Fractured/Earth

this is the draft of a story on microfinance agents that never got published. i could not conclusively prove the existence of these microfinance agents. but it is an interesting read nonetheless, on how the informal economy subverts the formal sector’s best laid plans. take a look.

In xx, while auditing the books of an Indian microfinance institution (MFI), Deepak Alok, partner at a microfinance portfolio-auditing firm called m2i from Gurgaon, noticed something intriguing. Locals — rickshaw pullers, small-time politicians, husbands of MFI clients, etc — were bringing it clients in return for a commission. Some of these clients were genuine. Women who needed loans but lived in villages the MFI did not cover.

Others, however, were borrowers who needed larger loans of Rs 1 lakh or so but could not get those from the formal banking channel. Consequently, they were approaching these intermediaries. Who, in turn, would present this loan to the MFI as Rs 10,000 loans for 10 women. The women would fill out the form and furnish documents for verification. In return, they would get Rs 500 up front for filling the form out and another Rs 10 every week for attending the MFI-mandated weekly meetings. But the repayment itself would be done by the final borrower, via the agent.

That is one vignette from the world of the microfinance agents. The folks who have been in the news over the past few days, getting blamed for harassing microfinance borrowers in Andhra Pradesh to a point of such desperation that 30 (and counting) of them killed themselves.

There’s is a shadowy, little-glimpsed world. The agents rarely crop up in popular discussions about MFIs. And yet, operating at the intersection between the MFIs and their borrowers, they can be powerful forces. Large agents command enough clout to be able to direct women borrowers to stop repayments. They can redirect their loans to others. Needless to say, every time a loan is redirected, there is a failure of KYC norms with cascading implications for the MFI and the bank. Not knowing who got the loan, they cannot follow up in the case of a default. Then, as recent events in Andhra Pradesh show, agents’ egregious conduct can land MFIs in the dock.

Remember Kolar where MFIs took a collective hit of Rs 60 crore after the local Anjuman Committee issued a fatwa barring women from transacting with MFIs? That was due to the agents. Or take Lucknow, in late-2008, agents were responsible for another microfinance NGO, Nirman Bharati, almost shutting down.

For all that, not too much is known about the agents. Who are they? Are they an isolated phenomenon or are they more widely spread? What are the implications for the MFIs and the banks whose money is at stake?

Inside the microfinance industry, opinions are divided. Most say that the agents are nowhere as pressing a problem as the multiple loans borrowers are stacking up (see “Quest for fast growth lands India’s microfinance institutions in soup”, 8 March, 2010, Economic Times). Others say the agents are a more serious problem than that.

To find out more, the Economic Times spent two weeks on their trail. At this time, two points seem to be fairly evident. One, while more studies are needed to quantify individual MFIs’ exposure to agents, the structural reasons responsible for their entry into microfinance are widespread.– which includes the MFIs’ disregard for financial prudence in their search for growth and valuations.

A closer look at the agents
In the MFI model, women are formed into joint liability groups of five or so members each. Each group is headed by a group leader. A bunch of these groups combine to constitute a centre. Which in turn is headed by one member who is appointed centre leader. A collections meeting is held every week, where the women have to sit in queues corresponding to their groups. the MFI’s centre manager arrives, the women recite the oath, and then the centre leader and the centre manager collect instalments from every woman.

It is this model that is being distorted.

1. The field staff starts charging commissions from the borrowers. on the whole, says an SKS ex-employee, s/he might walk off with as much as Rs 1,000/2,000 from a Rs 10,000 loan.

2. The centre leader, usually a more affluent woman, uses her position to hold on to some of the borrowers’ loans. If she oversees, say, 8-10 groups (about 40-50 women), she retains and uses a part of the overall loan portfolio — for consumption, or to put into her own business. While the loans continue to be in the names of the members, the centre leader makes the repayments.

For this to happen, the field executive and the branch manager have to outsource the responsibility for disbursing and collecting money to the centre leader. She then decides whom to lend to.

3. In a third model, an community member — a shopkeeper, a local bigwig, a rickshaw puller, etc — offers to supply borrowers to the MFI. Over time, he becomes the local point person, and all the MFI’s work is done through him. He does the lending and he does the recollections. He might lend to the women. Or he might take their names on the application forms but lend to someone else.

There are some larger points to be made here. It is in the interest of the agent to keep the repayments on track. He/She stands to lose if the arrangement collapses. Also, the fact that agents are doing the onlending need not be bad per se. They know the market, and can customise loans far better than the MFIs – they might lend anywhere between 2000 to 200,000 to a borrower, offer flexible repayment schedules, all the while ingeniously ensuring weekly repayments are on schedule. Until, of course, an external shock throws all calculations awry.

