The Sa-Dhan FICCI Financial Inclusion Conference 2012 - blog*spot

Ramesh S Arunachalam

The Sa-Dhan FICCI Financial Inclusion Conference 2012[i], themed as ?The First Mile Walk into the Financial System? is to be held on 7 - 8 August 2012 at the sprawling Hotel Ashok, New Delhi.

At the outset, Sa-Dhan and FICCI must be congratulated for continuing their focus on financial inclusion, which is indeed a very important aspect in India today. That said, I have some very fundamental issues with the design of the conference and the messages that it is intending to send out and I attempt to highlight these below:

First, this whole notion of financial inclusion being a static phenomenon is rather peculiar. Inclusion is a dynamic activity and people get included and excluded, time and again. Many of the families that were (financially) included in the Integrated Rural Development Program (IRDP) were subsequently excluded. Likewise, some farmers who were included in the mainstream financial system (before the major agriculture debt waiver that happened a few years ago) have perhaps now been excluded. Similarly, perhaps, many of the clients who did not repay in the aftermath of the 2010 Andhra Pradesh (AP) micro-finance crisis and ordinance, will now become official ?defaulters? ? if and when the great Indian micro-finance credit bureaus become completely operational ? and thereby possibly get (re) excluded again!

Therefore, what needs to be critically looked at is why clients have been forced to leave the financial system and/or are pushed out of it, where do they go when this happens and how can they be meaningfully re-included? These are not exhaustive questions by any means but rather sampler issues that should bother well meaning financial inclusion strategists immensely ? and only then can we make the (re) walk into the first mile of the financial system, a pleasant and lasting experience.? Let us make no mistake about that!

Second, it is very ironical that a conference on financial inclusion (FI) excludes the following key sectors, stakeholders and models:

a)?? There is no serious representation of state governments in most (if not all) of the sessions at the Sa-Dhan FICCI conference. Let us face the fact that ?financial inclusion programs? are not (and cannot be) implemented in a vacuum or in isolation. Financial inclusion (or exclusion) occurs in physical areas (in India) that are called as ?States? or ?Union Territories?. Therefore, not having adequate representation of State/Local Governments is indeed a serious weakness.

And without question, any financial inclusion program should be able to benefit significantly from participation by State Government Departments (Such as Agriculture, Rural Development, Planning, Cooperation, Urban Development etc) apart from representatives of the District and Local Administration (Collectors, Heads of Urban/Local Bodies etc). India has almost 600 districts and yet, I have rarely seen District Collectors being invited to major conferences on Financial Inclusion. I guess we are missing their very critical input here!

In fact, as per the brochure on the FICCI site, a look at the panelists suggests that, by and large, it is the same old ?inner club? of Indian micro-finance that is to dominate the Sa-Dhan FICCI conference. That is fine and I admire many of these stalwarts but given what has happened in the last few years in the financial inclusion and micro-finance space, I strongly believe that it is imperative to have greater representation of State/Local Governments in such proceedings. Incidentally, the program also lists the Chairperson of the Parliamentary Standing Committee of Finance as a panelist in one of the (special) sessions ? I am not sure of whether (or not) there is a conflict of interest here because the Micro Finance Institutions Development and Regulation Bill, (2012) is currently said to be under the examination of the (same) Parliamentary Standing Committee.

b)?? A second exclusion in lack of a strong focus on agriculture in the financial inclusion conference. No program on financial inclusion is complete, if it ignores agriculture, which is perhaps the single largest occupation/livelihood provider for poor/low income people in India.? Providing a range of need based financial services to over 600 million people engaged in agriculture (and related sectors/areas) remains a huge challenge in India, even today. And unless that challenge is successfully met quickly, in the already dualistic nature of our economy, the disparities will continue to widen between India and Bharat. Under such a situation, financial inclusion and inclusive growth will remain lofty objectives that have no feet on the ground. Let us be clear on that!

