November 26th, 2010 at 6:09 am, Normand Arsenault ()

Dear All,

Here is an extract of the article “Help microfinance, don’t kill it” posted in the Indian Express of today.
http://www.indianexpress.com/news/help-microfinance-dont-kill-it/716105/0

“As microfinance expands, there will undoubtedly be frictions between MFIs and clients, government schemes, and politicians. Some will be genuine, others motivated by a desire to get loans waived, and yet others from attempts to increase influence or protect the interests of existing moneylenders whose business may be threatened. Unless there are some clear, universal regulations binding MFIs, there will be continued attempts by local political entrepreneurs to intensify these frictions for political gain. Yet over-regulation of the industry will certainly destroy it, by increasing the costs of lending to unsustainable rates — forcing us to depend once again on public sector efforts for financial inclusion that have largely been unsuccessful.

Given this obvious tradeoff, regulation should be less focused on fixing interest rates or limiting profits, and more focused on institutional reform that makes it easier for MFIs to screen borrowers and thereby lower the cost of their products, as well as encouraging MFIs that charge reasonable rates. The following could be immediate starting points for reform:

1. The AP government should withdraw, or at least suspend, its ordinance until a more comprehensive way of achieving its legitimate aims is worked out.

2. A consumer grievance redressal process should be created as part of a larger structure for consumer protection, as suggested by the Committee for Financial Sector Reforms (myriad agencies for grievances will increase confusion and costs).

3. While regulation that sets strict interest rate ceilings should be avoided, regulation should reward MFIs that charge reasonable interest rates as well as those that introduce innovative products that provide flexibility in repayment. For instance, built-in insurance that protects the borrower during times of distress.

4. The establishment of a well-functioning credit bureau to which all MFIs are required to report their entire portfolio of lending is key to preventing over-indebtedness. The introduction of Unique IDs greatly facilitates the establishment of such a bureau, which would benefit the industry as a whole.

5.MFIs recently created a Microfinance Institutions Network (MFIN) that adopted a code of conduct that focuses on fair practices with borrowers. The industry should accelerate MFIN implementation as well as the credit bureau. The RBI should examine, approve and monitor the implementation of this code of conduct, which could form the basis of future regulation.

When it works well, microfinance can be a win-win situation, as the poor can borrow money at rates that may look high, but are much lower than those offered by moneylenders; and banks can make a sustainable business in lending to the poor. All this rests as much on a social contract as on a legal contract. MFIs need to be more diligent in their lending and screen borrowers better — if too many borrowers can’t repay their loans, the social obligation will start to fall apart.

But politicians also need to be wary — in taking aim at the occasional overstep, they may find themselves inadvertently destroying the whole business, at great cost both to the poor, and the financial institutions that have stepped in to work with them. If we are not careful we may end up in the pre-microfinance world. That would be a great disservice to the poor, and their hope of climbing out of poverty.

The writers are: Abhijit Banerjee (MIT), Pranab Bardhan (Berkeley), Esther Duflo (MIT), Erica Field (Harvard), Dean Karlan (Yale), Asim Khwaja (Harvard), Dilip Mookherjee (Boston), Rohini Pande (Harvard), Raghuram Rajan (Chicago)

I would add a sixth starting point for reform: It should be obligatory by law for all microfinance institutions of India to be a member of the Microfinance Institutions Network (MFIN) (that adopted a code of conduct that focuses on fair practices with borrowers.) All microfinance institutions that do not accept to be part of MFIN should be closed.

Best regards,
Normand Arsenault

November 26th, 2010 at 6:52 am, Fehmeen | Microfinance Hub ()

No doubt, skill building can offer great value to microfinance clients, and it may be easiest for MFIs to outsource this activity to NGOs, as already pointed out. However, MFIs can do this themselves, as we see in the case of Trickle Up. The financial ramifications of this may be immense, but so will the social impact.

