The idea of thinking that a credit bureau alone could eliminate multiple, over and ghost lending and usher in responsible micro-finance lending seems very naïve. In fact, this could result in the credit bureau becoming a red herring rather than an actual solution. And unless the systemic issues are addressed, responsible micro-finance lending will remain a distant dream

The term ‘responsible micro-finance lending’ has become a buzz word after the 2010 Indian micro-finance crisis and I keep hearing many stakeholders drop this phrase, every now and then, in (industry) conversations. There is also a responsible micro-finance project of the World Bank being implemented through SIDBI. While all these stakeholders recognise the fact that multiple, over and ghost lending led to the 2010 crisis, they simplistically state that all these ills will simply vanish, lo and behold, if only MFIs were to adopt the mantra responsible micro-finance lending.

Okay, what then can perhaps help eliminate multiple, over and ghost lending in Indian micro-finance? In my opinion, there are several things that need to happen and I hope that the RBI, the micro-finance industry and other stakeholders work together in ensuring that these happen on the ground.

Re-Orienting the MFI Vision: The boards of MFIs must first be able to re-orient their organisational vision to one of responsible finance—this means they will have to move away from the desire of some MFIs for ‘super fast’ unnatural growth and high profits (to gain better valuations in investment and go for an IPO at a premium etc) to balanced natural growth and normal profits. Much of the motivation for multiple, over and ghost lending appears to be related to the above and unless this (perverse) vision is altered, no amount of technology (including the most sophisticated credit bureau) can perhaps prevent such erroneous lending. Technology was touted as the solution in 2005-6 after the Krishna crisis and you can judge for yourself what it has achieved so far. As a previous Moneylife article on MISⁱ suggests, even the most basic issues with regard to an MIS still need significant attention in Indian micro-finance.

That said, further, even when the boards make an impassioned plea for responsible micro-finance lending, the MFI’s senior management must be able to translate the above vision into action by bringing about the necessary changes in systems, policies, procedures, processes, staff attitudes, etc. This is very critical as otherwise, ‘intended strategies’ will remain on paper and realised 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, organisations put these well-prepared plans in the shelf and lock them up and get around to doing what they are anyway doing.”

Therefore, once the MFI board and senior management have done what they have to do, then it may be possible to check multiple, over and ghost lending and usher in responsible micro-finance lending provided:

a) Internal control systems have sufficient checks/balances with regard to loan disbursement, loan collection, client selection, etc, and these controls properly work on the ground. Proper functioning also means that MFIs are willing and able to take action against errant staff/stakeholders in real time, as and when the frauds and exceptions are spotted. Ideally, systems should deter frauds/exceptions, failing which, they must at least swiftly and appropriately punish staff/stakeholders who have caused these frauds in the first place,

b) Internal audits spot multiple lending exceptions, as and when they occur and recommend/ensure immediate corrective action on the ground. This suggests that the internal audit department reports directly to the board or audit committee and auditors have complete independence from the senior and/or operational management, whose functions and systems they are to audit,

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, over and ghost lending can be tracked and dealt with in real time - this is a very critical aspect. This also means that MFIs know their end user clients and have a proper verifiable record of all transactions backed by pre-numbered and properly dated receipts/vouchers with all necessary details,

d) Field level frontline and all other staff are NOT incentivised on irresponsible disbursements, reckless burgeoning growth and coercive repayments. In fact, they must be trained and sensitized to believe in and work towards responsible micro-finance lending—where multiple and reckless lending through the agent-led decentralised model is viewed as a bane rather than boon for the organization. It goes without saying that the reward system and human resources function (in general) must be compatible and foster responsible micro-finance lending on the ground,

e) MFIs wholeheartedly decide to adopt green field client acquisition processes where they form new joint liability groups (from scratch) by themselves. Thus, they must commit to not indulge in other types of (not-so-desirable and fast tracked) client acquisition methods (like acquisition of JLGs through breaking of SHGs etc) in their field operations. Most importantly, they must walk the talk with regard to these commitments. Of course, robust implementation of client level controls and periodic verification/action by the internal auditor would go a long way in helping MFIs to sustain their commitment to green-field process of client acquisition,

f) Bankers exercise appropriate due diligence with regard to multiple, over and ghost lending, as part of their (notional) supervisory role in discharging their priority sector obligations. This calls for appropriate planning of field visits by bankers with a view to spend sufficient time at the grass-roots and engage in effective on-site monitoring of actual clients, physical/virtual records, their comparison, etc,

g) The Reserve Bank of India (RBI) ensures appropriate supervision on the ground, with regard to practices of its (NBFC) MFIs—on aspects such as multiple, over and ghost lending, as part of its on-site and off-site supervision obligations stemming from its non-bank supervision duties, and

h) The RBI ensures appropriate supervision on the ground with regard to lending and monitoring practices of DFIs and commercial banks—in relation to public/priority sector funds with a view to prevent multiple, over and ghost lending in real time.

This and much more—all with a view to put clients and their situations/needs first—would have to be done to ensure stoppage of multiple, over and ghost lending and usher in an era of responsible micro-finance lending. Therefore, the idea of thinking that a credit bureau aloneⁱⁱ could eliminate multiple, over and ghost lending and usher in responsible micro-finance lending seems very naïve – let us not forget our past experiences with the voluntary codes of conduct (which were not implemented on the ground). In fact, this naiveté could result in the credit bureau becoming a red herring rather than an actual solution, because, as of now, it seems to be distracting the micro-finance industry and its stakeholders from the real systemic problems at hand that need to be urgently and comprehensively tackled. And unless these systemic issues are addressed, responsible micro-finance lending will remain a distant dream and merely a paper concept…

ⁱ Please see Moneylife article on MIS for MFIs - http://www.moneylife.in/article/establishing-standards-for-effective-management-information-systems-for-mfis/19655.html

ⁱⁱThe credit bureau is a very positive development. Also, it needs to be understood that a credit bureau is a necessary but not sufficient condition for responsible micro-finance lending!

(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).