Therefore, while inclusive finance, as a paradigm, has gained significant acceptance in India among policymakers and some others, and is being touted as the mantra for success in modern India, there are several good reasons?as to why it has not achieved serious success on the ground, so far. The conference has a unique opportunity to look at this critical issue?and understand why this is the case?

c)?? A third major exclusion is lack of specific focus on Cooperatives, despite 2012 being The United Nation?s Year of Cooperatives. And cooperatives, despite all of their perceived weaknesses, are still the most vibrant CDFIs in India and yet, they appear to receive much less attention at this conference in comparison to MFIs, SHGs and Business Correspondents. And what is paradoxical is the fact that Sa-Dhan claims to have a focus on community development finance institutions! The question here is when you can have special focus on MFIs, SHGs, Business Correspondents and others, why not a special focus on cooperatives ? especially because the reform program (as per The Vaidyanathan Committee) is also said to have been aborted half way and of late!

d)?? Fourth, there is not a single unique session devoted to client literacy and protection. Given what happened in Andhra Pradesh (AP) in 2010 and before, because of which large numbers of people stand excluded, it would only have been appropriate to have had a specific session on protecting clients in various models as they (re) walk through the first mile in the financial system.

e)?? And after agriculture, the major employer is the MSME sector and financial inclusion of a range of MSMEs (including informal sector enterprises involved in agriculture and non-farm sectors) are very critical for inclusive growth. It would have been good to have a plenary (rather than a breakaway) session on this very important topic.

I am not sure that these (critical) exclusions will enhance the discussions at the conference in any meaningful manner.

Third, the brochure makes the claim that ?Microfinance institutions?mostly considered as the last mile connectivity in the financial system, have played a key role in furthering the objective of financial inclusion.? (Sa-Dhan FICCI Financial Inclusion Conference Brochure 2012, Page No 1, http://www.ficci.com/events-page.asp?evid=21075)

I am sorry but I beg to differ with this starting premise of the program. In India, typically, financial inclusion (FI) is presently characterized by:

a)? Preoccupation with opening of savings accounts: The gist of this approach is that it deals with enabling low-income people to have access to bank accounts and remittance services. Thereafter, it is assumed that, many benefits will automatically follow?often proved to be a killer assumption, in development parlance.

b)? Large focus on consumption credit and small production loans: While institutions (mostly MFIs) have provided low-income people and women with access to financial services, the focus has largely been in terms of delivery of credit. And within credit, the focus, at least over the last few years, has largely tended to be on consumption loans - small production loans do exist but appear rather small in number (pun intended), especially in relation to consumption loans. This constitutes the bulk of what we typically call as priority sector financing with regard to MFIs, often coming under the micro-credit category[ii]. c) Low outreach with regard to vulnerable groups in agriculture: While admittedly agriculture is a major component of priority sector financing, there are critical issues here: a) In many states, the priority sector lending norm of 18% advances to agriculture appears to include non-poor (non BPL[iii]) households in a significant proportion[iv]; b) the share of agriculture in priority sector lending (PSL) is not fully met in some states and it has been going down in few other states[v]; and c) the thrust of the financial inclusion drive, while good, must be properly interpreted - not all excluded people are poor and vulnerable and not all included stay that way. Therefore, it can be argued from the above that the outreach to vulnerable groups in the agriculture category of PSL is low. d)? Lack of suitable and affordable risk management services: In reality, several critical financial needs are yet to be satisfied for low income people. ?I would put these under two major categories: a) formal/flexible voluntary savings[vi] (the most basic ?insurance? product); and b) health, asset, accident and life insurance tailored to client needs rather than insurer abilities. While there have been some attempts to innovate with regard to different types of insurance, these innovative insurance services tend to be closer to the service providers? abilities rather than clients? actual needs. More importantly, they are not affordable in many cases. Further, they often tend to be available to a small sub - section of people only and, hence, outreach is best characterized as minimal. e)?? And where outreach has been scaled up, there are major issues as mentioned hereafter in a recent news item in The Hindu Business Line (May 22, 2012) ? ??We have found massive problems in insurance operations of SKS Microfinance?, Mr J. Hari Narayan, Chairman, Insurance Regulatory and Development Authority, told Business Line. IRDA teams conducted field enquires and inspections for a long time, he said. The irregularities included receiving the cheques of death claims from its insurers on its name, which is illegal. The only listed MFI in the country, based out of Hyderabad, had also ?collected? higher commissions than permitted by the insurance regulator while selling the insurance policies?[vii]. f)?? Lack of appropriate livelihood financing: Yet another financial service that has been in short supply is the ?larger production and livelihood credit?, especially with a focus on post harvest/production financing. Thus, livelihood financing is still very nascent[viii]. The above two aspects of lack of suitable and affordable risk management services and lack of appropriate and affordable livelihood financing are noteworthy aspects, because they again show the huge gaps between a great vision and intended strategy (the recommendations of the well intentioned financial inclusion committee[ix]) and the actual implementation on the ground, which is narrowly focused on consumption and small production credit. Hence, from the above, we can understand that priority sector financing is?used?primarily[x]? by banks to provide consumption and/or small production credit, mainly through MFIs, to end users (low income people). And the 2010 Andhra Pradesh (AP) micro-finance crisis clearly reveals that the misuse of such financing can result in ghost, over and multiple lending (with sub-prime like indebtedness), especially in the absence of any serious supervision. That ghost lending continues even today is evident from the following recent Moneylife news item ? ?SKS Microfinance has said that some of its employees have cheated the company to the tune of Rs15.8 crore in the last financial year, reports PTI. The services of employees involved have been terminated and the company has written off over Rs14 crore. The auditors of the company have reported that there was cash embezzlement by the employees to the tune of Rs2.5 crore and loans given to non-existent borrowers was Rs13.3 crore, the micro lender said in its annual report? (http://www.moneylife.in/article/sks-microfinance-employees-swindle-rs158-crore/27247.html)