November 26th, 2010 at 3:12 pm, Normand Arsenault ()

Excerpts from:
“Microfinance Banana Skins 2008 – Risk in a booming industry”
The Centre for the Study of Financial Innovation
http://www.citigroupfoundation.org/citi/microfinance/data/news080303b.pdf

“Some respondents noted that borrowers were getting the message about lower standards and had become more delinquent, running up debts to several banks at once. Group guarantees, traditionally the underpinning of individual creditworthiness, were also weakening. Philip Biswas, executive director of the Rural Reconstruction Foundation in Bangladesh, said “the main risk we are currently facing – and it’ll be critical in future – is the duplication of different MFIs in the same area with the same borrowers.

All this is taking place against a background in which credit assessment and portfolio management skills may be inadequate, where credit bureaux are lacking, and where legal systems may not aid the recovery of bad debts.” p.21

It seems Mr. Philip Biswas was a visionary. In a market where a microfinance institution has a monopoly, if a borrower defaults on the loan, he/she will be denied access to a loan in the future. It provides a security against default. Once you have competition, this security diminishes. Clients can also take a loan from one MFI to repay a loan granted by another. To top it all, in Andhra Pradesh, there is a conflict between the commercial MFIs and the subsidized SHGs supported by government and World Bank.

Best regards,
Normand Arsenault

November 27th, 2010 at 3:55 am, CS Reddy ()

Its a very good posting Parmesh.

For almost six years, the MFIs have been asked to improve their practices on the ground. However, there is no improvement. After the 2005-06 crisis, the MFIs came up with the voluntary code of conduct. Its implementation is yet to begin. The SHGs and their federations suffered a great deal due to the exponential growth of the MFIs without any regard for the SHGs.

In 2005-06, MFIs made several commitments like reducing the interest rates, not indulging in multiple lending and that the recovery practices would not be coercive. None of those commitments were acted upon. They did not seem to learn any lessons from the previous experiences. MFIs have pushed a lot of credit resulting in many households in a debt trap.

MFIs have to demonstrate that they “walk the talk”. Those that seem to make comments in support of the MFI practices need to understand the practices on the ground. Responsible microfinance does not exist in practice

November 27th, 2010 at 12:03 pm, V.Rengarajan ()

Dear Parmesh Shah
Your posting is timely and very much refreshing as it goes beyond micro credit. towards ultimate goal of Micro finance instead of delving on over focused institutional issue ( the means) consuming lot of money time and space
I wish to share some of my points regarding the subject discussed in your posting
1. To quote ‘Although these institutions have 90% of the rural poor as its members and have achieved quantitative coverage, there is significant scope to improve the quality of these institutions. Here what about the scope for improvement of the quality of the standard of living of the poor? While quantitative coverage appears to be attractive, members’ drop out rate in SHG system in India as reported by 43% of SHGs , is 8 % (Srinivasan’s status report on Microfinance) this is causing concern in the context of exclusion of financially included poor . What is the experience in SERP in AP in this regard ?.
2. Diversified products – Among the diversified products quoted, only a few is found only for income generation (IG)? Micro credit priority is for IG. Otherwise repayment difficulty will be there in the case of Food security health risk fund? All safety nets are necessary for the poor but it is the responsibility of the government to ensure these services through Public Distribution system, public Health system and free premium insurance scheme ( now in all states ) not necessarily through micro credit.
3. Micro credit plan and pro poor repayment schedule are highly appreciated. I have been specializing this micro credit planning area at SHG level. As an international consultant for Micro finance attached to APRACA –Jakarata mooted the idea of this micro level planning for SHG in one of the regional workshop in South Korea it was well received and appreciated. by Asian bankers/MFIs. But this credit planning exercise which has potential for adherence for credit discipline and its productivity it is yet to take off. widely.
4. Beyond credit with livelihood development is the right approach . In the context of Micro credit alone unfortunately becoming be all and end all, a lot of advocacy is needed for promoting this approach.
5. .Provision of livelihood services ( forward and backward linkages – Indian banking parlance ) is a must . But these have to be arranged .jointly and severally by public and private institutions. Those MFI turned NGOs could do well in this regard . Mind set is required
6. Way forward
Some strategy for institutional adjustment, institutional linkages, institutional innovation, innovative products and services are required in MF sector.
a. Institution-SHG Federation need not become an intermediary to MFI . I feel that SHG federation should become over a period of time mini MFI independently managed by community themselves enjoying grass root democracy. .It should be self reliant based without linkage with MFI NGO who nurtured and promoted.
b. Product- mere diversification is not enough- the main purpose of credit should be for IG purpose linked with insurance and savings. marketing inked , .Mini Micro finance plan for each SHG for assessing needs of savings credit and insurance , capacity building need tobe formulated and integrated with panchyat , Mandal , district development plan and also dovetailed with District Credit Plan/Annual Action Plan of the banks. ( underRBI’s Lead Bank scheme) – These micro level credit planning need to be done in tune with Potential Level Credit Plan (PLCP)being prepared by NABARD at district level. The district/state authorities need to bridge the gap in arrangement of livelihood services and other physical infra services as indicated in these plan. This would go a long way in enhancing the productivity of the micro credit and IG for the poor , good recovery for the financial institution which provided the credit.
c.. Role of existing coordination forums SLBC, DCC, BLBC, special forum for addressing the issues related to the operational problems related to MFI sector 9set by RBI)etc, need to rejuvenated and activated to ensure MF services on the one hand and non financial services for sustainable livelihood and safety net to the poor clients – Here a coordinated and joint endeavor
by multiagency are emphasized for a sustainable poverty reduction through Microfinance.
e. In the context of different layers in poverty pyramid, graduation approach for the poorest in the bottom may be followed with micro savings micro insurance and capacity building inputs. Last but not the least drop out/push out phenomenon prevailing in SHG-MFI system merit urgent attention of all concerned with MFI in the context of exclusion of financially included poor It also involves cost
Rengarajan

