Suicidal Microfinance, Desperate Actions: Why Business Correspondent Model Is an Effective Policy Prescription for Micro-banking Customers in India?

Recent spate of Suicides committed by reportedly 30 microfinance customers or their relatives in Mecca of the Indian microfinance - Andhra Pradesh has shaken the policy echelons at all levels. The Government machinery flung into action with an extraordinary swiftness and resulted into issuing  a   Special ordinance to rein so called rouge MFIs which is in addition to the Reserve Bank of India’s sub committee to look into MFI functioning . Thankfully, the Ministry of finance’s response has been cautious but with discernable strong signals about introduction of legislation on MFI sector in the parliament.

 The first glance and most of us would appreciate the public policy response of state actors to tighten noose around ‘Suicidal Microfinance’ amid of high passions for the breavered families; for which like all of you my heart also goes with the family members of those who committed suicides in Nizamabad and other places. But the question I pose here is slightly contrasting one: Is the fire fighting action initiated by the state Government going to create more problems than solutions for poor? Not only that, what could be the impact of ripples effects on MFI clients in days to come?  Especially at a point in time when the sector is gradually making transition to integrate itself with the mainstream capital market and lower its dependency on lenders for high cost of capital which ultimately factors into higher interest rates for micro clients.  The first market signal is 9% bottom dip in the share value of SKS microfinance - The only India listed Microfinance Company which had lent micro loans to 17 of those who committed suicide. All this is a reason for concern, but the policy response may also not be a welcome move for the Indian microfinance sector, particularly for those players which may plan to go public in coming days.

If suicide is a parameter, I would like to share some pieces of data here, According to the National Crime Records Bureau, between 1997-2009 reportedly 2 lakh farmers in India have committed suicides due to reasons like crop failure and inability to repay  bank loan, but we not seen similar “supra regulatory” actions against lending banks, instead Government actions were  mature  and no one can deny role of  policy  in enabling  the Indian mainstream financial system (which consists of Commercial and Scheduled Banks ,Regional Rural Banks, PACS and cooperative credit structure) to deal with the farmer suicide crisis . Not only was credit bailout option offered to farmers, rescheduling of loans was also carried out and debit refinanced by the Government – worth noting here no bank faced stifling noose of regulations. Basically, Policy actions empowered the end customer to choose her lender and thus reinforced tenets of free market and rational choice theory.

Unfortunately, actions in the microfinance saga are diagrammatically opposite as these signals lead to ‘more regulations and less free market’. Here it is worth mentioning about success story of the Indian Mobile telephony where supra regulations did not create fetters for MNOs at least in formative years and facilitated market competition due to which today mobile phone penetration in India is more than 670 million and is growing exponentially.   Defining role of Public Policy in free market is facilitation of business and ensuring fair competition for firms and offering choices to customers without creating distortions.

Finally, the question one might be tempted to ask; what is an alternative?  . Answer is, a dedicated Business correspondent (B.C) which offers door step banking facility to micro customers.  

The B.C is an ultra low cost technology driven banking channel which acts as extended arm of prudentially regulated financial institutions like banks and insurance companies and take their products and services to the nooks and corners of India – Product and service ranges from No frills savings accounts to remittance and insurance to low cost micro credit and payment solutions. B.C plays an important role in creating healthy competition in the micro-market and provides choice options for end customer to choose her financial service provider. On the top of this, BC is fully complaint to banking rules and regulations and works on razor thin margins.

Dedicated BCs which offer doorstep services have potential to transform not only “scenarios of suicide” but face of unbanked and under banked in India. Therefore, strengthen free market competition   that too, without low or no distortions if facilitated adequately by policy, can be a sustainable solution.  If we compare cost of delivery of services, BC’s cost to serve a customer at her doorstep is around INR 4 -5 per Customer whereas typical MFI cost is much higher. A BC earns average revenue of INR 100 per customer per year and still survives but a typical MFI at present is not designed to operate on such thin margins, it earns on an average 5% of net profit per loan (which is around INR 500 for INR 10,000 loan size).

Finally, what will address the issue adequately and sustainably is not more stringent regulations or predatory policies but policy actions enabling free market principles and offering more supply side choices to the end customer.

                                                                                                                                             -  Jatinder Handoo.

Financial Literacy required to stimulate demand for financial inclusion

Being in the social sector, one becomes aware of the disadvantages poor face for accessing financial services. Many a times they are not even aware of the various benefit schemes introduced by Govt. A major reason for this existing scenario is information gap. In these terms, financial literacy assumes paramount importance.

Financial literacy is a prerequisite for effective financial inclusion, which will ensure that financial services reach the un(der) banked sections of the society, leading to consumer protection through self-regulation. By making people aware of the exsiting products and services and the ways and means to utilise them to their advantage, financial literacy helps in stimulating the demand side of financial markets.

In recent years, as the financial markets have become increasingly complex with the risk shifting from governments/corporations to individuals, managing risks require individuals to be able to access information that enabled comparison of the various available choices. Both developed and developing countries, therefore, are focusing on programmes for financial literacy/education. In India, the need for financial literacy is even greater considering the low levels of literacy and financial capabilities, and the large section of the financially excluded population.