Therefore, I am unable to accept the assertion that ?Microfinance institutions?have played a key role in furthering the objective of financial inclusion?(Sa-Dhan FICCI Financial Inclusion Conference Brochure 2012, Page No 1). On the contrary, as Dr Rangarajan (Chairman Economic Advisory Council to the Prime Minister Office) and Dr Y V Reddy (the former governor of the Reserve Bank of India) and others have argued often times, the flawed business model of the MFIs along with wrong incentives have resulted in MFIs being viewed as what they are today:

?The business model of microfinance institutions is faulty. They must revisit the model to support the income earning ability of the borrower,? Prime Minister's Economic Advisory Council chairman C Rangarajan said at an event organised here by Skoch Consultancy. Rangarajan said multiple lending done by MFIs is inconsistent with the very repayment capacity of borrower. He said MFIs have been indulging in multiple lending and large parts of the loans are given for consumption purposes and this model of business has landed them in trouble. ?Income earning capacity must be criteria for granting loans... The provision of credit for consumption must be a small part of the total loan,? Rangarajan said?[xi] ?According to Dr Y V Reddy, the former governor of the Reserve Bank of India, credited with saving the nation?s financial system from the 2008 meltdown, ?micro-finance is India?s subprime.? ?Ultimately, its something like subprime lending,? Mr. Reddy told Economic Times in an interview ahead of his book release. ?The same incentives are operating here... it was securitization and derivatives that operated in the US. Here it is the priority sector lending by banks.?"[xii]

Therefore, I see the statement in the conference brochure more as a continuing attempt to deny what happened in Andhra Pradesh (AP) in 2010 and the earlier years. Therefore, while the fact that MFIs represent a huge infrastructure at the grass-roots cannot be contested, their furthering the objective of financial inclusion would depend largely on ?introspecting with integrity? and I still see no signs of that despite the two years having gone by! I really hope that the Sa-Dhan FICCI conference would kick start this process through the various sessions for I still (genuinely) believe that (re-oriented) MFIs can play an important role in financial inclusion in India.

Fourth, on the aspect of the micro-finance credit bureau (s) which are yet to be fully operational (despite many deadlines having passed), I have the following observations and I hope that the panelists at the conference take into account the following:

1)?? It has almost been over 24 months from the 2010 microfinance crisis and a transparent use of the microfinance?credit bureau?(s) appears to be nowhere in sight - at least for outsiders like me. While the intentions to establish the?credit bureau (s)?may have been genuine and well-founded, the lack of real-time implementation progress raises several important questions with regard to the process of establishing the (Indian microfinance)?credit bureau?(s) in the first place.

