built with clients. And according to the COCA report, the only MFI that seems to have invested in such a relationship is SKDRDP:
As the COCA report says “The SHGs are required to conduct weekly meetings and undertake compulsory savings for a minimum period of three months before they become eligible to undergo the process of grading. Only SHGs receiving satisfactory performance grades are eligible for applying for loans.” (http://www.sidbi.com/micro/COCA%20SKDRDP.pdf, page 7)
Yet Sir, it is ironical the SKDRDP has received the lowest COCA score! C'est la vie!
Sir, in summary, in many MFIs that had an emphasis on rapid growth, loans were disbursed (indiscriminately) at the fastest rate possible. And greening, informal collateral and abusive collateral substitutes (Tackling informal collateral and collateral substitutes in Indian microfinance) were used to collect back the loans – primarily because the agents behaved like local level thugs. Not enough time was taken by the MFIs to really get to know the clients and to be able to assess their (true) capacity to service the debt. The case of BASIX, which is generally known as one of India’s better MFIs, amply demonstrates this. The fast growth trajectory prevalent in the Indian micro-finance industry (much of BASIX’s peer MFIs in Andhra Pradesh grew at much faster rates than BASIX, prior to 2009) perhaps pushed well intentioned organisations like BASIX (which had sound lending systems originally and I can vouch for how good it was in its early years as an NBFC) to sacrifice their proper lending methodology – that is why as the M2i report on Basix argues,
“However, it was observed that the practice of recording the existing loans of clients in not uniformly practiced across all the units. We found during client interviews that some of the clients had borrowed from other MFIs but this had not been recorded in their loan forms. In one of the units—Kamareddy in Andhra Pradesh—a random inspection of 15 loan appraisal forms revealed that none of them had a mention of any other lender. It is improbable that none of the clients would have borrowed from any other MFI in the region given the prevalence of MFIs. Also, interviews with the LSPs revealed that nearly 70% of his clients had borrowings from other MFIs.” (http://www.sidbi.com/micro/COCA%20Samruddhi.pdf, Page 12)
And this is confirmed by none other than the then CEO of BASIX, who candidly said to The Economic Times,
“That (following sound lending practices) is where we failed,” says Sajeev Viswanathan, CEO of Basix. MFIs lent liberally to individuals who didn’t have a corresponding ability to repay. The mismatch had to hurt sometime, and that’s what is happening now. ...Mr Viswanathan says MFI lending in Andhra rose from Rs5,000-Rs6,000 crore in 2009 to Rs9,000 crore this year. ” (From Microfinance: What's wrong with it, by M Rajshekhar, Economic Times, November 2010)
Sir, all of the above is fine but what then are the positives from the SIDBI-World Bank sponsored COCA reports? After having analysed eight assessments, the most positive aspect that emerges is the fact that the presence and use of unauthorised agents in Indian micro-finance has now been (officially) acknowledged and admitted. I say officially because of the COCA reports are sponsored by the SIDBI-World Bank project and that puts these findings in a different plane altogether. And M2i, SIDBI and the World Bank certainly need to be complemented for their courage to bring the (widespread?) use of agents in Indian micro-finance officially out into the open. Kudos to all of them!
A major disappointment however is the fact that those MFIs engaged in such (undesirable) practices have been rewarded with highest scores for Code of Conduct Compliance. As a result, not much value can be attached to the scores resulting from the assessments. And without question, as J Nunnally, the Psychometric Guru would argue, the COCA tool will need significant revamping for it to become a reliable and valid psychometric measure, capable of portraying ground level reality in an accurate and unbiased manner. And given that Sa-Dhan and MFIN have just released a joint code of conduct in Indian microfinance, it is only natural that they take on this task of creating an appropriate tool—one that rewards actual implementation rather than glorious intentions on paper.
Sir, coming back to the SAMRIDHI, a programme promoting microfinance and impact investment, I have tried my best to present you with relevant facts and details (in the public domain) with regard to the practice of microfinance in India. I would be very grateful if you can use your good offices to ensure that the available lessons and learning are factored into the implementation of the DFID SIDBI SAMRIDHI programme (being launched today) as well as the DFID Poorest States Inclusive Growth (PSIG) project that is to be implemented in the near future! And please be rest assured sir that your kind intervention will not only enable millions of low income people in India to have a better quality life but also be an integral part of the inclusive growth story in India!
Thank you sir!
With best wishes
Ramesh S Arunachalam