Responsible Indian microfinance in India: Still a pipedream year after crisis

The self-help group & bank- linkage model has been touted as the panacea for solving the current crisis facing Indian microfinance. But this linkage model faces a number of issues that need urgent attention

The Indian microfinance crisis continues and there seems no sign of real revival on the ground. Of late, we have been hearing that a savings-led model may have prevented the recent (ongoing?) Indian microfinance crisis! I am not sure that a mere savings-led model would have prevented the crisis and here is why.

The Indian SHG-Bank linkage programme is a savings-led program but there are a number of unanswered issues and questions with regard to the SHG-Bank programme as well. Please see the earlier Moneylife article in this regard (Microfinance industry: Where is the self-help group-bank linkage model headed?).

There are several issues with the SHG-Bank linkage model that need urgent attention:

  • The correct number of SHGs operational in the country cannot be accurately estimated and no one can say with certainty as to how many SHGs really exist/work in India today. 
  • Data on the transactions (especially, savings, loans, etc.) and working of SHGs is very weak. Therefore, we know only about SHGs being linked but nothing concrete about their day-to-day working and performance, especially after the bank linkage.
  • In short, one is yet to get a good sense of:

1.    Number of SHGs formed until date since the inception of the SHG bank linkage programme.
2.    Number of SHGs physically operational as on date, based on some reliable verification mechanism.
3.    Number and names of members in various SHGs and their KYC coordinates.
4.    Status of all loans (loans disbursed, loans repaid, unpaid principal balance, principal overdue etc) made by SHGs to its members using external funds (cumulative position as well as recent period/year loans).
5.    Status of all loans (as per parameters above) made from member savings by SHGs to their members (cumulative position as well as recent period/year loans).
6.    Total savings of SHGs in the financial system versus total loans to SHGs by the financial system.
7.    Disaggregation of all above data by year, region, state, SHG age, loan cycle and the like.

  •  This lack of information also relates to the issue of how the linkage loans are actually used by the SHG members.
  •  Several stakeholders have also raised questions on whether all linked SHGs are physically (still) present. According to them, in many cases, apparently, data on old SHGs is being provided even while the original members (may) have migrated elsewhere!
  •  Much less is known about what happens to older SHGs that have been linked multiple times—some stakeholders argue that fresh SHGs are formed using members from older SHGs. Therefore, we would need to know whether all the fresh SHGs are really new or whether they have been created using members belonging to older SHGs. The KYC (Know Your Customer) implications of this aspect are indeed huge and make this a critical issue.
  • It would also be interesting to know the actual overlap of members between the SHG bank linkage programme and the Grameen type MFI model—while it should be huge, given that many MFIs are said to have cannibalized SHGs, knowing the actual extent of overlap in clients across these models is very necessary to understanding the level of indebtedness. Therefore, official participation by the SHG bank linkage program in the ongoing credit bureau efforts would be very useful and critical—an aspect that not received support at the highest levels.
  •  There are many other issues such as:

1.    SHGs either disintegrating (this may not be a bad thing by itself!) or being taken over by the elite among the poor.
2.    Also, in today’s fast-paced rural economy, the number of low-income clients who are likely to be actively involved in the kind of social intermediation that so-called ‘good’ SHGs have to practice appears rather farfetched. Given the (fast) changing nature of our society, the choices available and the information explosion that is going on, the long-winding meetings of SHGs would be very difficult to sustain in the medium/long-term. And without such preparation, the quality of SHGs will surely dip, and the moment we forcefully push for targets with regard to quick establishment of (such) SHGs, then, the process will start getting corrupted and agents will creep into the process as has been pointed out in previous Moneylife articles.

Therefore, it is my opinion that we may be exaggerating what savings can really do and in reality, much more than savings (as well as associated credit) is needed to really include low-income people and ensure this on a sustainable and long-term basis.

That said, if we want to have real responsible finance in terms of long standing inclusion of low-income people, we need several things:

First and foremost, we need good distribution vehicles that can reach low-income people effectively and efficiently. Here, by effectiveness (doing the right things), I mean they must provide need-based financial services ranging from quality and vulnerability reducing financial services (livelihood credit, post harvest/production credit, savings, remittances and a range of risk management services such as insurance, pensions etc. Likewise, efficiency (doing things the right way) concerns the aspect of reducing transactions cost in service delivery without compromising risk. There is always a trade-off between risk and transactions cost and the key is to optimize the same for Pareto-optimal situations (to the extent feasible).

