The many questions on MFI regulation

The cacophony surrounding microfinance regulation has left little room for the voice asking some fundamental questions that should ideally be guiding the debate on any reform.

The pro-regulation lobby has been worried about the recent suicides of indebted borrowers in Andhra Pradesh which they claim is a direct result of a) many MFIs chasing few borrowers and therefore bullying poor people into taking loans they do not need, b) charging very high interest rates for these loans and c) using coercive tactics to ensure repayment of the loans, so much so that some even encouraged poor people to commit suicides so that the MFI could get their claims. On the other hand are claims of government conspiracy to promote its own bank-linked SHG model which suffered due to stiff competition from the MFIs.

While allegations on both sides sound horrific, they beget the question of how true these really are, how pervasive these are amongst the plethora of MFIs that exist, and consequently and most importantly, what should the response be. Given the complexity of the industry, the allegations and the information asymmetry it is extremely difficult to understand exactly what is going on.  Here is a nice survey article on the problems of AP which in turn points out to several others.

The MFI gross loan portfolio in India stood at USD 4.6 billion and is said to have a a borrower base of of 26 million in 2009*. These span a variety of structures (NBFCs or not; for-profit or not) and operational models, including different forms of collection of funds, different lending and recovery practices, different funding sources including commercial banks and donor agencies and a distribution of interest rates.

If a few MFIs are the culprits, then there is little to gain by brandishing the whole sector as 'bad'. An article in the FE discusses this issue. The response needs to ensure that in taking action against fraud, we do not shut off an industry that has been providing much needed credit access to those who have been left out by the banking sector in India.

Do we want to only regulate outright fraud, or setting of interest rates? Do we want to ensure that information is available? Do we want to oversee all the processes or just new products? Or do we want to do all of the above? Would we treat all the agencies similarly? Would we treat all the products similarly?  What would be the cost of doing so? What about borrower responsibility? Sure, the borrowers are poor, but does it absolve them of the responsibility of taking multiple loans knowing fully well that they do not have the ability to repay? When does responsibility shift from MFIs that lure to borrowers who get lured? This is a very difficult question, but one that needs to be asked.

To regulate the MFIs without understanding the issues that both lenders and borrowers face would be jumping the gun too soon and in a few years create the problem of too-much-thoughtless regulation that we have all too often encountered in India.

The whole issue also needs to be looked at in the context of laws and regulations that already exist. For example, would MFIs be covered under fraud protection laws prevalent in the country? If not, is there something special about MFIs that requires a separate agency? What about laws for creditors as well? For example, would a MFI be covered under the SARFAESI if debtors default?

The Andhra Pradesh ordinance certainly does not seem to have addressed any of the issues. In fact it has managed to cease operations of all MFIs by a stroke of a pen in a matter of days. Even if one believes that the government is right in its intent, such haphazard actions by the state hurts potential investment and business, which whether one likes it or not, are key to generating income and jobs.

If anything, the MFI regulation debate in this country is in need of some serious public-policy rethink keeping in mind that throwing the baby with the bath water is not the ideal way to go forward.


*Source: http://www.mixmarket.org/mfi/region/South%20Asia

How governments mess up

The NYT has a great article describing how a government department is pursuing policies that exactly offset each other. 

On the one hand, Dairy Management, a marketing arm of the United States Department of Agriculture has made cheese its mission while the parent department continues to pour dollars into an anti-obesity drive. This has come about because all the money spent on promoting 'low-fat' milk led to a pile-up of milk-fat and what better way to get rid of it than promoting cheese sales? Net change in obesity: not much.

Just another example of ad-hoc policies adopted by governments to solve the problem at hand without giving much thought to its broader consequences.

Update: Another fascinating article on the unintended consequences of policy in the context of obesity.

Thinking about corruption in India*

Given how ubiquitious corruption is in India, I wonder how the process of 'cleansing' will ever come about.

I'd like to think of a very simple world which has two people. Lets call the first, the officer and the second, the common-man. Given the institutional structure, the common-man needs the officer to get his work done. For example, he needs the officer's signature to get the title to his land.

