Indian microfinance credit bureau: Why is it not fully operational yet?

The microfinance credit bureau has not been set up yet due to lack of strong leadership, no serious regulatory support, unrealistic targets, lack of reliable ground-level data, IT issues and lack of focus on execution

It has almost been over 12 months from the 2010 microfinance crisis and a transparent use of the microfinance credit bureau appears to be nowhere in sight-at least for outsiders like me. While the intentions to establish the credit bureau may have been genuine and well-founded, the lack of real-time implementation progress raises several important questions with regard to the process of establishing the (Indian microfinance) credit bureau in the first place. In my opinion, the current delay could be due to several factors articulated below, and I would like the proposed Microfinance Bill drafters to take this into account while finalising the forthcoming microfinance legislation which proposes the establishment of a credit bureau as an integral part of the overall regulatory architecture.

So what then has caused a delay in establishment of the microfinance credit bureau? Here are some plausible reasons:

 Lack of strong and committed leadership—This is on the part of those involved in promoting the credit bureau initiative—to ensure that the credit bureau is indeed functional within the stipulated timeframe. Several deadlines have gone by and we still keep hearing statements that the credit bureau is ready and will be operational soon. It has been getting ready from December 2009 and two years have already gone by and it is about time that we began objectively analysing as to why these deadlines have constantly shifted. It would surely help us understand the real issues better in terms of why the delays are occurring (data availability and integrity, willingness of MFIs or microfinance institutions to walk the talk with regard to the credit bureau initiative, etc.,) and thereby pave the way for quicker and timely implementation on the ground.

 The credit bureau initiative has no serious regulatory support whatsoever—I have not seen a single statement from the RBI (the Reserve Bank of India) affirming the validity of the ongoing credit bureau efforts and wonder what role will the RBI have in ensuring data integrity, especially given the proliferation of agents, multiple loans to shared JLGs (Joint Liability Groups) and clients and also the lack of a unique ID for low-income clients. The MIS (management information system) at many MFIs is weak and unless robust standards are created and enforced with regard to the MIS at MFIs by the regulator/supervisor, I doubt that any meaningful (reliable and valid) data will go into the credit bureau. I hope that the RBI looks into the various issues as soon as possible so that it is not caught on the wrong foot later when it becomes the sole regulator for microfinance.

 Absolutely unrealistic targets which means that quick wins and early results are not possible to show—This gets further exacerbated by the microfinance industry's underestimation of data quality and information technology issues which are dealt with below. Quick wins provide a great momentum and that has not been possible in the Indian scenario. This is what makes the credit bureau a real red herring! From December 2009, when MFIN (Microfinance Institutions Network) has been formed to date, I have seen a number of public statements on when the credit bureau is likely to be ready and used and I would like someone to get into the reasons for the shifting goalposts. I, for one, feel that this could be occurring because of lack of proper data at the grass-roots mainly due to the use of the agent-led decentralised model at this level.

 Lack of reliable ground-level data—A number of issues affect data quality in microfinance and especially in India. There are both structural problems (agent-led modelsi , shared JLG, shared clients) and bad credit-granting practices (over-lending, multiple lending, successive greening, ghost lending and fraudsii , etc). Among the data issues observed are: lack of unique identifiers (several people in villages especially can have the same names and initials); lack of location identifiers (e.g., village/street names and building numbering, especially in rural areas are hugely duplicated); unavailability of key credit information (e.g., especially because of the highly prevalent agent-led model); and poor data quality of available information (e.g., errors in data entry, data conversion/manipulation, frauds as you have been reading, etc). Please recall that when the Andhra Pradesh government requested data from MFIs, errors were reported in the media to wrong data conversion.

A range of information technology issues—Different IT-related constraints prevent the smooth establishment of a credit bureau and much of these constraints arise due to the remote physical spread of Indian microfinance. Among the IT issues observed are: the lack of a standardised core MIS system at the MFI level; weak IT infrastructure within MFIs (branches not connected to headquarters, etc.); basic IT commodities are not available or not reliable (e.g., unstable power supply; slow or unreliable Internet connections); hardware and software provisioning issues (e.g., limited availability of hardware brands and models to ensure quick and efficient processing of very, very large volumes of small amounts of repetitive data that characterise microfinance); and lack of experienced service providers for infrastructure setup and maintenance.

