Default Management in CBFO

Microfinance means different things to different people. There is difference between working of regular MFI companies and Community-Based Financial Organizations (CBFO). Community based microfinance model, owned and governed by community members has always served cost-effectively and provided financial services to the end users. Too much scaling without proper assessment could drive CBFO to financial indiscipline at the SHG level, lead to over-borrowing and potential default. While working with few clients will be unsustainable for the CBFO itself.

Loans can benefit the poor and their community only if properly managed. In most of the default, the pressure on giving loans without proper risk assessment mounts on both supply and demand side. A debt becomes bad when it’s not paid for three consecutive months. Here are few pointers that are learnt with the experience -

How to avoid delinquency ?

• Peer monitoring and group pressure is the main influential factor in loan recovery performance of the SHGs. Even the family of loan applicant must be in the loop when loan is sanctioned.

• Due diligence must be carried out in loan appraisal to ensure the repayment capacity of the customer and assessing the customer's capacity to repay and avoid over-indebtedness. Educating clients on ill effects of over-borrowing will go a long way in reducing arrears and defaults.

• Recovery and repayments depend on the mutual trust between CBFO and its members. Agent dormancy, or inability to deliver service due to vacancy, has a corrosive effect on trust, which is the bedrock for any system of financial services.

• The clarity on installments, penalty & expected vs actual must be with agent as well as member for bringing clarity and smooth information flow.

• It is the responsibility of the staff to clear overdue and facilitate the grievances readdressal with the community. There must be refresher training for the staff and office bearers on risk management, sustainability, accountability and ownership.

• Knowledge dissemination of Panchasutra : Regular Meeting, Regular Saving, Inter Loaning, Timely Repayment, & Up to date Books of Accounts.

• Reminders or calls up the customer for recovery is common practice. Weekly SMS reminders before scheduled repayment date with detail of loan amount will serve as a nudge in the behavioral change of members.

• Documenting and communicating answers of questions like -What was the main single factor that motivated you to repay? Are they consistent or not? If not, why not?

Do’s of Overdue Recovery

• Try to motivate borrowers to repay and root cause analysis of the default must be filed. The default happens either due to fraud or real time emergency. The distinction between them makes easy for recovery down the road.

• Only one person must be Point of Contact (POC) for default/ delinquent group. Recovery for default must be done in the team of office bearers and members of SHG or cluster with the staff.

• There must be a notice served to members having defaulted loan before visit. Regular follow-ups with proper communication messages are the best way of ensuring recovery.

• The emotional factor must be utilized in recovery process by giving successful examples of other members in such position. There must be pressure exerted from two sides. One person must explain her social angle of the default while other person must focus on self interest and future options.

• The defaulted member must be invited in the meetings with respect. Staff must facilitate that positive environment is maintained in the meetings. There must be carefulness on the gender and caste issue.

• Recovery should normally be made only at a mutually agreed designated place. Field staff shall be allowed to make recovery at the place of residence or work of the borrower only if borrower fails to appear at the designated place on 2 or more successive occasions.

Don’t of Overdue Recovery

• Team especially consisting all men shouldn't go for recovery from women member and no abusive language should be used. The contact time is between 7am to 7pm excluding inappropriate occasions such as death. RBI norm must be followed with rigor in the recover process.

• Police complain is the last option to be used by the team. There should be strictly no mention of claiming Land/ Gold for recovery of default amount.

• Field staff shouldn't give any commitment of either rescheduling or restructuring of the loan without any consent to the superiors. To rework household budget and make provisions to accommodate changes in the repayment amount must be made in written agreement.

• A very high level of indebtedness and tough recovery techniques can led to many villagers seeking government intervention that will be political risk for the operations.

What people think of Microfinance?

Microfinance is financial services for poor and low-income communities, people who have been excluded from the mainstream financial system. Yet, there are the diverse opinions people have about Microfinance. I have encountered few in last 5-6 years and presenting them in summary format.

1. The MBA: "Truly amazing business model & poverty reduction tool."

2. The arrogant: “Unsustainable and too risky! Does it actually work?”

3. The over-informed: “Yes, I know about it, you give money to poor. Social enterprise!”

4. The ill-informed: “Thugs lending money to poor at high interest rates and brutal recovery techniques.”

5. The devout fan: "This is the future, only we need investment and scaling and may be P2P."

Microfinance is not panacea from all troubles, this also means that not any poor person can obtain the loan. I can vouch with my experience that only micro loans can't solve poverty. There is enough evidence to support my claim : Microloans Don’t Solve Poverty But research might reveal what will. I always go for the advice of Wayne Dyre before deciding for myself:"The highest form of ignorance is when you reject something you don't know anything about."

