Microfinance Focus, Oct 20, 2010 (By S.C. Hassain) : Editor's Note: S.C. Hassain is the Secretary & CEO Star MicroFin Service Society (SMSS) which is based out of Andhra Pradesh. In the light of latest developments in Andhra Pradesh microfinance field, he has shared with Microfinance Focus, his perspective on the actual happenings that led to the issuance of the Microfinance Ordinance in the state. Edited Excerpts:
 
The fact that Andhra Pradesh private microfinance is in competition with the Andhra Pradesh government's SHG programme (VELUGU) is itself a major reason for all the happenings in AP. Organised groups of women were always considered by the bureaucracy, politicians and administration as a vote bank or as a well connected group which can be mobilised for any political or governmental programme. The fact that many government schemes are connected to SHGs in AP is itself an indication of the same. When so called "private" microfinance expanded across the state (ironically during the regime of Chandra Babu Naidu - then considered pro microfinance CM), the political and administrative advantages are no longer available for the district administration. This has created an animosity with many district officials including the District Collectors as well as the Project Directors of District Rural Development Agency (DRDA) in the rural areas and Mission for Eliminating Poverty in Municipal Areas (MEPMA) in the urban areas.
 
The media, especially the local (Telugu) media in Andhra Pradesh is characterised by political affiliations and political motives. The largest circulated news paper is considered to affiliate a prominent local party, now in opposition. The second largest news paper, on the other hand, was established by son of the Ex CM of the state.  Though it may not easy to prove whatever is being said here, it is a popular opinion that both these papers have political advantages highlighting the failures of the government.
 
The negative stories of microfinance that were coming up in the news papers recently almost had the same format. It starts with death/suicide of a micro finance client, then it talks about coercive collection mechanisms of micro finance institutions (mostly about the top five institutions) then about interest rates, concluding that failure of government run microfinance (velugu) has made the members victims of private micro finance and finally ending with statement from any of the political opposition of the incumbent government. These typical formats both in print and visual media are common and also indicate the political game behind the entire episode.
 
While it is essential to know that the political parties, administration and media are majorly responsible for all mis-happenings, it is also a painful fact to admit that there are failures from the microfinance sector both in practice as well as in responding to the media.
 
Fierce competition between top micro finance institutions,  their willingness to provide loans much higher than credit absorption capacities of the clients, rapid expansions  leading to failure in training and transferring the micro finance ideals at large and organisation specific vision and objectives coupled with target driven - sales kind of - operations have led to the scenario today.
 
In one of the cases of suicide by the microfinance clients (Mrs Jafarbee) in Nagulati village, Kurnool District, we have experienced that media has gone overboard and created a story against microfinance. Mrs. Jafarbee who is also client of SMSS, committed suicide on 28 September 2010 and the same was informed to SMSS. One of our field staff, as per our policy, visited the deceased lady's house and offered them funeral expenses on behalf of SMSS and write-off her loan outstanding. The family members were also informed that the lady is covered under insurance scheme and were asked to complete the required claim forms later. On the subsequent day a representative of one of the largest MFIs has visited the same house for repayment. As we understand that field officer has insisted on the scheduled repayment in spite of the situation. He was with held the case was escalated to village sarpanch who further reported to the police. Blindly, the police was pressurised by District Officials and they were registered case against all the Branch Staff of the MFIs working in that area including SMSS. The media rechristened the story as "suicide after MFIs harassment".
 
The subsequent consequences including legal and administrative action against MFIs in the area we had to visit the district magistrate and explain him about our activities. The district collector, he himself being an ex employee of Velugu, understands microfinance very well. He also appreciated SMSS for the good work we are doing, but however expressed his helplessness in addressing the larger issue since it is at State level. Over all in the state there are many district officials who understand what microfinance is and many of them also know that it only few of the MFIs who do unscrupulous practices.
 
The latest on the issue as you must aware is the AP Micro Finance Institutions (regulation of money lending) Ordinance 2010 as AP Ordinance No. 9 of 2010 released by the State Government. The ordinance has been welcomed by opposition leaders and micro finance institutions with mixed responses. First, the ordinance intends to curtail the unscrupulous practices especially the collection processes. This intention is good and will be appreciated but the question that arises is whether the ordinance is legally applicable to all kinds of MFIs in the state. NBFCs which are regulated by RBI have already declared that this ordinance will not be applicable to them. However it would difficult to state the same and continue operations as that would against the state government and district administration.
 
There are some key issues in the ordinance that might create disturbances in the microfinance activity. For instance, the registration and renewal authority is given to the bureaucratic setup of DRDA and MEPMA who are by design competition to MF activity. It might also create issues of red tape and corruption. One of the powers of cancellation of MFI registration either on complaint by public or suo moto can create disputes of unfair actions by the authority.
 
The ordinance directs SHG member not to have multiple MFI exposure. Based on this it may be possible that SHG members withdraw from the Velugu programme and continue with the MFIs because of the inherent government inefficiencies in Velugu. This might create more trouble as the Velugu is competition as well as regulator.
 
As for getting prior approval for loans, we feel that the DRDA & MEPMA team doesn't have the capacities and staff strength to verify each MFI member details and confirm if they are SHG members or not. This will only delay the process of loan delivery, which was the hall mark of microfinance sector.
 
The rest of content in the ordinance are good and are require as they enhance transparency and better social performance. As part of Sa-dhan and other MFI networks we at SMSS have already initiated practices mentioned in the ordinance viz. Transparency, disclosure of details, non coercive methods of recollections, no security loans etc. We will be strengthening this even more in the next few months.
 
The entire action might now trigger will full defaulters to default and local leaders encouraging the groups to default. Hence we have decided to conduct financial literacy programmes including explanations on what is microfinance and the advantages of being associated with MFIs. We are also revising and strengthen the process especially the client selection and loan sanction process.
 
As part of networks like Sa-dhan and MFIN we are discussing with the industry leaders as to how we can address the issues raised by the issue of ordinance. There may be a possibility of legal battle or representation to the Governor and government at the same time efforts to mitigate the bad reputation through PR exercises, discussions with media etc.
 
At office during the period we get permission from the state government (30 days is mentioned in the ordinance) we would be enhancing our current systems and process, amending the manuals to enhance transparency at the same time make them full proof at same time adhering to the ordinance issued by the government.
 
While many of the MFIs have declared holidays to the staff and freeze loan cycles till the time the legal permission is provided by the government, we at SMSS have decided to continue our activity but stop collections and disbursements. In other words we would be conducting the weekly meetings but will not collect the repayments. Our field staff will spend 10 minutes at each centre explaining them why they should continue with MFIs, delivering financial literacy and health education modules. This we believe will enhance our credibility and will help us, with the support of the members, re build even more stronger and ethical business models.
 
(Disclaimer: The opinion expressed here is solely that of the author and do not necessarily reflect any views of Microfinance Focus - Editor)