Money & Banking
Tackling informal collateral and collateral substitutes in Indian microfinance

The RBI must ensure that informal collateral and/or abusive collateral substitutes do not contaminate microfinance in the future. It should also seriously think on incentives/disincentives that can be set up to eliminate use of informal collateral and/or abusive collateral substitutes, where they exist

Recently the Reserve Bank of India (RBI) issued a circular defining NBFC–MFIs. According to the circular, an NBFC-MFI is defined as follows:

“An NBFC-MFI is defined as a non-deposit taking NBFC (other than a company licensed under Section 25 of the Indian Companies Act, 1956) that fulfils the following conditions:

i.    Minimum net owned funds of Rs5 crore. (For NBFC-MFIs registered in the North Eastern Region of the country, the minimum NOF requirement shall stand at Rs2 crore).
ii.    Not less than 85% of its net assets are in the nature of ‘qualifying assets’.

For the purpose of ii above, ‘Net assets’ are defined as total assets other than cash and bank balances and money market instruments. Thus qualifying asset shall mean a loan which satisfies the following criteria:-
a.    loan disbursed by an NBFC-MFI to a borrower with a rural household annual income not exceeding Rs60,000 or urban and semi-urban household income not exceeding  Rs1,20,000;
b.    loan amount does not  exceed Rs35,000 in the first cycle and Rs50,000 in subsequent cycles;
c.    total indebtedness of the borrower does not  exceed Rs50,000;
d.    tenure of the loan not to be less than 24 months for loan amount in excess of Rs15,000 with prepayment without penalty;
e.    loan to be extended without collateral;
f.    aggregate amount of loans, given for income generation, is not  less than 75% of the total loans given by the MFIs;
g.    loan is repayable on weekly, fortnightly or monthly instalments at the choice of the borrower

iii.   Further, the income an NBFC-MFI derives from the remaining 15% of assets shall be in accordance with the regulations specified in that behalf.
iv.    An NBFC which does not qualify as an NBFC-MFI shall not extend loans to the microfinance sector, which in aggregate exceed 10% of its total assets.” (Source:

While in a series of articles, I look at the above RBI circular and outline its implications, the first in this series concerns a very fundamental aspect identified in the aforementioned circular—that of mandatory non-collateralized lending as a condition for an NBFC’s assets to be classified as qualifying assets—which again is very critical for the NBFC to be recognized as an NBFC MFI.

Through the years leading to the 2010 Andhra Pradesh (AP) microfinance crisis, I have come across a phenomenon at the grass-root level that startled me somewhat. All along, we have known typical microfinance to be non-collateralized lending and that is why we have the RBI using the same to define qualifying assets for MFIs and also defining NBFC-MFIs. And it remained as such until perhaps the Krishna crisis. However, in the recent years, I have come across several instances where informal collateral and/or (abusive) collateral substitutes have been used for making loans and/or collecting repayments from low income clients. And given that the RBI has listed non-collateral lending as one of the conditions for classifying a microfinance asset as a qualifying asset, it becomes important to understand ways in which informal collateral (and/or abusive collateral substitutes) are being used in Indian microfinance

Here are some examples:
1.    At the time of making a loan, especially large multiple loans, ration cards are sometimes taken as a form of collateral security. This is mostly done by agents/field workers
2.    Ration cards, are also provided by clients for other clients on a fee per loan basis—thus, the loan becomes a sort of benami loan as it is made in the name of the person who has given the ration card, although the actual borrower is someone else
3.    Pattas, or village/slum land title deeds are often re-possessed in case of clients being delinquent. They are also taken as collateral security for larger loans and/or clients who are over leveraged
4.    Plus several other examples

The implication of all of this is that any instrument—by which low income clients’ access government subsidies/services—can become informal collateral for MFIs. In the future, UID cards and/or other such technology-based arrangements are perhaps easy fodder for such prey. This aspect needs to be recognized by the RBI and other stakeholders.

This apart, I have seen collateral substitutes as well—often, called as peer pressure in the good old days of microfinance pilots, such current day practices seem to have degenerated to forcibly taking over household utensils, small assets (including cows, pigs, goats etc.) and sometimes, even children as the Leo Hornack’s ( and other stories suggests.

That said, what then are the key questions for the RBI?
1.    How widespread is the use of informal collateral (and/or abusive collateral substitutes) in microfinance?
2.    Under what circumstances are informal collateral and/or abusive collateral substitutes used?
3.    When microfinance is synonymous with non-collateral lending, then, how and why is this happening?
4.    Are agents in the decentralized microfinance model primarily responsible for this? Or is the drive for better operating results in wake of supply led disbursements (in the commercial model) responsible for this unique phenomenon?