 Design of MIS at MFIs is not using accepted standardised best-practices—The problem is further compounded because MIS at the MFI level is not up to commonly-accepted standards. This means that consistency and integrity of data will continue to be a major issue in credit bureau implementationiii .

 The lack of focus on execution to overcome lack of implementation capabilities—I also see no serious effort whatsoever by the microfinance industry to overcome the implementation bottlenecks. All I get to hear is, "the job is very difficult as this is a low-income financial services industry and therefore what the industry has achieved so far is commendable".  Sorry, but that is not a fair argument as we are talking of commercial microfinance that seeks to become a part of the larger financial sector. Surely, under such circumstances, no handicap is permissible because the microfinance industry has always wanted to mainstream itself as an extended arm of banking and hence, there can be no compromise whatsoever with regard to quality of the MIS and related standards (accounting, internal control, etc.,) that influence the quality of data going into the MIS.

All of the above issues do indeed make setting up a credit bureau in an emerging market like India an extremely challenging task—if serious efforts are made, it could take at least 3-4 years (or maybe even 5 years) from initial discussions to regular use of the credit bureau (that produces transparent, reliable and valid credit information reports and not just some reports). So, folks, it is time to tune down our expectations and I hope that the powers that be, who argue that a credit bureau will solve all problems in Indian microfinance, do look into the above and other issues of practical relevance. I would also like various stakeholders—DFIs (Development Financial Institutions) like SIDBI (Small Industries Development Bank of India), commercial banks, international agencies like CGAP (Consultative Group to Assist the Poor) and donors supporting the credit bureau initiative—to come out and vouchsafe the integrity and quality of the data being supplied to the credit bureau by MFIs. This must be done in terms of data integrity, internal consistency and physical compatibility with client existence and records and these stakeholders (especially SIDBI and commercial banks) must make themselves accountable and responsible for the quality and integrity of such data. Unless all of the above are done, the credit bureau will just remain another idea like the multiple codes of conduct, supposedly operational on paper in the Indian microfinance industry for a long time now! I hope that the proposed Microfinance Bill drafters, key regulators and the RBI take these aspects into account while formulating a strategy for implementing a microfinance credit bureau.


 i Please see previous Moneylife articles on microfinance agents - http://www.moneylife.in/article/how-and-why-did-microfinance-agents-become-a-part-of-the-indian-microfinance-business/19301.html, http://www.moneylife.in/article/implementation-safeguards-against-notorious-agents-are-an-imperative-for-the-proposed-microfinance-bill/19017.html and http://www.moneylife.in/article/proposed-microfinance-bill-has-to-look-at-the-re-leader-as-a-microfinance-agent/20019.html
  iiPlease see previous Moneylife article on frauds - http://www.moneylife.in/article/increasing-frauds-internal-lapses-at-mfis-need-to-strengthen-supervisory-arrangements-to-protect-the-poor/18309.html
  iiiPlease see Moneylife article on MIS for MFIs - http://www.moneylife.in/article/establishing-standards-for-effective-management-information-systems-for-mfis/19655.html

(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).

Comments
Ramesh S Arunachalam
1 decade ago
Dear Vasu

Many thanks for this and I am glad to hear that the credit bureau is somewhat operational.

Congratulations and your comments are much appreciated!

My points are simple:

General Use and Data Integrity: The micro-finance industry says the bureau is operational but I would like the department of non-bank supervision, and rural planning and credit department, RBI to confirm that the credit bureau is indeed operational. I would also like the departments to transparently vouch for the integrity of data in terms of compatability of micro-finance assets on the ground and the records in the credit bureau. I would also like SIDBI and commercial banks to tell us transparently as to how they are using the credit bureau and also how they can vouch for the authenticity of the data. Lastly, I would also be grateful if the department of banking supervision, RBI is able to match real deployment of priority sector loans of its commercial banks with credit bureau data and also vouch for the physical existence of the clients with the micro-finance loan

Agent Models, Ghost Clients, Frauds and Corrective Measures: Now, there are several mails in circulation among the top NBFC MFIs where they complain about the proliferation of agents and also lack of knowledge about end user clients due to the increasing use of the agent led decentralized model. These e mails are available in my book as well as given in previous Moneylife articles but I have withheld the identity of the NBFC MFIs (the original emails with all names are however available for verification anytime) – please see http://www.moneylife.in/article/how-and-..., http://www.moneylife.in/article/implemen... and http://www.moneylife.in/article/proposed...

