In August, Parag Jariwala and Vikesh Mehta, both analysts at Religare Institutional Research, put out an analysis which indicated that all was not well, based on the amount of investment that was coming into the sector, the valuations of the expected returns and, therefore, the required growth rates.
In a recent article in The Wire, a news website, Chander Suta Dogra talked about field reports where many women are at the deep end of indebtedness and warned of another crisis brewing.
However, a recent blog by Vaibhav Anand and Aryasilpa Adhikari of IFMR Capital dismisses The Wire report as “sporadic" events and argues that drilled-down data analysis at the pincode level from credit bureaus does not indicate overheating.
My own analysis carried out in the Inclusive Finance India Report 2015 showed an infusion of ₹ 30 billion into the microfinance sector (including about ₹ 11 billion that came in for Bandhan, which became a commercial bank). The corresponding amount for the previous comparable period was ₹ 7.5 billion. The amounts disbursed as microfinance loans grew at 80% in the 19 states for which detailed data was available. The portfolio outstanding grew by 61% and the loan accounts grew by 64%.
This is indeed a very high growth for the financial services sector operating exclusively with the poor and vulnerable, considering that we were operating on a base of around ₹ 240 billion in FY2014, growing to ₹ 390 billion in FY2015. What is worrying is that this growth has not seen a concurrent growth in the number of microfinance institution (MFI) branches (10%), employees (22%), and clients (23%). Clearly, the infrastructure is being stretched, the employees are being stretched and the clients are being stretched. All these might well be within the Reserve Bank of India (RBI) specified limits as argued by the IFMR blog, but still a cause for worry.
The murmurs, the suicides and the news reports that indicate a bubble are not borne out by specific data trends. With RBI putting in place a series of restrictions on how microfinance institutions operate, we will not find any data that seems to blatantly violate the RBI norms. Therefore, any analysis at the meta data level is not going to yield any specific intelligence. What is important is whether these “sporadic" events that are getting reported, the murmurs from the field have the potential to become a contagion. How could this grow into a crisis?
For understanding this, we need to look at the issue from a more nuanced perspective. When the first guidelines for MFIs were issued by RBI in 2011, the ceiling on the income of an MFI client was defined as ₹ 60,000 and ₹ 120,000 in rural and urban areas, respectively, and the maximum indebtedness of the client, beyond which the MFI could not lend, was pegged at ₹ 50,000. All MFIs together could not lend more than ₹ 50,000 to the poor client who had an income less than the specified amount.
The norm has been now amended to increase the income limit to ₹ 100,000 and ₹ 160,000 in rural and urban areas, respectively, and the cap on the indebtedness has been doubled to ₹ 100,000. Are these limits fair?
The answer to this question varies depending on the vulnerability of the client, the location and the livelihood opportunities. What works in Madurai as an appropriate loan amount may not work in Muzaffarpur.
The second issue is termed as pipelining—people lend their name and identity to somebody else who will borrow. So, on the literals, the rule is followed, but basically there could be irresponsible lending, resulting in achieving the target. If the underlying pipelined loan does reasonably well, it would not show up as delinquency, but if the activity fails, then multiple loan accounts that have pipelined the main loan will simultaneously show up as delinquency.
Both these are risks to the MFI. If the practice is rampant, it has the potential of a contagion. If there is a sharp growth in lending amounts, and no concurrent growth in the physical outreach of branches and employees, then it is most likely that the credit checks of identity, pipelining and utilization may be short-changed. This would happen with aggressive growth targets for the credit officer, as the person is stretched to add more portfolio. The growth rates are themselves driven by investments and valuations. At this time, we have all the ingredients of a potential crisis.
The symptoms for this crisis in the first instance are murmurs from the field; this is ground-level intelligence. An indication of this was available in Andhra Pradesh in 2006 and later in 2010. The second stage could be large defaults concentrated in certain branches and locations (without affecting the books of each of the MFIs, as they would be geographically diversified). Usually, the MFIs do not ease the pressure of collection on the credit officers. If they do not ease up, then the clients may be driven to take the unfortunate step of suicide, bypassing the second stage of defaults. By the time this manifests as data, it may be too late.
What is needed at this time is that each of the “sporadic" but serious incidents—that have resulted in an unfortunate suicide—be investigated thoroughly. A thorough and detailed audit be carried out on utilization checks and pipelining in all accounts of branches where the deceased borrowers were indebted and a thorough system check be done on the institutions from where the client suicide reports are emanating. These are essential before this brews into a larger crisis. We need to remember that every crisis is not about whether people are following the letter of the law; in most cases, they would be. But the crisis would be about the inappropriateness of the norm in a given situation.
To start with, RBI possibly should at least look at the MFIs that have been awarded initial licences for small finance banks, to ensure that their practices are audited at the field level before the in-principle licence is converted into a final licence. In addition, it is essential to follow up on the murmurs and stories that have specific intelligence and subject them to a thorough check.
We have to remember that stories of personal tragedy and unhappiness are a result of specific situations and large data will not show them. A hundred suicides of microfinance clients can be termed “sporadic" given the large data set of the overall number of clients, but each one of those stories has lessons for the majority who are intertwined in the same system. Therefore, the sporadic instances are not to be ignored as blips, particularly if these instances have resulted in suicides. Let us hope RBI acts.
M.S. Sriram is a visiting faculty at Centre for Public Policy, Indian Institute of Management, Bangalore.