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It is very easy to talk high flying concepts at conferences, however, much of the intended strategies are not implemented and that is something that conference organizers must take notice of with regard to financial inclusion and/or microfinance
The Sa-Dhan FICCI Financial Inclusion Conference 2012i, themed as “The First Mile Walk into the Financial System” is to be held on 7th and 8th August at the sprawling Hotel Ashok, New Delhi.
At the outset, Sa-Dhan and FICCI must be congratulated for continuing their focus on financial inclusion, which is indeed a very important aspect in India today. That said, I have some very fundamental issues with the design of the conference and the messages that it is intending to send out and I attempt to highlight these below:
First, this whole notion of financial inclusion being a static phenomenon is rather peculiar. Inclusion is a dynamic activity and people get included and excluded, time and again. Many of the families that were (financially) included in the Integrated Rural Development Program (IRDP) were subsequently excluded. Likewise, some farmers who were included in the mainstream financial system (before the major agriculture debt waiver that happened a few years ago) have perhaps now been excluded. Similarly, perhaps, many of the clients who did not repay in the aftermath of the 2010 Andhra Pradesh (AP) microfinance crisis and ordinance, will now become official ‘defaulters’—if and when the great Indian microfinance credit bureaus become completely operational—and thereby possibly get (re) excluded again!
Therefore, what needs to be critically looked at is why clients have been forced to leave the financial system and/or are pushed out of it, where do they go when this happens and how can they be meaningfully re-included? These are not exhaustive questions by any means but rather simpler issues that should bother well meaning financial inclusion strategists immensely—and only then can we make the (re) walk into the first mile of the financial system, a pleasant and lasting experience. Let us make no mistake about that!
Second, it is very ironical that a conference on financial inclusion (FI) excludes the following key sectors, stakeholders and models:
And without question, any financial inclusion program should be able to benefit significantly from participation by state government departments (such as agriculture, rural development, planning, cooperation, urban development, etc) apart from representatives of the district and local administration (collectors, heads of urban/local bodies, etc). India has almost 600 districts and yet, I have rarely seen district collectors being invited to major conferences on financial inclusion. I guess we are missing their very critical input here!
In fact, as per the brochure on the FICCI site, a look at the panelists suggests that, by and large, it is the same old “inner club” of Indian microfinance that is to dominate the Sa-Dhan FICCI conference. That is fine and I admire many of these stalwarts but given what has happened in the last few years in the financial inclusion and microfinance space, I strongly believe that it is imperative to have greater representation of state/local governments in such proceedings. Incidentally, the program also lists the chairperson of the Parliamentary Standing Committee of Finance as a panelist in one of the (special) sessions—I am not sure whether (or not) there is a conflict of interest here because the Micro Finance Institutions Development and Regulation Bill, (2012) is currently said to be under the examination of the (same) Parliamentary Standing Committee.
Therefore, while inclusive finance, as a paradigm, has gained significant acceptance in India among policymakers and some others, and is being touted as the mantra for success in modern India, there are several good reasons as to why it has not achieved serious success on the ground, so far. The conference has a unique opportunity to look at this critical issue… and understand why this is the case?
I am not sure that these (critical) exclusions will enhance the discussions at the conference in any meaningful manner.
Third, the brochure makes the claim that “Microfinance institutions…mostly considered as the last mile connectivity in the financial system, have played a key role in furthering the objective of financial inclusion.” (Sa-Dhan FICCI Financial Inclusion Conference Brochure 2012, Page No 1, http://www.ficci.com/events-page.asp?evid=21075)
I am sorry but I beg to differ with this starting premise of the program. In India, typically, financial inclusion (FI) is presently characterized by:
And where outreach has been scaled up, there are major issues as mentioned hereafter in a recent news item in the Hindu Business Line (22 May 2012)—“We have found massive problems in insurance operations of SKS Microfinance”, J Hari Narayan, chairman, Insurance Regulatory and Development Authority, told Business Line. IRDA teams conducted field enquires and inspections for a long time, he said. The irregularities included receiving the cheques of death claims from its insurers on its name, which is illegal. The only listed MFI in the country, based out of Hyderabad, had also ‘collected’ higher commissions than permitted by the insurance regulator while selling the insurance policies”vii.
The above two aspects of lack of suitable and affordable risk management services and lack of appropriate and affordable livelihood financing are noteworthy aspects, because they again show the huge gaps between a great vision and intended strategy (the recommendations of the well intentioned financial inclusion committeeix) and the actual implementation on the ground, which is narrowly focused on consumption and small production credit.
Hence, from the above, we can understand that priority sector financing is used primarilyx by banks to provide consumption and/or small production credit, mainly through MFIs, to end users (low income people). And the 2010 Andhra Pradesh (AP) microfinance crisis clearly reveals that the misuse of such financing can result in ghost, over and multiple lending (with sub-prime like indebtedness), especially in the absence of any serious supervision. That ghost lending continues even today is evident from the following recent Moneylife news item—“SKS Microfinance has said that some of its employees have cheated the company to the tune of Rs15.8 crore in the last financial year.