Second, among other things, institutions—whether MFIs, SHGs, SHG Federations, Banks/FIs—must be made accountable so that there is good and transparent governance on the ground, minimum systems (MIS, internal controls, risk management, accounting etc) function properly during implementation and there is overall commitment (not just in words but more importantly in action) towards really ensuring low income people gain access to a wide range of affordable and need based financial services. This commitment would also include an unequivocal assurance by concerned institutions not to engage in frauds such as multiple, ghost and over lending and other (nefarious) practices associated with the decentralised agent model. In other words, the operational model must be in tune with reality and help to prevent frauds/disconnect from original mission during implementation. As I have been saying time and again, commercial microfinance is not bad but commercialisation without necessary safeguards will turn out to be a recipe for disaster!

Third, regulation must be appropriate and it should enable and ensure the above while at the same time not stifling operations and growth of the microfinance industry. Again, there is a tradeoff here between regulation and development in a nascent industry like microfinance and that needs to be optimised so as to create a Pareto-optimal situation.

As I have been saying for long, much of the failure of Indian microfinance has occurred due to the indifferent attitude of regulators during years of extreme growth—when they assumed that all microfinance was positive and ignored real time (negative) signals from the ground. I am very glad that Dr YV Reddy (former Governor, RBI) has now come out and clarified the various issues and graciously accepted the mistakes committed in the regulatory domain (in a recent EPW article - Microfinance Industry in India: Some Thoughts, vol xlvi no 41, October 8, 2011-http://epw.in/epw/uploads/articles/16635.pdf).  

A further aspect on regulation is that it is always tiered when it comes to microfinance (where banks and DFIs are supposed to supervise MFIs). What is really sad is that, despite the existence of laws and a regulatory framework, DFIs like SIDBI and banks were allowed to engage in absolutely irresponsible and lazy lending using priority sector funds. It is also important to note that they failed miserably in their duty of tiered supervision, which is implied in the Banking Regulations Act. This needs to be recognised square and fair!

That said, I even heard many DFI officers (including a very senior management officer of a DFI that subscribed to the MFI model) and several bankers during the early days of the crisis justify their laissez-faire attitude. They simply said, “Over, multiple and ghost lending situations like these are common in nascent industries like microfinance and they should be taken in their stride.” I was horrified to hear this coming from so called responsible professionals in whose hands (our) public deposits are being left for management. I hope all of the banks/DFIs realise that the money they lend are public deposits and they must be prudent with it!

A related dimension in regulation is about client protection and here again, the self-regulatory mechanism (codes of conduct etc) was not implemented on the ground due to the decentralised agent led microfinance model that was used by many (if not all) MFIs. The lack of appropriate local level supervision obviously helped to exacerbate the client protection problems.

Without question, regulation apart, going forward, DFIs like SIDBI, self-regulatory organisations (SROs) and microfinance associations (MFAs) (like MFIN), international bodies (like CGAP, IFC and others), credit rating agencies, banks and other stakeholders must pledge that they would perform their roles with utmost transparency and objectivity so that early warning signals to a crisis are not pushed under the carpet. Only this will help the larger cause of financial inclusion and responsible microfinance as deeper crisis situations can be avoided

Last but not the least, the most important cog in the responsible microfinance wheel is the larger infrastructure and ecosystem necessary to enable low-income people to get the rewards/returns commensurate with the efforts they put in, investments they make and risks they undertake in their livelihoods (agriculture and several other non-farm sector occupations, enterprises and MSMEs, labour and other services etc). This is still the most important yet neglected aspect as if this larger ecosystem is absent, then, the poor and low income people do not get the returns required to be financially included and continue to be in debt (from various sources)—in fact, under such circumstances, their ability to save also diminishes seriously. This aspect of a larger ecosystem needs to be tackled on a war footing in India as otherwise the cycle of inclusion and exclusion and associated indebtedness can never ever be solved.From IRDP (Integrated Rural Development Programme) to SJSY (Shahari Jan Sahabhagi Yojana), the IFAD (International Fund for Agricultural Development) Program, SHG Bank Linkage, the MFI Model—I have seen history repeat itself over a good solid 30 years now and I hope that we wake up to this urgent need for a larger ecosystem expeditiously.  The NRLM can surely make a definitive contribution to the same. And let us be clear that without it, the financial inclusion of low-income people will always remain a mirage and/or illusion!

