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Questions about the independence of self-regulatory organisations (SROs), Microfinance Institutions Network (MFIN) and Sa-Dhan have arisen.
Problems with the governance of MFIN, the major self-regulatory body for MFIs, have been highlighted in reports authored by no less than individuals on the board of MFIN. Case in point is the Responsible Finance India Report 2016 authored by Professor Alok Misra, chair of MFIN’s self-regulatory organisation committee and independent board member. It states that “it will be wise to have a stricter firewall between [self-regulatory organisation] and advocacy work, and at the same time, reduce the dependence on member funds for [self-regulatory organisation] work.”
MFIN’s transparency is a concern, since the organisation does not publicly share critical field investigation reports, credit bureau data and third-party MFI evaluations as mentioned in the Responsible Finance India Report 2016. According to the report, this is likely because MFIN draws funding from member MFIs, constraining public disclosure. “Funding of [self-regulation] through public funds will also ensure that the public disclosure will increase, as currently being a member-based organization, critical aspects of its functioning such as field investigation reports, [credit bureau] data, and so on are not disclosed, thus reducing transparency in its functioning.”
Professor Misra noted that a majority of MFIN’s board members should be independent, and independence criteria should “exclude people providing direct services to member MFIs, such as funding.”
Ramesh Arunachalam, an author of several books on microfinance, and who has extensively highlighted the conflict of interest in microfinance, says, “[G]ood governance requires identification and mitigation of conflict of interest, which has not happened in the microfinance sector.”
“Self-regulation is an oxymoron, and having industry associations as quasi-regulatory bodies is fraught with danger,” he adds.
MFIN has 12 governing board members, eight of whom are from member MFIs. The remaining four members are so-called “independent board members.”
Of the independent board members, Navin Kumar Maini is a retired SIDBI Deputy Managing Director. He was a non-executive director of MUDRA, a financial institution which lends to MFIs from August 2015 to February 2018, while already appointed as an independent board member at MFIN in 2014. Desh Raj Dogra is a former Managing Director and CEO of CARE Ratings.
Professor Alok Misra is also designated as an independent board member. Misra was previously the CEO of a microcredit rating agency (M-CRIL) and assistant general manager of NABARD (National Bank for Agriculture and Rural Development), which lends to microfinance institutions. When Global Ground Media asked Alok Misra about his designation as an independent board member of MFIN, he declined to comment.
Dr Aruna (Limaye) Sharma, a retired Indian Administrative Services officer, is the only independent board member not previously working at an organisation providing direct services to members of MFIN.
Raising concerns about MFIN’s board, Arunchalam expressed his opinion in an interview with Global Ground Media: “SIDBI and MUDRA are major lenders to the microfinance sector. CARE Ratings and M-CRIL perform third-party evaluations and code of conduct assessments. How can former employees be independent board members of a self-regulatory organisation, when they have worked for organisations that profit from the microfinance business? Under no circumstances can MFIN’s board be called an example of good governance.”
He suggested that board members could function independently only if there was a sufficient time gap between their previous microfinance industry affiliation and current position as an independent board member of a self-regulatory organisation.
An examination of the work backgrounds of independent board members Navin Kumar Maini, Desh Raj Dogra and Alok Misra, showed that they joined MFIN approximately a year or less after quitting their previous jobs in microfinance as listed above. Dr. Aruna (Limaye) Sharma was appointed as an independent board member by MFIN six months after she retired in August 2018 as Secretary, Ministry of Steel.
“If ever there is a conflict of interest with a member of MFIN, our independent directors adhere to the highest standards of corporate governance and recuse themselves from any discussions,” an MFIN spokesperson said by email.
Governing and representing members
In addition to affiliations with other companies in the microfinance sector, there is also the appearance of direct conflict of interest where independent board members simultaneously represent member organisations. At least two MFIN independent board members still hold board positions at organisations which are members of MFIN.
Desh Raj Dogra is listed as an independent director on the boards of Asirvad Microfinance Limited and M Power Microfinance, both members of MFIN. Independent board member, Alok Misra, is also an independent director on the board of Vaya Finserv, an MFIN member.
An MFIN spokesperson stated: “Independent directors have to disclose if they are on the board of an MFIN member, which Desh Raj Dogra did in the instances of M Power and Asirvad.” Misra recently joined Vaya Finserv and disclosed this to the MFIN secretariat, an MFIN spokesperson stated.