Which is what happened in Kolar. Accrding to an MCril report on the crisis, a local agent called Sardar Khan had taken a loan in the name of 20-25 local women, and onlent it further. When he failed to repay, the MFI staff went after these women. Who in turn told Khan to pay up. In the heat of the moment, he drank poison, landed in hospital, his friends complained to the local Anjuman Committee, which issued a fatwa banning any business with MFIs.

4. The fourth model is more predatory. Here, a local political agent steps in as a local intermediary. In this case, he becomes the local agent with the intent of converting the loans into political capital. Says Mohammad Anas, a microfinance ex-employee of both SKS and Spandana: “at times some commission agents become so dominant in certain pockets that we are bound to avoid that area for the time being.”

Also, the second, third and fourth model make the branch manager very dependent on the agent. Says a Lucknow-based exemployee of SKS Microfinance, “While the MFI model is built on spreading risk across a bunch of people, here, one member carries disproportionate risk.”

The balance of power here is in the agent’s favour. If the agent leaves, the MFI will not know who its final clients were. Nor would the clients know who the MFI is – because if the MFI tries to promote itself in the village/locality, it will alienate its agent. Also, if another MFI comes in, the agent can play the two against each other. Or start representing it as well. The branch staff of the first MFI will rarely be in a position to object. Also, if the agent is not able to keep the repayments coming, the branch staff is likely to advance him/her a fresh loan to avoid a default which would expose the distortion.

All this has further implications. Says rural finance practitioner Ramesh Arunachalam, “Microfinance is a large number of small loans, disbursed in remote areas, built around weekly transactions. In all, there is a lot of cash involved. Further, once agents come in, there are no checks and balances. For that reason, they have a perfect setting in which to run all sorts of frauds. It is all a recipe for disaster.”

The bigger question is about the extent of the problem.

Omnipresent agents. Weak systems. Weak communities.

In the first place, it is incontrovertible that agents themselves are around. External interventions in Bharat– by companies and government – are surrounded by tens of thousands of people looking for ways to turn that intervention into private gain. It doesn’t help that the interventions themselves, always conceptualised with scale in mind, are rigid hierarchical structures with slow response times. Between the two, subversion is inevitable. Be it the village elite trying to get family members into position of power – as an anganwadi worker, into the panchayat. Or a farmer pushing bad stocks into the government’s procurement system by bribing the buying agent (who too is looking for his own ways to maximise his overall fitness).

Here too, the agents illustrate some of the lesser-known ways in which communities are responding to microfinance. There are others. In ‘Multiple Meanings of Money’, Smita Premchander talks about how women in her study site of Koppal, Karnataka, are unilaterally dissolving and recombining as new groups – along risk profile, risk appetite, neighbourhood, caste, etc. Working on this story, ET heard stories about field staff running off with cash.

What makes their presence even more incontrovertible is the fact that it is easy for them to spot the microfinance opportunity. One kind of agent, says Anas, “takes shape while the women are filling out their forms. He might be the son of one of the women or the husband of a centre leader. He helps them with the forms, perhaps runs around a bit and gets the photocopies, etc, arranged.” In return, the women voluntarily pay him some fee, and an idea takes root. “His brain clicks”, says Anas, “This is a good way to make money, and he starts looking for more groups to form.”

Others might see the model at work, contact a bunch of women living in the next gali, etc, who need loans but have no MFI, and puts them in touch with the MFI in return for a commission. Next, those seeking larger loans approach him, and the misrepresentation starts.

It is interesting. This intersection between the formal and the informal economy. The smaller agents lead lives of quiet desperation. Says Alok: “If the borrower defaults, the MFI will contact the women. And then, they will point him to the agent. Who will probably get hauled off to the police.”

The bigger agents raise questions about the utility of microfinance itself. They thrive on patronage. Which translates into a complete negation of what microfinance stood for. Lenin Raghuvanshi, founder and executive director of Peoples’ Vigilance Committee on Human Rights, who works with the beleaguered weavers of banaras, says communities such as these are structurally marginalised. To ensure repayment, MFIs are tying up with local Dabanng characters. “But if an MFI ties up with the local elite to disburse funds, isn’t it getting coopted into the existing semi-feudal society?” If so, what kind of qualitative change in the lives of its clients can it possibly bring about?