To sum it up, savings alone cannot ensure responsible finance and/or long standing financial inclusion. Apart from ensuring that low-income people have access to a wide range of need-based and affordable financial services (savings, credit, risk management etc) through well-governed and managed institutions, the lessons from the crisis clearly call for efficient prudential and non-prudential regulation backed by appropriate ground level supervision of the institutions (MFIs, banks, etc). Additionally, effective consumer protection (which given the nature of microfinance, requires good local presence and calls for a constructive role by State Governments) is also mandatory!

And it is all of the above that should enable Indian microfinance to take off in a responsible manner and facilitate low-income people to be included in the real sense of the word.

However, sadly, despite a long and arduous year in crisis, none of this appears to be in sight in Indian microfinance!

(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).

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    COMMENTS

    G k agrawal

    9 years ago

    Author has brilliantly brought out the various deficiencies in the SHG-Bank linkage model of micro finance and the corrective follow up action need to be taken by RBI,Nabard, Sidbi,banks and others. Most of the shortcomings however relate to reporting , monitoring, evaluation and follow up and are remediable and not necessarily of the linkage model per se. Savings led model has its obvious advantages over loaning led model

    The line between ‘amateur’ and ‘professional’ cameras has vanished. But you still need a trained eye behind the lens for that right click

    The cost of making audio and visuals just became much cheaper. But the skill of the photographer or cinematographer is still paramount in the business of photography or filmmaking 

    Living in Delhi, one gets used to heavy security guidelines and regulations for all sorts of events, and has learnt to live with them. However, even by Delhi standards, this one was new, listed as one of the security guidelines for the Formula-1 event in Delhi. It states that included in the list of banned items for spectators are (See: Professional audio visual equipment, professional cameras http://in.bookmyshow.com/sport/formula1/spectator-guide/).
     
    Frankly, till now, either electronic items were allowed, or they were not. Yes, the Archaeological Survey of India (ASI) in its wisdom, continues to try to charge extra for using video equipment, not realising that almost all digital cameras now will record video as easily as they will record stills, but then that's the legacy of decades ago. And they are old hands at it, plus what’s at stake isn't more than a small charge levied for non-commercial video. F1 is supposed to be about state-of-the-art everything—including and especially electronics. Surely they know, by now, that there’s not much difference here, anymore, in what looks like professional equipment and what doesn’t?
     
    This is also interesting, because as on date, the dividing line in output quality between professional audio/video equipment and what is known as consumer audio/video equipment is so thin that it has almost disappeared. Moreover, to leave this sort of discretion in the hands of private security guards is asking for trouble, of the sort that has a bad habit of becoming an issue in this day and age of instant social media based publicity. After all, there are cameras as small as the handheld point and shoots—which function almost as well as professional DSLRs, and there are old very professional looking cameras which will not match even the cheapest of point and shoots anymore.
     
    The reference to the security issue pertaining to cameras at the F1 event in Noida was just one example of a huge change taking place in cinematography lately, which does not seem to be reflected in the way not just security agencies, but others react to the new age dawning on us. Assuming HD (High Definition) film quality as a benchmark, good enough for the end product to be screened at the best of multiplexes, the back-end in terms of equipment used for shooting itself has changed tremendously.
     
    A good professional camera, used in both the television and film industry, like the RED-1, with bells & whistles, would cost between Rs30 lakh and Rs50 lakh in India today. At the other end of the price spectrum, a very good DSLR from a manufacturer like Canon, for example, along with a good lens, locally procured follow-focus, grip, new age LED lighting and portable sound recorder, would come for between Rs1.25 lakh and Rs3 lakh. That’s the simple bottom-line that a producer needs to deal with when going out looking for a few dozen cameras to work with while doing a movie or a commercial.
     
    And both are going to give the same result, as more than a few movies as well as commercials will testify—movies as diverse as Ra.One and The Girl in Yellow Boots have used the low-cost DSLR camera-based rigs, and as for commercials—the list is already very long. Established professionals have not been able to tell the difference, when shown products from both options, while customers from the larger corporates who commission such work clump along blithely unaware, like the security guys at F1, that the world has moved on.
     
    In addition, while professional camera equipment would still require a studio and equipment to work on it for the final product, the DSLR based cinema equipment often requires nothing more than a decent computer and a very quiet room. Yes, both will require some specialised knowledge of techniques, but the importance of the sound recordist as well as the technicians is still paramount, and lighting continues to play a major role for specialised cinema. But by and large, the cost of producing a film which has a technical quality good enough for the best of playback options available, is now coming crashing down because one of the main elements—the camera—is now available at just a fraction of the cost.
     