Distinct Honour to Chaitanya

Governor CH Vidyasagar Rao has appointed social researcher Dr Sudha Kothari and Founder of Dalit Chamber of Commerce and Industry (DICCI) Milind Kamble as expert members on the Rest of Maharashtra Development Board on 6th June 2016. Sudha Kothari serves as the Managing Trustee of Chaitanya, a developmental organization established by her in 1993. Chaitanya is one of the pioneers of community based microfinance institutions in Maharashtra state and promotes 42 SHG federation with an outreach of 1 Lakh women members across 18 districts of Maharashtra. Dr. Kothari also serves as a Member of Board of Trustees at FWWB India.

One of the great delights of my job is the daily encounter with Dr. Kothari. She is a great mentor and her whole life mirrors commitment to poor women. It’s an honor to work with people whose contributions make us proud and inspiring. 

Good Governance & Public Policy

What is Public Policy ? Public policy focuses on the processes by which various types of policies and regulations that affect members of the public are created and enforced. Public Policy deals with public goods delivery – political economy, taxation, law and order, good social and physical infrastructure, including better education and health facilities – and facilitate provision of private goods (cheaper power, flexible labour laws and other subsidies). The guiding principles for better public policy include building people’s ownership and participation in the governance and decisions affecting their lives. Regulation, Redistribution and Equity came to the forefront of policymaking.

Resources be it human, natural or financial are limited in a country and a government must utilize them in the most productive manner can achieve the best possible growth. That is the essence of good governance. The first and foremost requirement of good governance is broadly distributed political rights among citizens and the government accountability and and transparency in public administration. An ideal public service institutions will be decentralized, professional and autonomous management structures.

The theoretical framework however doesn't work smoothly in the real world. Governments in many developing & underdeveloped countries are corrupt and never work in favor of the people. They work for the interests of specific groups. It would be naive to think that governments work for the public all the time. Economics works alongside and interacts with social and political forces framing the policy. Politically motivated decisions, the undisclosed profiteering, the conflicts of interest, the vested interests, & the bad experiments with good intentions can lead to the flawed policy making process. So how the end objective is achieved ?

Policy makers must be open-minded and open-armed to combat such conflicting interests arising due to potentially corrupt motivation. They must have sound knowledge of the local context of a community – its history, politics, social structure, and culture, along with its economics. More the diverse the stakeholders in policy making, the probe in the issue will examine ground realities, re-validate assumptions on which our policies rest, and evaluating  new initiatives. The real impact of policy decisions are measured by three factors:

* Number of beneficiaries covered under the policy
* Number of beneficiaries who experience a positive change with the implementation
* Participation of the people and innovation springing from the outcomes.

Public opinion is varied and contested space, continually shaped and reshaped over time. Popular opinion in India generally overlook corrupt vested interests or don't want to go for long term reform. Hence, Indian state has always insulated public policy from open debate. The bureaucracy in India has never let the control of policy shifts to an autonomous institutions and public has suffered the ill results of lack of knowledge among civil servants. Bureaucracy seldom promotes creativity and, under the cover of neutrality, preserves the advantages of the powerful by dominating the weak. In the government systems, professionals are always crowded out by the imprisoning logic of bureaucracy. As described aptly by Prof Ajay Shah: In the West, leaders choose the direction of public policy. Government is like a car, which goes where the leader directs. But in India, the car is broken, and just turning the steering wheel is ineffective. To do public policy in India, the skill required is that of an engineer and not the driver. It is about opening the hood, understanding what is wrong with the institution, and fixing it.

Each policy must face several test: Are the policies realistic? How will they be implemented? What results will they produce in the long run? Were there more reasonable, less risky, cost effective, user friendly, & more inclusive policy measures that would have yielded as much benefit as the rolled out one ? There is no ultimate policy measure but always a solutions-oriented approach means more innovative outreach and trade-offs in a wiser way. I will be putting more on the non academic and self learned diagnosis of public policy in coming days. Watch this space and hear buzz words like committees, accountability, check and balances, transparency. Have I lost you yet? I will.