The services of employees involved have been terminated and the company has written off over Rs14 crore. The auditors of the company have reported that there was cash embezzlement by the employees to the tune of Rs2.5 crore and loans given to non-existent borrowers was Rs13.3 crore, the micro lender said in its annual report” (http://www.moneylife.in/article/sks-microfinance-employees-swindle-rs158-crore/27247.html)
Therefore, I am unable to accept the assertion that “Microfinance institutions…have played a key role in furthering the objective of financial inclusion” (Sa-Dhan FICCI Financial Inclusion Conference Brochure 2012, Page No 1). On the contrary, as Dr Rangarajan (chairman, Economic Advisory Council to the Prime Minister Office) and Dr YV Reddy (former governor of the Reserve Bank of India) and others have argued often times, the flawed business model of the MFIs along with wrong incentives have resulted in MFIs being viewed as what they are today:
‘The business model of microfinance institutions is faulty. They must revisit the model to support the income earning ability of the borrower,’ Prime Minister's Economic Advisory Council chairman C Rangarajan said at an event organised here by Skoch Consultancy. Rangarajan said multiple lending done by MFIs is inconsistent with the very repayment capacity of borrower. He said MFIs have been indulging in multiple lending and large parts of the loans are given for consumption purposes and this model of business has landed them in trouble. ‘Income earning capacity must be criteria for granting loans... The provision of credit for consumption must be a small part of the total loan,’ Rangarajan said”xi
“According to Dr YV Reddy, the former governor of the Reserve Bank of India, credited with saving the nation’s financial system from the 2008 meltdown, ‘microfinance is India’s subprime.’ ‘Ultimately, its something like subprime lending,’ Mr Reddy told Economic Times in an interview ahead of his book release. “The same incentives are operating here... it was securitization and derivatives that operated in the US. Here it is the priority sector lending by banks.”xii
Therefore, I see the statement in the conference brochure more as a (continuing) attempt to deny what happened in Andhra Pradesh (AP) in 2010 and the earlier years. Therefore, while the fact that MFIs represent a huge infrastructure at the grass-roots cannot be contested, their furthering the objective of financial inclusion would depend largely on ‘introspecting with integrity’ and I still see no signs of that despite the two years having gone by! I really hope that the Sa-Dhan FICCI conference would kick start this process through the various sessions for I still (genuinely) believe that (re-oriented) MFIs can play an important role in financial inclusion in India.
Fourth, on the aspect of the microfinance credit bureau (s) which are yet to be fully operational (despite many deadlines having passed), I have the following observations and I hope that the panelists at the conference take into account the following:
It would be great if the conference panelists could deliberate and identify solutions—to the above and other problems—so that the transparent use of various credit bureaus (in a complete sense) becomes a reality.
Fifth, there is a session on ‘Improving the Investment Climate’. This is a very interesting session and the aspect of micro-finance investment has caught significant international attention of late with the case of LAPO (Nigeria) as discussed in Hugh Sinclair’s recent book. Please see previous Moneylife articles in this regard (Why blame the MFIs alone?; Should not microfinance investment vehicles be judged by the same standards set for retail MFIs?; and Does Sinclair’s Open Challenge (to the Global Micro-Finance Industry) Make His Claims True?).
For me, while improving the investment climate to promote investment is critical, Hugh Sinclair’s book has indeed been a revelation about how microfinance investment vehicles (MIVs) operate in the international supply chain of delivering financial services to low income people. And after reading the book, I am searching for answers to questions such as (but not limited to) the following:
Therefore, without any doubt, while we need investments in microfinance and financial inclusion (and especially in India), MIVs also need to be (made) as accountable and as responsible as MFIs—let us make no mistake about that! In fact, much of the microfinance crisis in India (in 2010) was fuelled (perhaps) because of the irresponsible investments (debt and equity) made by many stakeholders including MIVs. And let us therefore understand that the first dictum of responsible microfinance is responsible investing. We certainly cannot have MFIs practice responsible microfinance on the ground when their investors are ‘irresponsible’. That needs to be understood and appreciated by all stakeholders including those at the global microfinance industry. And given the wider (global) participation expected at the Sa-Dhan FICCI conference, it would be a useful starting point to jump (Dhaka) start this debate as well.
One final caveat is in order folks! While I do appreciate the efforts of Sa-Dhan and FICCI, the larger point I want to make is that it is very easy to talk high flying concepts at conferences and also publicly claim that the same is being applied in practice. In reality, however, much of the intended strategies do not get implemented and that is something that conference organizers (Sa-Dhan and FICCI), industry associations, regulators and stakeholders must take notice of with regard to financial inclusion and/or microfinance. Therein lies the pathway to overcome the present impasse and I sincerely hope that the global financial inclusion fraternity and the Indian microfinance industry recognize this basic fact and devise appropriate strategies to overcome this serious gap between policy and implementation. And what better place than the forthcoming 2012 Sa-Dhan FICCI FI 2012 Conference to be a natural starting platform for this introspection with integrity… only then can the wide reaching and extremely well intentioned “Dr Rangarajan Committee Recommendations on Financial Inclusion” really see the light of the day…
(Ramesh S 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.)
ii http://www.rbi.org.in/Scripts/BS_ViewMasCirculardetails.aspx?id=5818. There could be more sections relevant depending on quantum of loan but these are the broad and most frequently used categories
iii BPL = Below Poverty Line
iv This however needs to be confirmed through a large national sample study covering agriculture PSL beneficiaries.
v This also needs confirmation through a large national sample study, covering agriculture PSL beneficiaries in different states of India.
vi By and large, in many cases that I have come across, the no frills accounts remain dormant and are rarely used.
vii Source: Quoted from http://www.thehindubusinessline.com/industry-and-economy/banking/article3446545.ece
viii While some innovative MFIs/FFIs have tried to deliver such services to select clients, the larger and wider penetration of these services is still quite minimal.
ix The Financial Inclusion Committee was chaired by Dr Rangarajan, Former RBI Governor and had several eminent professionals as part of it
x I say primarily because there are other categories used by banks under priority sector
The steel producer said its profits fell mainly due to higher input costs and forex fluctuations