November 30th, 2010 at 3:28 pm, Normand Arsenault ()

Dear Mr. Reddy

Thank you for your comment. I really sympathize with you. You write : “For almost six years, the MFIs have been asked to improve their practices on the ground. However, there is no improvement…..MFIs have to demonstrate that they “walk the talk”. Those that seem to make comments in support of the MFI practices need to understand the practices on the ground. Responsible microfinance does not exist in practice.”

I believe the managers of MFIs are acting in good faith. The reason why MFIs don’t improve their practices on the ground is that they don’t have the systems to do it.

The fundamental barrier to capacity building is cumbersome access to the information MFIs’ employees and management need to work. Management and employees who can’t access work-related information have difficulty controlling what is going on in the field and making the right decisions. Many times, they work blindfolded. Management and employees look like they are doing a bad job but it’s just that they don’t have access to the information they need. Anybody with poor tools look bad.

Many microfinance institutions continue to overlook this fundamental barrier. Why? Because MFIs lack proper support in designing and implementing their information system.

Unfortunately microfinance stakeholders who finance the technical assistance and who take the decisions about it don’t know enough to know what they don’t know.

From my experience, MFIs fall into two categories. MFIs in the first category are almost totally manually operated and technology is almost absent. For example, surprisingly, it seems that the systems of SKS are almost entirely manual. SKS bought recently Microsoft Dynamics nav for their accounting at head office but it seems that’s about it.

MFIs in the second category are those with high-end technologies like Oracle or SQL servers. They have high-end technologies but with practically very little usefulness for operations and management.

Up to now, in designing and implementing their information system, MFIs have used the technology-driven approach, using IT experts and software vendors to design and implement their information systems.

It seems most IT experts operating in the microfinance industry have experience with very large organizations. Very few IT experts in the microfinance industry have the knowledge and experience to deal with small and medium sized enterprises. They tend to oversell the benefits of expensive technologies when making recommendations. In many cases, expensive, complex, and often unnecessary technologies have been purchased by MFIs, financed by well intentioned donors. Being expensive does not always mean being best.