2)?? In my opinion, the current delay could be due to several factors - Lack of strong and committed leadership, No serious regulatory support whatsoever, Absolutely unrealistic targets for establishment/use of credit bureaus, Lack of reliable ground-level data, A range of information technology issues and problems (including design of MIS at MFIs not using accepted best-practice standards) and so on

It would be great if the conference panelists could deliberate and identify solutions - to the above and other problems - so that the transparent use of various credit bureaus (in a complete sense) becomes a reality.

For me, while improving the investment climate to promote investment is critical, Hugh Sinclair?s book has indeed been a revelation about how Micro-finance Investment vehicles (MIVs) operate in the international supply chain of delivering financial services to low income people. And after reading the book, I am searching for answers to questions such as (but not limited to) the following:

a)?? How do MIVs make investment decisions? What systems do they have to ensure that the pressure to lend/invest does NOT result in poor investment? Should not MIVs have minimum governance standards and internal audit requirements just as RETAIL MFIs do?

b)?? How do MIVs protect the overall interest of their primary investors? What systems do they have to ensure this in real time? What else may be necessary given the recent experiences?

c)?? What standards of governance, transparency and reporting are MIVs currently subject to? Who sets these standards and who enforces them? How adequate are these?

d)?? Given the huge diversity in legal form, location (of incorporation), products, what can be said about the regulation and supervision of MIVs in an overall sense? And specifically, who regulates these MIVs? Who supervises them? What is the role of central banks in all of this? And does this regulation/supervision afford any protection to the primary investors in these MIVs?

e)?? Last but not the least comes the questions of whether there is any regulatory arbitrage?

Therefore, without any doubt, while we need investments in micro-finance and financial inclusion (and especially in India), MIVs also need to be (made) as accountable and as responsible as MFIs ? let us make no mistake about that! In fact, much of the micro-finance crisis in India (in 2010) was fuelled (perhaps) because of the irresponsible investments (debt and equity) made by many stakeholders including MIVs. And let us therefore understand that the first dictum of responsible micro-finance is RESPONSIBLE INVESTING. We certainly cannot have MFIs practice responsible micro-finance on the ground when their investors are ?irresponsible?. That needs to be understood and appreciated by all stakeholders including those at the global micro-finance industry. And given the wider (global) participation expected at the Sa-Dhan FICCI conference, it would be a useful starting point to jump (Dhakka) start this debate as well.

One final caveat is in order folks! While I do appreciate the efforts of Sa-Dhan and FICCI, the larger point I want to make is that it is very easy to talk high flying concepts at conferences and also publicly claim that the same is being applied in practice. In reality, however, much of the intended strategies do not get implemented and that is something that conference organizers (Sa-Dhan and FICCI),?industry associations, regulators and stakeholders must take notice of with regard to financial inclusion and/or micro-finance. Therein lies the pathway to overcome the present impasse and I sincerely hope that the global financial inclusion fraternity and the Indian micro-finance industry recognize this basic fact and devise appropriate strategies to overcome this serious gap between policy and implementation. And what better place than the forthcoming 2012 Sa-Dhan FICCI FI 2012 Conference to be a natural?starting platform?for this introspection with integrity?only then can the wide reaching and extremely well intentioned ?Dr Rangarajan Committee Recommendations on Financial Inclusion? really see the light of the day? ?

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[iii] BPL = Below Poverty Line [iv] This however needs to be confirmed through a large national sample study covering agriculture PSL beneficiaries. [v] This also needs confirmation through a large national sample study, covering agriculture PSL beneficiaries in different states of India. [vi] By and large, in many cases that I have come across, the no frills accounts remain dormant and are rarely used. [viii] While some innovative MFIs/FFIs have tried to deliver such services to select clients, the larger and wider penetration of these services is still quite minimal. [ix] The Financial Inclusion Committee was chaired by Dr Rangarajan, Former RBI Governor and had several eminent professionals as part of it [x] I say primarily because there are other categories used by banks under priority sector

Source: http://microfinance-in-india.blogspot.com/2012/08/the-sa-dhan-ficci-financial-inclusion.html

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