MFIN’s 2018 Bye-laws state that “representatives of Associates [non-members] are eligible to be nominated as independent members.” Associates refer to non-members engaged in activities related to microfinance and financial inclusion and have associateship status with MFIN, but are not NBFC-MFIs. The bye-laws do not state that representatives of member organisations are eligible on the condition that they need to disclose their affiliation.
An MFIN spokesperson says that independent board members are chosen for their ability to augment the association’s knowledge and expertise. “Microfinance as a business does not work in isolation. MFIN and its members work closely with multiple stakeholders,” the spokesperson said.
Via email, the spokesperson also said that independent directors play an important role in MFIN’s governance. An independent director chairs the nominations and remuneration committee, which reviews the performance of senior management, appraises the CEO’s performance and recommends new independent directors to the board, to the self-regulatory organisation committee and to the enforcement committee. MFIN’s finance and audit and SRO committees are also chaired by independent directors.
Two of four MFIN independent board members, Dogra and Misra, are performing these functions while at the same time being affiliated to member organisations.
Different SRO, similar practices
The other self-regulatory organisation, Sa-Dhan, currently has 11 members on its governing board, of which eight belong to member institutions of Sa-Dhan. Another three are independent members, of which Brij Mohan was a former executive director at SIDBI and Madhukar Umarji was an executive director at RBI, which they left in the 2000s. A third independent director is Rajashree Baruah, Chief General Manager at NABARD.
Independent board member, Brij Mohan, is also the chairman and independent director on the board of Ananya Finance for Inclusive Growth and independent director at Maanaveeya Development and Finance. Both organisations are members of Sa-Dhan. Mohan is also an independent director with rating agency M-CRIL.
When asked about Brij Mohan’s affiliations, Sa-Dhan’s Executive Director, Pillarisetti Satish, said in an email: “Brij Mohan is not a full-time employee of any institution. He is an independent director/independent board member [of those institutions]. All the institutions he is associated with work for the broader goal of inclusive finance in the country, so there are no issues with regard to his contribution to these institutions as an independent director/independent board member.”
Satish did not respond to repeated questions about Baruah’s position at NABARD.
Executive Director Satish was NABARD’s Chief General Manager. The Executive Director does not have a seat on the board at Sa-Dhan.
Arunachalam said about Sa-Dhan’s board: “Sa-Dhan’s board is not perfect. Yet, the fact that they have a representative from the regulator RBI is a sign of more neutrality.”
Arunachalam added that the RBI is aware of weak governance in the sector, but is itself suffering a crisis of credibility. “Does RBI ensure the veracity of reports submitted by the [self-regulatory organisations]?” he asks. In recent years, RBI has been questioned for weak supervision, lack of transparency and failure to check dubious lending. RBI did not respond to repeated requests for comment from Global Ground Media.
In its case by the Central Information Commission against RBI for not providing the names of defaulters, RBI said it could not provide the names due to “confidentiality between customers and RBI” and the requested information would not only pertain to wilful defaulters but also the borrowers suffering economic distress. The case is pending in the Bombay High Court.
Even as governance in microfinance causes concern, the on-the-ground realities are no less troubling.
Moin Qazi, who has worked with banks and microfinance companies, and has spent four decades in the development sector, adds about the microfinance sector generally: “Things are very bad on the ground. Loan officers should adequately counsel borrowers but have huge targets to meet. Due diligence is neglected in the process. Are MFIs serving the poor or profiting off the poor?”
As MFIs expand their loan portfolio, loan officers face pressure to get more clients and ensure loan repayment. The Inclusive Finance India Report 2018 points out that the concerns of loan officers about increasing workload, in terms of the number of clients and volume of portfolio handled, have yet to be fully addressed by MFIs.
Amulya Krishna Champatiray, who works in financial inclusion and leads training and workshops at IFMR Lead, a research organisation that works on microfinance, states that MFIs have learned from every crisis, but have a long way to go as far as clients are concerned.
Even as microfinance’s advocates try to paint a picture of all being well, a closer reading of the sector and regulators indicates that while some MFIs try to financially service the poor, warning signs persist and issues which sparked the 2010 Andhra Pradesh crisis continue to spell trouble for the sector.
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Article by Urvashi Sarkar.
Editing by Mike Tatarski and Anrike Visser.
Research by Peter Allen Clark.
Illustrations by Imad Gebrayel.
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