In fact there are two important obstacles to microfinance institutions software acquisition success:
1. TECHNOLOGY-DRIVEN APPROACH. Tendency for acquisitions to be technology-driven, rather than processes and people driven.
2. LOW-COST SOLUTIONS AIMED AT SMALL AND MEDIUM SIZED INSTITUTIONS NOT SOUGHT. Solutions making use of leading-edge technologies aimed at large banks results in high-cost, inappropriate solutions rather than low-cost, efficient solutions.

For example, many IT companies tend to oversell the benefits of expensive hardware when making infrastructure (network) suggestions. They may sell systems to customers that are packed with expensive, unnecessary, and inflexible components that they will not benefit from.

Overselling complex high-end technologies may jeopardize long-term development of the MFI as it may be overly complex and expensive to manage and make change.

Computers have advanced far enough these days that systems like Microsoft Dynamics will do what many people want to do. Web services—now a mature technology and the standard for robust integration—have replaced hardcoded software integrations that existed for years. Browser-based products completely underwritten in Web services have several distinct advantages:
• Instant access to additional functionality offered by some vendors by adding on-screen buttons or drop-down choices;
• Access to work, wherever your workers are, whenever they need it;
• Added power at users’ fingertips without the need to learn new software.
• 24/7 access to information and work provides far more than convenience.

Myths about security options of high end solutions are nourished by overselling software providers. It is true that sometimes simple technologies do not offer some of the security options provided by high-end systems like Oracle. However, for the purposes of most MFIs, the differences are not relevant. Good management, policies, procedures, and internal control are far more important than software security. When installing a new software, strong emphasis should be put on reviewing policies and procedures and integrating the software into operations during implementation. No amount of software security or hiring of systems administrators can substitute for good internal procedures, strong supervisors, and internal audits.

The security built into some simple solution is well-designed and well-implemented. In addition, most software applications have a thorough audit trail built in.

After years of working in this field, I’ve seen many small and medium sized microfinance institutions struggling to work with high-end solutions completely inappropriate for them. They’ve been oversold on features, overwhelmed by unnecessary expenses, or the package they’re using simply doesn’t meet their requirements. The techniques of large corporations don’t work for smaller enterprises.

High-end systems are often too rigid and too difficult to adapt to the specific workflow and business processes of small and medium-sized financial institutions and sometimes it is the main cause of their failure.

Choosing the right architecture and platform would result in flexible simple systems that increase productivity, save time and cost, generate a stronger bottom line, dramatically enhancing customer service, and above all allowing management to have control over their practices on the ground.

Best regards,
Normand Arsenault
Microfinance Consultant

December 2nd, 2010 at 3:14 pm, CS Reddy ()

Based on the discussion that is happening, there is a clear need for the Government of Andhra Pradesh to set up a task force to address the issues related to microfinance and livelihood support services.

If MFIs are keen to lend to SHGs, SHG federations and livelihood organizations, there could be a meaningful discussion on this. Lending to these has to be in a responsible and transparent manner. If NBFC MFIs are keen to continue individual lending at high interest rates with 50 weeks repayments, there is no scope for discussion. MFIs need to do much more to offer products that are more suited for the poor. The products can not suited to the MFIs to ensure exponential growth. MFIs will have to also come up with concrete proposals on how they would invest huge profits made from the poor in promoting livelihoods for the poor.

APMAS has already done work in the area of financial literacy. We have 15 booklets developed for the SHGs and SHG federations on financial literacy and self management. If the capacities of the SHG institutions be built in these areas, they could become self-reliant and sustainable.

There is definitely a need to work on livelihood support services for the poor. NRM based livelihoods are possible and can be supported. We need to promote livelihood organizations of the poor based on the foundations of the SHGs and SHG federations. NRLM can play a key role in this area. ENABLE, a network of resource organizations supporting the SHG movement in India, can work with NRLM in this area.

April 25th, 2011 at 6:05 pm, Ever been to Celedonia? « pinayprestamos ()

[...] defaults is extremely high and reports of aggressive collection methods have been reported (à la Andra Pradesh). Similarly, there have been protests and the government has not shied away from doling out [...]