As long as the officer knows that a) the risk of getting caught is low or b) the punishment on getting caught is low, it is not in his interest to not take a bribe. As long as the common man knows that a) the chance of him being able to expose the officer in a short period of time is low or b) upon exposing, he has an even lower chance of getting the signature or c) the bribe actually expedites the signature process, it is not in his interest to fight against the officer.

I see this status-quo changing when either the officer is made redundant i.e. the institutional structure is such that the signature is no longer required. Or when the risk-reward for both parties changes such that it is costly for the official if he gets caught, and cheap in terms of time and money for the common man to expose the official. As we move towards a market-economy, the first process will gather steam but it can only go as far as we can live without the bureaucracy/government. The second is what, I think, we need to focus our energies on.

So lets add another player: another officer who calls himself the super-officer. Assume this person has the authority to sack the corrupt officer. Other things equal, we have made it more expensive for the corrupt officer to take a bribe as the punishment is higher. We have made it cheaper for the common man to complain -- he knows who to go to. Of course, this rests on the super-officer not being able to get into an agreement with the corrupt officer that they share proceeds from the bribe. The benefits from aligning with the common-man have to at least be equal to if not more than the benefits from colluding with the corrupt officer.

I have heard several anecdotes about how some measures to fight corruption, actually led to higher corruption. I remember one story where initially for a tender to be passed, one needed a signature of one official. Given complaints about high bribery, a new rule was passed that required that unless all five officers signed, it could not be passed. It was believed that bribing five officers was a very expensive proposition. What happened was that competitors (for the tender) started bribing the last  official to NOT sign their rival's tender.  This just highlights how crucial the reward structure is if anti-corruption measures have to succeed.

How do some of the recent innovations to fight corruption in India fare?

The Right to Information Act: This has made it easier for people to demand information from the government. I still do not know how this translates to redressal. It also remains to be seen how this is brought about once more and more people start to use it and there is 'case-overload'.

Anti-corruption bureau (in Maharashtra): This allows people to file complaints against corrupt government officials. The ACB does not have the power to sack the official, but directs such complaints to the judiciary. This has solved the problem of who to go to, but not really solved the problem of being able to do things in a short-period of time and will be limited by the efficiency of courts to bring about speedy redressal. I do not know what the reward structure of the ACB officers is, and how well aligned it is with that of the common man.

Zero Rupee Note: This makes it cheaper for the common man to expose the officer, but it still does not  ensure that upon exposure things don't fall back to the same old equilibrium.

We need several such initiatives that are able to provide better information, and redressal in short periods of time. The 'aam-admi' needs to be incentivized to wage this war, and the 'babu' worried that it is a losing battle.

* This post grew out of conversations with Amol Hatwar.

Testing the effectiveness of our schools

Raghuram Rajan and Abhijeet Banerjee argue for the need for effective testing in our primary schools. I could not agree more.

An interesting organization set up by the IIM-A alumni is Educational Initiatives - India, with the mission of qualitative improvement of India's educational system. They seem to have a wide range of testing and teacher training programs that effectively measure learning outcomes.

This is a valuable resource for governments to actually have independent assessments of all the money that is poured in the name of education.

Cities for a new India

While most of us have dismissed the recent 'who-is-a-Mumbaikar' furore as another political stunt, it does raise some serious questions about the process of urbanisation and migration in India. I think Mumbai is only the forebearer of several such brawls, as cities get metro-nized and become magnets for immigrants from across the country. What we really need is not one Mumbai or New Delhi, but several city-centers across the country that are able to absorb the rising numbers who flee impoverished villages in search of a better life.

At one end of urban development lies GIFT, a public-private partnership between the Gujarat Urban Development Company Limited (a Government of Gujarat undertaking) and IL&FS, built to serve as the hub for financial services in country. It will certainly change the landscape of Gujarat, and neighbouring regions.