So, what then are the key issues here? First, the RBI must surely clarify on how it will ensure that informal collateral and/or abusive collateral substitutes do not contaminate microfinance in the future. Second, the RBI must seriously think on incentives/disincentives that can be set up to eliminate use of informal collateral and/or abusive collateral substitutes, where they exist. Three, the RBI must specify detailed guidelines for its supervisors (and examiners) on how to unearth this informal collateral and abusive collateral substitute menace and take swift action against the erring agents, field workers and concerned institutions.

Surely, without tackling this problem of informal collateralization of microfinance loans, no policy drive for financial inclusion will provide meaningful results on the ground. Let us be clear on that as what is often told to us in microfinance (by MFIs and other stakeholders) is very different from what is actually happening on the ground. And I do hope that the forthcoming Microfinance India summit, to be held at Hotel Ashok, New Delhi on 12th and 13th December, will look closely at critical and practical problems like these rather merely discussing rhetorical paradigms in theoretical obscurity…


Group buying sites, funded by lemming-like PE funds are on death throes as shows

Group buying sites, a PE-funded mania, are about to die as fast they came up. has shut down and group offers for spa and beauty treatment have no takers, the group-buying site launched in June last year has closed down citing adverse market conditions and price war among group buying sites. This has raised a big question over survival of other similar sites, especially those trying to survive without any funding from venture capitalists. Even analysts and experts feel that if someone like, which was funded by Greylock Partners and Battery Ventures, could not survive the competition, then there is something seriously wrong in the business or business model, as Moneylife has pointed out in the past. Interestingly, almost all  

Mahesh Murthy, founder of Pinstorm, in an open letter to’s John Kuruvilla, said, “There was no differentiation among deal sites and till that happened there would be no real traction for anybody and no chance of building a real business.”

The reasons why group-buying sites are unlikely to take off are poor quality of the deals for consumers, merchant satisfaction and flawed business model. “Given these basics”, wrote Murthy, “the only way one can win is to spend more money than the others and lose more money than the others till rivals throw in the towel and drop off the map. Taggle was the first prominent one to do so. But believe me, others have already done so and more will do so. But this is a pyrrhic victory as both investor and deal company have a bloodied balance sheet. And at the end of it all, there’s little or no likelihood of either making a decent exit, given in this case that potential acquirers—global leaders Groupon and such are doing even worse,” he added.

Last year, Bengaluru-based Taggle Internet Ventures Pvt Ltd received a funding commitment for $8.75 million, based on certain milestones from Greylock Partners and Battery Ventures, for running its group-buying site. Speaking with reporters in Mumbai during August 2010, Mr Kuruvilla informed that within six weeks of its launch, Taggle had gathered a fan base of over 1.1 lakh on Facebook, out of which about 15% have turned group buyers on the portal. Unfortunately, they could not convert or retain their fan base in order to make the business viable. This also shows that people may come together for chatting or exchanging messages but not necessarily for shopping.

Following the supposed success of Groupon, group-buying sites have become a global crazy, resembling a bubble. They are now going down the drain in groups. In China 1,483 group buying sites out of around 6,000 shut down this year, many of them backed by venture capital firms.

Last month, Lashou Group Inc, which runs one of China’s top group buying site decided to postpone its listing on the US exchanges citing corporate developments. In fact, even Groupon, the first listed group-buying site, is finding it difficult with its shares are trading below its initial public offering (IPO) price.

In China, several of the group buying sites were found to be selling fake coupons. In October, Groupon and Tencent Holdings’ joint venture site Gaopeng came under fire for selling fake Tissot watches to customers through group buying deals. Gaopeng was also found to be selling McDonald coupons to a number of its customers that were not even endorsed by the food chain.

In India, some group buying sites can also be seen selling Chinese items, mostly mobile phones, through advertisements in local newspapers. While publishing an ad in newspaper adds more cost to the deal, many of the sites are using this route for acquiring new customers.

In a report, comScore said, in June 2011, about 46 lakh Internet users age 15 and older accessed coupon sites from homes or work locations, representing 10% of the online population. led as the top site in the category with nearly 15 lakh unique visitors during the month, followed by and, which both neared 10 lakh online unique visitors.
Unfortunately, the increasing number of visitors does not seem to add any value or help survive the group buying sites as it can be seen from experiences around the world. Here is what has said on its site...

“When we realized that service deals were not giving the best value to users, we quickly shifted focus to only products. Our users responded very positively to the shift and it reflected in our revenue numbers too, we grew our revenues 10 times within three months of the shift. However, the current market conditions have resulted in many e-commerce players selling products at below cost price to lure users. The only way to sustain the business at this time is to get into a price war and burn a lot of investor money and try to outdo competition in a ‘Last Man Standing’ game.”

The question is how much of smart private equity money will have to be eventually written off in the group buying experiment. There seems to be a slim chance of survival of any.