    So, implications for so-called security issues apart, where does this leave the word "professional equipment" as far as so-called ‘film-making’ goes?
     
    First of all, from the security point of view, professional or consumer level equipment, both are as dangerous or safe, if a fair and proper risk analysis is done. Organisations like F1 need to take a call on this serious matter.
     
    Next, as far as those who are really creative or want to get their point of view across are concerned, it places them in a wonderful place, freed of the cost of film and developing to start with. (How many here remember the political clout involved in even getting hold of raw stock of film for making movies, not too long ago?) The main equipment cost has also come crashing down to about 10%-15% of what it used to be.
     
    And finally, what this really gets across is that no longer is it the person who owns the machine who calls the shots in what the rest of us are going to see, because now it is increasingly clearer that anybody can own or rent these cheaper professional cameras. It will now be the message that dominates, as well as the technological skills of the person getting that message across, and not any more the cost of the technology.
     
    Who is going to explain this to the security guard, or the corporate honchos, then, when their bosses are still not reconciling themselves to this radical shift taking place in the world of cinematography?

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    COMMENTS

    SANarayan

    9 years ago

    The eye behind the lens is indeed most critical, but today's camera's do more than just help.While on a trip to Kailas-Mansarovar I assessed the Nikon DSLR too heavy to lug along in that rarified atmosphere; so just took a Sony cybershot. But a short video from that is so amazing......Pl send me your email-id and I'll send the file.

    REPLY

    malQ

    In Reply to SANarayan 9 years ago

    Dear Narayan ji, thank you for writing in . . . may I request you to post the video on youtube or equivalent, and also place the url here, please?

    And yes, the point and shoot videos are getting better and better every day.

    Grateful/vm

    SANarayan

    In Reply to malQ 9 years ago

    The URL is http:/www.metcafe.com/channels/s.a.narayan

    SANarayan

    In Reply to malQ 9 years ago

    Have given the URL

    Diwali fails to light up sales: Consumer outlets feel the pinch, bigger retailers cushion the shock

    Consumers were less enthusiastic this festive season, thanks to high inflation. Corporates have also slashed their budgets for gifts to clients

    The festival of lights failed to light up consumer stores this Diwali. While claims are being made about grand sales, this year, the shopping season has been dim.

    “We have not sold much this year,” said the manager of a consumer durables and electronics showroom in Vashi, Navi Mumbai. “Diwali is generally a good time, and people buy televisions, kitchen appliances, cameras, and computers. But most of our stock is unsold, and even fewer turned up for window shopping.”

    The manager also said that they were expecting Sony Bravia to sell well, but shortly before Diwali, reports appeared that many television sets abroad were recalled after smoke started coming out of them. This was a big setback.

    Retailers too, are counting their losses. Representative of a leading apparel brand said, “We see a lot of people shop for ethnic-wear during the festive season, but this year, people seemed less enthusiastic. We had introduced some new designs for women, but we have had few takers. Footfalls have decreased, and sales are considerably lower than what we have seen earlier.”

    However, not all retailers have been adversely affected. A Future Group spokesperson said, “Yes, the footfalls have been low, but since we offer a highly diversified range of products and have many formats, we have not felt that much pressure.”

    While Govind Shrikhande, managing director of Shoppers’ Stop has attributed the dull response to the grim sentiment prevailing over scams, industry body ASSOCHAM had predicted that inflation will force the shoppers to cut back substantially on their Diwali shopping budget. Just before Diwali, a survey by this entity said many middle- and lower-income families across the country will cut around 35-40% of spending on festive seasons like Diwali to manage their monthly budgets.

    ASSOCHAM said, “Delhi ranks first in curtailing expenses followed by Mumbai (2nd), Ahmedabad (3rd) Chandigarh (4th), Kolkata (5th) and Chennai (6th).” Apart from that, ASSOCHAM also reported that corporates have slashed Diwali gifting budgets by 25%-30%.

    During Diwali, not only clothes, but even grocery and other daily-use items become costlier. This year, milk and dairy products, sweets and dry fruits were more expensive, which significantly dampened consumer spirit. Even gold and jewellery, which attract a lot of customers during ‘Dhanteras’ and Diwali, has seen few takers. “This year, not many people have bought jewellery, because gold is expensive right now. We have sold many silver items instead,” said Firoz Johari, a jeweller from Dadar, central Mumbai.

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