Building cities from scratch is one way to go about urbanising India, but not harnessing natural advantages of existing centers of commerce is a mistake. Nagpur is one example that always comes to mind. Located smack at the center of India, it could serve as a nucleus for facilitating internal trade. To some extent, it already does. But trade within India is complicated given the nature of State-level taxes and other barriers to goods movements. Nagpur is just one casualty of such impediments. Plans are currently underway to develop it as an international cargo-hub, with manufacturing, health and technology parks planned around. Not that this is a bad idea, but it is ironic that we dream of making it the international hub, but forget its huge domestic potential.

Another missed opportunity, to my mind, is the North-East of the country. If the GOI wants to really plan an international hub for transporting goods towards South-East Asia and further to Australia and New Zealand, endowing Guwahati or Shillong with a major international airport will do for the region, what decades of policy has not. This region also has far more to offer by way of tourism, which an international airport will only facilitate.

It is time to think out of the box.

Responding to the claim that Bollywood does not take a stand

Soutik Biswas raises a very important question on why Bollywood does not take a stand?  He claims that 'with liberalization Bollywood's divorce from contemporary realities has been complete'.

I think taking a stand can be done in two ways:

By making movies that reflect the pressing issues of the day.

I don't think Bollywood is doing too badly on this front. There is certainly a trend towards making more relevant movies, and these cut across all budgets. The latest that come to mind deal with issues such as the rat-race in our educational institutes (3 idiots, Taare Zameen Par), news-channel wars (Rann), petty corruption (Rocket Singh), communal themes (Aamir, A Wednesday), terrorism (New York). I am sure I could think of more, but a comprehensive list is not the objective here. While many would argue (correctly) that some of these are not exactly the best-written or executed movies, I think they do mark a move towards talking about what matters.

One could also argue that most of these are oriented towards city-audiences, I think issues of corruption, education, terrorism are relevant just about everywhere. And we have also seen movies set in small-towns, Omkara and Ishqia being one's that I can think of immediately.

I also think editing standards have improved considerably in the last decade, and I continue to be optimistic.

By taking a stand outside the movies, and getting involved in the larger civil society.

In this, I agree with the article, in that we have only a SRK to look to for not apologizing to the Thackerays. I think the problem is deeper than just film-makers being devoid of reality. The film industry largely does not have access to financing through banks, or equity markets. (If this has changed in recent years, I would love to know). If the door to formal borrowing is closed, the other option is financing through informal sources, and I have only heard stories that claim that large pots of money come from the underworld. In addition, our track record on law and order is not something we can be proud about. It is then not surprising that everyone kow-tows to the local don (or the politician, and often there is no difference between the two). We should not blame individual people, in as much as look towards reforming whatever the laws are that stop producers from raising money from the markets and ensuring basic law and order.

For if Farhan Akhtar were to issue equity for one of his movies, I would totally buy, if not for the movie, but for my loyalty to him! I think I would not be alone. :)

Gender imbalance, dating problems and national savings

The NYT has a very interesting article on the repurcussions of changing sex-ratios in higher education on dating possibilities. With a 60:40 ratio of women to men in higher educational institutes across America, frequent all-girls-night-out's do not seem to be the exception anymore. Girls have apparently become less choosy about men, and also less demanding about what is acceptable behaviour. Classic case of supply and demand!

See http://www.nytimes.com/2010/02/07/fashion/07campus.html?pagewanted=1&hpw 

In another corner of the world, economists have found a link between another kind of a skewed sex-ratio (122 boys born for every 100 girls) and the high national savings rate. The idea is that the one-child policy in China has led to a gender-imbalace as families have a preference for male children. This has led to a situation where men are finding it difficult to find brides and as a result have to compete for them. Families have responded by saving more in anticipation of marriage-related expenditures.

See http://www.voxeu.org/index.php?q=node/4568

If one is to buy this hypothesis, we should see a reversal of the preference for sons in the next decade, and a more balanced sex-ratio, for if people are so rational to save more in the expectation of a shortage of brides, why would they not see that it makes more sense to have daughters now?