That being the case, how can the credit bureau or the NBFC MFIs or RBI or SIDBI or commercial banks say that the self reported data from MFIs (many of who have very weak MIS systems and are using the decentralized agent models) is reliable and valid data? What measures have been adopted by the credit bureau, MFIs, banks, SIDBI or RBI to account for the agent model and ensure the integrity of the credit bureau data? In fact, if you look at self reported frauds in many MFIs (taken from their balance sheets) are increasing and again, the question is how is this being addressed and who will guarantee for the integrity of data?

Please see http://www.moneylife.in/article/increasi... and http://www.moneylife.in/article/establis...

Regulatory Support: Also, in my opinion, the credit bureau must have active regulatory support – mere licensing by the RBI is not enough. Only that will facilitate at least all formal sector loans to come into the credit bureau – by this I mean, the SHG bank linkage, non- NBFC MFIs and other bank priority sector/agri lending (if any) to the same low income people must come into the credit bureau for us to get a real sense of the overall borrowing. I know that getting informal loans, which are huge, is a lot difficult. That would require very special efforts and the cost/benefit must be ascertained!

Data Integrity and Errors in MIS: If fact, I am glad that you have responded from the industry and much appreciated Vasu. I am waiting for the RBI or SIDBI or Commercial Banks to comment on the same and vouch for the integrity of the credit bureau data in terms of reflecting reality of client loans on the ground. Data integrity is a must and cannot be compromised. I will sign off with one example of this – during the AP crisis in 2010, when the MFIs were submitting data to the AP government, the data submitted by one of the MFIs showed very high interest. The AP government said that data submitted by an MFI confirmed what the AP govt had been saying all along about high interest rates on the ground. The MFI then came back and said that it was an error due to computing and data conversion. Please see the following news item extract and original news item – “Sanjiv Viswanathan, CEO, BSFL (part of Basix group) said their effective rate of interest is between 32 to 34 per cent. “In order to meet the deadline for data submission, INCORRECT COMPUTATIONS have found their way in the data. In order to clarify this, we met Principal Secretary of Rural Development-Subramaniam Reddy today and he has agreed to give us time to resubmit our data. WE ARE RECHECKING OUR LOAN DATA AND IN THE NEXT FEW DAYS WE WOULD RESUBMIT OUR INFORMATION,” Mr. Viswanathan said. Please see original article - http://www.thehindu.com/news/states/andh...

My question here is when the MIS systems of such reputed MFIs can give such fundamental errors and also given the serious governance issues at some MFIs (http://www.moneylife.in/article/governance-of-mfis-time-to-implement-connected-lending-provisions-of-rbi-circular-of-2007/18473.html), we surely need an independent body to provide authentication with regard to the integrity of the credit bureau data and I am sure that you will agree with what I am saying. Only then, would I feel comfortable with the statement that the credit bureau is functional. And I feel that the RBI must take interest and leadership in this whole matter and cannot afford to be as hands-off as it was during the last few years. We saw what hands off supervision resulted in. Hope they act now with regard to the credit bureau issue and initiative.

I do not want to make my comments long but unless these and other issues mentioned in the article are transparently addressed, it will be impossible to judge the completeness of the credit bureau and the integrity of the data.

Thanks again and your comments are much appreciated!

Warm regards

Ramesh
p n vasudevan
1 decade ago
hi Ramesh, High Mark Credit Information Services P Ltd, which is one of the RBI approved credit bureaus is already fully operational for the micro finance sector. almsot all the leading 40 odd NBFC-MFIs in the country, with the exception of about 3 have been providing their full data base to the bureau on a monthly basis now for the past few months. and almsot all of us have started downloading reports and checking the borrowing profile of the loan applicant before sanctioning loan to anyone. in fact over the last 2 months when this has picked up full momentum, across the MFIs, we have downloaded about 1.5 million client reports for the purpose of checking overall borrowings before giving fresh loans. the software which HIgh Mark developed is a phonetic based one which is able to do matching based on multiple data points and produce reports which are pretty accurate.
the credit bureau for the MFI sector in India is now a reality and functional with about 80% of nbfc-mfi data and we expect it to be 100% shortly. of course, we still dont have bank-shg details or private money lenders or non-nbfc mfi data on the bureau but while these are important, but they are clearly outside the influence of mfin and needs regulatory or governmental intervention to make them participate in the bureau which would make it totally complete.
regards/vasu
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