For this purpose, Govts and financial institutions across the world are involved in developing and implementing programs on these lines. Recently, the Reserve Bank of Fiji launched the Green Ribbon Campaign as a partnership between the public and private sectors and non- government agencies to promote financial literacy. OECD has been quite active in this direction having implemented its Project on Financial Education, and established the International Network on Financial Education and the International Gateway for Financial Education (the first international clearinghouse on financial education).

In India, Reserve Bank of India (RBI), with the assistance of Organization of Economic Development (OECD) has issued a concept paper, promoted a financial literacy website, and set up credit counseling centers to provide advice on personal finance. RBI’s ‘Project Financial Literacy’ aims at disseminating information about the central bank and basic banking concepts through various media like films, games, cartoons and comic books, and essay writing competitions, specifically target school and college-going students. Various corporate banking organizations have also promoted financial literacy drive, mostly as part of their Corporate Social Responsibility.

However, there is still a lot to be done. India is a diverse country with different regional profiles in terms of language and culture, accessibility and reach. There is a wide divergence in literacy levels across and within the States. Penetration levels of the formal financial sector, especially between rural and urban areas are quite wide. This diversity makes a standard pan-India program redundant.

The need of the hour is to design and implement programs specific to the target audience and involving use of suitable media; bring out publications in vernacular and simple language and ensure distribution of the material to the people in both urban and rural areas. Also appoint instuctors/counsellors from local areas who have the requiste qualifications as well as the trust of the people. One possible solution is the training of Business Correspondents to pass on the financial information to the customers. At the same time, monitoring and evaluation systems need to be build up so that the programs effectively reach the intended.

Engagement of For Profit Companies as Business Correspondents: Winners and Losers?

By Jatinder Handoo
Published in Microfinance Focus on August 6, 2010

The Reserve Bank of India (RBI) has recently put up a discussion paper in public space for engagement of “for profit” companies as business correspondents (BC) in India. This was on cards after a series of developments like August 2009 Working Group’s review of the BC guidelines which paved path for relaxing entry barriers for new entities and individuals as BCs. It also entailed provision of allowing banks to charge a “reasonable” user fee followed by Government’s acceptance of Inter Ministerial Group’s recommendations for use of mobile phones to further financial inclusion and now the latest one – Prime minister’s high power committee on financial inclusion which includes Industry captains from sectors like telcom, retail,BFSI,IT etc.

Finally, we have a 22 page document on the bank’s website cobbled up with familiar arguments for a business case to facilitate entry of “for profit corporate BCs” citing reasons like “risk mitigation and organizational capabilities” and “too big to fail” as pros and a few cons as well. But the conventional public policy reasoning reminds: “Behind every policy decision there are winners and losers”. I leave it to the wisdom of esteemed readers to find out the set of winners and losers in this case.

The paper shores up case for quashing entry barriers in favour of corporate BCs who would be either telcos or organized retail players (organized retailing in India is less than 2-3 percent in India) or “bankers to poor” NBFC –MFI . The pivotal argument put forth in the draft arrows that there is a paucity of organizational innovation and technology adoption by the existing players for furthering the “business of financial inclusion” in India, hence the entry of corporate BCs for speeding financial inclusion.

By mentioning this, does proponents find a technology and innovation vacuum in the current network of BCs? And thus expects “for profit corporate delivery channels” to employ these engines of commercial viability?. If this is the case, then it becomes interesting to foresee how would a for profit corporate channel solve commercial viability jigsaw on its own which is primarily the outcome of “low take up rates” of financial services and products at bottom of the pyramid; particularly when end customers have erratic cash flows and there are not enough better designed and properly priced micro banking products and services available which is the domain specialization of financial institutions and not telcos and retailers .

Commercial viability of the model as a factor is cited in the draft to buttress the case, but there are no pointers as to how “for profit” BCs will make the model commercially viable. Finally a global overview of Business Correspondents and need for adhering to principles of client protection is also touched upon despite of the fact that globally celebrated telco led model of M-Pesa is also largely a remittance service oriented and Safaricom makes no or extremely razor thin profits from this business stream. In Brazil BCs are in picture since 1970s, they are commercial entities but still more than 95 percent revenues are generated from checking accounts, utility bill payments and remittances and they have to cross subsidize their operations.

Finally, it is an open secret that the RBI despite of its herculean endeavors to go with bank led model at present seems to be under tremendous pressure from various quarters to accommodate corporate interests. Retailer-Telco-Technology interest groups and corporate lobbying at high echelons has taken the debate of financial inclusion beyond obvious.

It needs to be understood clearly that business of banking is of bankers and not of telcos or retailers. In the Indian context is visible on ground that the regulator has been proactive and Banks have demonstrated serious intentions and vision for enabling universal financial inclusion. However the missing link is investment gap. To fund the gap, policy can play a defining role here by incentivizing banks monetarily and this could be done by propounding a clear cut financial support policy for banks.

Non banking Players like retailers and telcos have along way to go in demonstrating some scalable and profitable models of micro banking for bottom billion junta. BC model is just on the verge of stabilization after four years. Let the existing system be incentivized without further experimentation and keep the debate on technology for future.