Agricultural Commodities - Pulses

Market at the micro-level has to serve three main stakeholders with different expectations. Farmers wants good price and constant demand, distributor wants fat margin and consumer wants low prices and quality product. In the market scenario at macro-level production of the pulses, demand-supply conditions within India, volatility in global commodity prices, variation in exchange rate, policy of the government, and a surge in import can lead to determination of final price of the any commodity. 

This article series aims to provide an introductory overview on the agricultural commodities in India. The first article of this series will carry the discussion by offering an analysis of the pulses in India. India is the world’s largest pulse producing, consuming and importing country. Bengal Gram (Desi Chick Pea / Desi Chana), Pigeon Peas (Arhar / Toor / Red Gram), Green Beans (Moong Beans), Chick Peas (Kabuli Chana), Black Matpe (Urad / Mah / Black Gram), Red Kidney Beans (Rajma), Black Eyed Peas (Lobiya), Lentils (Masoor), White Peas (Matar) are major pulses grown and consumed in India. During 1950-51 to 2013-14, area under pulses increased by 31% from 19.09 million hectares [mha] to 25.23 [mha] and productivity per hectare increased by 46% from 441 kg to 764 kg with significantly disappointing 0.64% CAGR of productivity. Even the area under cultivation for pulses has seen marginal increment, there is shift in the quality of land used for pulses production.

Green revolution has pushed pulses cultivation in tough terrains resulting in declining productivity. As pointed out by Santa Kumar Committee Report: "GoI needs to revisit its MSP policy. Currently, MSPs are announced for 23 commodities, but effectively price support operates primarily in wheat and rice and that too in selected states. This creates highly skewed incentive structures in favour of wheat and rice. While country is short of pulses and oilseeds (edible oils), their prices often go below MSP without any effective price support. Further, trade policy works independently of MSP policy, and many a times, imports of pulses come at prices much below their MSP. This hampers diversification." Hence, the government needs to create a crop-neutral incentive structure for farmers, which is at present skewed in favour of rice, wheat and sugarcane.

Pulses have low carbon emission and water needs which make them ideally suited in India’s farming system. Rainfall in India is highly unreliable both in time and geography, leading to fluctuation in the production. The major driver of food inflation was the hike in prices of pulses, which was caused by the crop loss due to untimely rains. India’s pulses production fell from 19.25 million tonnes in 2013-14 to 17.3 million tonnes in 2014-15, while imports rose from 3.18 million tonnes in 2013-14 to 4.58 million tonnes in 2014-15. With the sky rocketing prices of the pulses, the government has taken haste decision to import 7,000 tonnes of Tur (5,000 tonnes earlier, and 2,000 tonnes now) to tame prices. In a country where the consumption of tur daal hovers between 3.3 to four million tonnes, aiming to control rising prices by importing 7,000 tonnes tur shows both the policy failure in pulse price management and strong cartel of importers artificially jacking up the prices. Ineffective policy measures appear to be knee-jerk reactions more than calibrated responses of policymakers.

No pulses are currently traded in future in international markets and only Chana is traded in future in domestic markets. The Securities and Exchange Board of India (SEBI), which also regulates the commodities futures market, may consider banning forward trading in chana (gram) as part of the government’s measures to bring down prices of pulses. By suspending futures and forwards markets, the government can simply shot the messenger. This is only evidence of a rather sloppy conceptual framework of policymakers. Merely scapegoating traders as  “hoarders” and “speculators” is not going to be effective in today’s times. Also, traders hold the strings to the political purse, and a crackdown against hoarding would be damaging for ruling political party. Forwards and futures markets are supposed to give signals for effective price discovery and efficient price risk management. It is therefore necessary to develop suitable futures contracts for major pulse varieties separately, as also for all pulses together in the form of index futures.

Pulses are now termed as crops for poor, largely cultivated in marginal lands prone to poor irrigation supplies. Low pulse yield in India compared to other counties is attributed to poor spread of improved varieties and technologies, abrupt climatic changes, vulnerability to pests and diseases, and generally declining growth rate of total factor productivity. Lack of effective market news system and existence of different grades and qualities have also contributed to these imperfections in market. Appropriate reporting with quality differences and graded produce could go a long way to reduce the high price differentials, spatial as well as temporal.

Readers can also read a good article in IPGA examining the price issue of pulses. Jokes comparing  butter-chicken  to pulses are already in the market, and the trend doesn't look good for next year. It will be much shame for current government promoting 'Make in India' campaign while importing pulses, oil-seeds etc from foreign nations. India government needs to get the act together if they are truly committed to the food security of our fellow citizens.