Says Mukul Jaiswal, managing director, Cashpor Micro Credit, “Wherever there is money, there will be agents.” The question is: under what conditions, do agents enter the microfinance business?

One. When the MFI’s systems are weak. Which happens either because it is trying to grow fast, and its systems cannot keep up. Or because competition is forcing its staff to cut corners.

Take Banaras. The city, says Anupam Tiwari, who moved from Cashpor to head the Rickshaw Sangh, a Banaras-based cooperative for rickshaw-pullers, has 12-13 large MFIs. This is quite a change from even 5 years ago when there was just Cashpor working here. As a result, he says, MFIs are competing to add borrowers. They are said to be giving cash bonuses for every new borrower a staff member brings in. In the process, several norms essential for running an MFI smoothly are being given the go by — client identification, training, group formation.

Also, agents come up most easily in areas where social relations are weak. As Jaiswal says, in a village, where people know each other, it will be stigma if the villagers figure that one of their own has been cheating others (or taking a commission that was never theirs to begin with). In the cities, less so. They belong to migrants. Fellow feeling is lower. That said, even inside the cities, there is a continuum. he says, “Multi-ethnic communities do not have great fellow feeling. Communities of a single caste/clan/ religion, etc, are more cohesive. Similarly, groups of members who live nearby form bonds that do not revolve only around the group meetings. these are stronger relationships.”

What parts of india correspond to these conditions? According to Manoj Kumar, xx, Spandana, the agents are a large problem in the cities. In Hooghley, disbursement itself has stopped.”

What is the best way to fix this?

These days, whenever an MFI hears about an agent, it stops all disbursments, and starts talking to borrowers, asking them to repay only to the MFI. The problem with this approach says Akhilesh xx, Microsave, is that getting the money back is very hard. This is because of two reasons, says Ramesh Arunachalam, a rural finance professional. One, because the women are promised a second larger loan if they repay. If there is no second loan coming in, they lose all incentive to repay. Two, when a community is steadily getting loans from the MFI, it is easier for the women to even borrow from each other to repay. When the loans dry up, it gets harder.

Instead of chasing defaulters, say sources, MFIs seem to be keeping one foot firmly on the gas pedal. That way, the proportion of portfolio at risk will never rise beyond 1% (defaults are roughly calculated as ‘total outstanding of past due loans’ divided by ‘total portfolio outstanding’). Says Alok Misra, director, rating and research, Micro-Credit Ratings International, “Even if they lose Rs 50 cr, that is nothing compared to their 5,000 crore balance sheet.”

This approach is problematic. Partly because the larger MFIs cannot possibly keep doubling every year to keep their PAR (portfolio at risk) low. An SKS has 7.3 million borrowers. And Spandana has 4.95 million.

And partly because 99% repayment itself is something of a chimera. Says the Lucknow banker: “Why should repayment be higher here than in credit cards or auto? Even if the loans are not taken with the intent to default, there will be environmental/seasonal factors that result in a default occassionally.” Indeed, every household has an absorption capacity for loans – the amount that their existing cash flows will enable them to repay. In the old days, families would borrow during emergencies and repay from these cash flows.

Now, the gush of microfinance seems to be changing that pattern. Partly because it has enabled households to borrow well in advance of any contingency. This way, they are already fully leveraged by the time any emergency arises. (Even if the borrower starts an income generating activity, it is not easy to find one which will throw up cash over a 50 week period in India’s agrarian economy which sees, at best, two spikes when money comes in).

A more permanent solution is needed. Some microfinance organisations, like Cashpore, have slashed the discretionary powers given to centre leaders and field staff. And they transfer their branch staff regularly so that they do not form linkages with the borrowers.

All this, says Jaiswal, has bought down the incidence of such complaints. But one still cannot completely rule agents’ presence out.

In his case, it might well have. Cashpore, which is not an MFI, grows at a positively sedate 30% every year. Its peers, however, continue to set an indescribable pace (see chart). Between 2004 and 2009, number of outstanding loans at six of India’s top 8 MFIs grew at over 1000%. The other two grew their outstanding loan portfolios at 500% plus clips.

There is considerable cynicism within the industry on whether their systems are keeping pace with this level of growth. Says Misra, “The 100% YoY growth is not sustainable. There is no system. Group meetings are not taking place. This is what happens when money starts chasing people.” Adds Arunachalam, “Microfinance was predicated on relationship lending and social capital. The key was that the field staff knew every individual client. That is now being replaced by something far more like Starbucks or McDonalds.”

The question is: can the MFIs slow down? Or will that reveal default rates in excess of that magical, mythical 1%?