Southward journey may continue: Friday Closing Report

Next level for the Nifty may be at 4,785

The spectre of lower growth in the current fiscal and weak global cues pulled the market down for the second day in a row. We had mentioned in our yesterday’s closing report that if the Nifty falls below 4,915, it may go down to the level of 4,865. The index opened well below 4,915 and closed at 4,867. If the benchmark goes below 4,840 on Monday, we may see it reaching the level of 4,785. However, if Nifty manages to keep itself above today’s high, we may see some change in the trend. The National Stock Exchange (NSE) saw a volume of 56.30 crore shares.

Extending its losses for the second day in a row, the market opened in the red on concerns about the slowing growth and dismal global cues. Wall Street ended lower overnight as European Central Bank president Mario Draghi shot down expectations that the central bank would increase purchases of government bonds. Besides, Germany’s move to reject some proposals to enhance the Eurozone’s bailout fund added to investors’ woes. The development led the Asian markets lower in morning trade which impacted the Indian market. The Nifty opened 73 points lower at 4,871 and the Sensex declined 230 points to resume trade at 16,258.

Recovery attempts were shot down by sellers, keeping all sectoral gauges in the red. The market slipped to the day’s low in noon trade with the Nifty falling to 4,842 and the Sensex sinking to 16,142.

Finance minister Pranab Mukherjee today lowered the country’s GDP growth forecast for the current fiscal to 7.5% in view of lower macro-economic indicators and global issues.

Bargain hunting after the market touched its lows pushed the indices to their intraday highs around 2.25pm. At the highs, the Nifty rose to 4,918 and the Sensex touched 16,383. However, doubts about a deal to resolve the European crisis at today’s EU summit, pulled the market down once again, settling lower for the second day in a row. At the close, the Nifty declined 73 points to 4,871 and the Sensex ended at 16,213, down 275 points.

The advance-decline ratio on the NSE was a dismal 497:1167.

The broader indices outperformed the Sensex today as the BSE Mid-cap index and the BSE Small-cap index declined 0.86% and 0.89%, respectively.

All sectoral indices settled lower for the second day in a row. The top losers were BSE Capital Goods (down 2.58%); BSE Auto (down 2.26%); BSE Oil & Gas (down 2.04%); BSE Power (down 1.80%) and BSE Realty (down 1.31%).

The top Sensex gainers were Coal India (up 1.10%); Maruti Suzuki (up 1.08%); Hindalco Industries (up 1%); Jindal Steel (up 0.62%) and NTPC (up 0.39%). The key losers were Jaiprakash Associates (down 4.67%); Mahindra & Mahindra (down 3.62%); BHEL (3.45%); Bajaj Auto (down 3.36%) and Sterlite Industries (down 3.20%).

The top performers on the Nifty were Reliance Power (up 1.26%); Hindalco Ind (up 1.23%); Kotak Bank (up 1.22%); Dr Reddy’s (up 1.09%) and Jindal Steel (up 0.94%). The declining stocks were led by SAIL (down 5.65%); JP Associates (down 4.89%); Siemens (down 4.18%); M&M (down 3.80%) and Tata Power (down 3.777%).

Markets in Asia closed in the negative on fresh European concerns. Investors in Asia were worried as the developments Europe were slowing down growth across the world, particularly in the emerging economies.

The Shanghai Composite fell 0.62%; the Hang Seng tumbled 2.73%; the Jakarta Composite slipped 0.59%; the KLSE Composite declined 0.87%; the Nikkei 225 tanked 1.48%; the Straits Times contracted 1.24%; the Seoul Composite fell by 1.97% and the Taiwan Weighted settled 1.28% lower.

Back home, foreign institutional investors were net buyers of shares amounting to Rs25.72 crore while domestic institutional investors were net sellers of stocks totalling Rs197.51 crore on Thursday.

TNL International Pvt Ltd (IITL), a subsidiary of IL&FS Transportation Networks has signed an agreement with the Chongqing Expressway Group Co (CEG) and SASAC-Chongqing to acquire 49% of the equity interest in Chongqing Yuhe Expressway Co. IL&FS Transportation Networks fell 0.86% to close at Rs168 on the NSE.

Australia’s Foreign Investment Review Board (FIRB) has cleared state-run NMDC’s proposal to acquire 50% stake in Legacy Iron Ore. The Indian iron ore producer and exporter had earlier said it would invest $18.9 million in order to acquire a 50% interest in Legacy, a Perth-based iron ore explorer. The stock tumbled 3.15% to Rs176.85 on the NSE.

Geojit BNP Paribas Financial Services’ board has agreed to divest its entire stake in a joint venture (JV) company to BNP Paribas SA for Rs40.50 crore. The company agreed to sell the stake held by unit Geojit Financial Management Services in BNP Paribas Securities India, which is in the institutional broking business. The stock jumped 5.54% to close at Rs17.15 on the NSE.


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