While macroeconomic changes are essential to iron out the chinks inherent in the industry, a close look is needed to look at the ground realities and the current agent-led decentralised microfinance model

As policymakers are trying to solve the Indian microfinance regulatory puzzle, let us look at a specific field-level problem that led to the present microfinance crisis and ask the question as to how the bill will prevent such occurrences in the future.

Let me start with the 'agent' led decentralised microfinance model. 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 taken cognisance of this (serious) agent phenomenon. Further, more often than not, industry experts describe any such aspect brought up as just an aberration. They are however sadly mistaken, as agents seem to be becoming more of the rule than the exception, based on what I have been observing at the ground level since 2005/6.

The attached emails (Dated January 2011), in circulation among MFIs, inadvertently reached the mail box of this writer and they clearly articulate what I have been saying all along about the increasingly widespread use of agents in Indian microfinance, perhaps to turbo-charge growth, create efficiencies, increase profits and the like.

As the first email suggests, this seems to be the story of (agent/ring leader) Ms Eshwari of Kulithalai in Tamil Nadu. At one level it appears to explain the context in which Ms Eshwari operated. In the meantime, it is also indicative of her representation to the district administration that she is being coerced (by MFIs) into making repayments. The 2nd email is a clear admission by MFIs about the havoc being caused by agents on the ground all over Tamil Nadu.



I keep hearing of other notorious members in Vellore District in Tamil Nadu (where the MFIs have run into a lot of problems recently)-Jayalakshmi and Nagalaksmi-who also double up as agents. I can provide similar stories from other states as well. Further, other stakeholders like N Srinivasan (Author of State of The Sector Report) and Micro-finance Focus (MF) have also made a mention of these agents. Mr. Srinivasan noted in the State of the Sectorⁱ  Report (2010),

"As in the example from Karnataka, MFIs in other states too have tended to concentrate around the same towns and peripheries, serving the same set of households. The deluge of availability of loans from several institutions has led to multiple borrowing and, in some cases, excessive debt. The pressure to achieve performance targets and breakeven within a short period of time has pushed the relatively new staff of MFIs to look to centre leaders who are in the know of MFI operations. These centre leaders have become a critical rallying point and are today termed as 'ring leaders: In state after state (Madhya Pradesh, Rajasthan, Orissa, West Bengal, Andhra Pradesh, Karnataka and Tamil Nadu), stories abound of how ring leaders informally register new customers promising loans for a fee. Most new MFIs setting up operations in such areas approach these centre leaders as an easy and natural entry point. This provides the necessary influence to the ring leaders to deliver on the promise made to several registrants for loans. The centre leaders are also in a position to obtain loans in the name of others, advantageously using the relative unfamiliarity of new field staff and new MFIs. The resultant ghost loans have a tendency towards default. The clients that pay the registration fee in order to get a loan feel justified in holding up repayments. This behaviour has an adverse effect on repayment rates and necessitates stronger recovery efforts. Some MFIs (including those in the list of top 10) had to wind down operations in some pockets of states such as West Bengal, Chhattisgarh, Rajasthan and Maharashtra without making an attempt to consolidate."

Likewise, Micro-finance Focus writes (Dec 22, 2010),   

"Moulding business models to meet their growth targets, some of the largest microfinance institutions are using group leaders as interface agents between borrowers and loan officers. Popularly called as 'Ring Leaders', these agents are responsible for conducting meetings in their premises and collecting weekly repayments from the borrowers... Borrowers of microfinance institutions in townships of Mehndipatnam, Begumpet and Dilkhushnagar of Hyderabad (capital of Andhra Pradesh) told the microfinance focus team that now these ring leaders have become a major cause of distress for them. The principle of 'Know Your Customer' is one of the keystones around which microfinance practices have been evolved. However, with the introduction of the 'ring leaders' into the process, it seems that this essential requirement of lending is being compromised. The end borrowers interact with the ring leaders who maintain their passbooks and repayments. The loan officers, in turn, collect these from the ring leaders, reducing the amount of their interaction with the borrowers to almost neglible levels. Another disturbing practice which came to light was the charging of 'membership fees' by the ring leaders from the borrowers to join an MFI group. Ranging in the amounts of Rs300-Rs500, these membership fees are over and above the interest paid to service the loan. This fee was pocketed entirely by the ring leaders and is their 'commission' for allowing a prospective borrower to be part of the group. "Ring leaders have become a major cause of distress for us but as we need money and don't have any better sources, we give in to their demands," one of the borrowers said." As Microfinance Focus further writes, "in the last few years of unbridled growth, the MFIs have been guilty of compromising on processes to achieve their targets. However, given the current circumstances where the entire microfinance sector is being subjected to a minute regulatory examination, it is high time that the MFIs undertake a thorough introspection and attempt to correct the flaws which have crept into their processes."ⁱⁱ

Ok, so where does all of this lead us? As we go along, we are bound to see the agent problem cropping up in more places and states. Therefore, it is about time that we stopped pretending that there are no agents. The truth of the matter is that there are large numbers of agents who have been (and are perhaps being) used to turbo charge the growth of microfinance and they are turning into Frankenstein's monsters created by the MFIs themselves and they now need access to more and more loans to make their existing repayments. It is much like the famous Eaglesⁱⁱⁱ  song, "Hotel California" which goes 'You can check out any time you like, but you can never leave'—the same applies to most MFIs today. That is why you are seeing the microfinance crisis in states (other than Andhra Pradesh) like Tamil Nadu, as the earlier email suggests.

In fact, I see agents as the major cause of the present Indian microfinance crisis and I strongly feel that the proposed bill should prevent their nefarious operations as otherwise, the end user clients will never be known. In my opinion, the agents are all pervading and powerful and they get clients for MFIs and they can make clients disappear from an MFI's horizon and put these clients onto another set of MFIs. They (can) stop client repayments. They indulge in coercive collective practices as many of them have backing of thugs and criminals (locally). Once created by the MFIs in search of fast growth and greater efficiency, they are now turning out to be the bane of Indian microfinance and yet, we have many stakeholders pretending that agents do not exist. Therefore, it is about time that Indian microfinance wakes up and deals with them in a swift and strong manner and I hope the proposed bill will take the lead in ensuring this.

Without question, the bill must tackle the agent problem directly by building appropriate safeguards in its implementation. While it is tempting to postpone implementation arrangements, the success of the bill as a legal framework will fully depend on the implementation arrangements (to be employed) and therefore, it needs to be addressed in a transparent manner, right now. Otherwise, the bill will merely remain a document of good intentions and that takes us right back to square one. Hence, adopting a hands-off approach to the rapidly prevalent agent problem is not an appropriate option at all and it is perhaps akin to waiting for a time bomb to explode. I really hope that this is something that the various authorities, involved in drafting the microfinance bill, will not permit.

  ⁱSource: Quoted from Microfinance in India State of the Sector Report, 2010, by N. Srinivasan, Sage Publications
  ⁱⁱSource: Quoted from http://www.microfinancefocus.com/content/big-league-microfinance-institutions-using-group-leaders-agents
  ⁱⁱⁱRock band

(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).