Dear Colleagues,
July 28th
2010 – this day four years ago - was when the historic SKS IPO opened. It was a
stupendous success and it set the bench mark for Indian MFIs aspiring to enter
the capital market. However, the architect of India’s only microfinance IPO was
however unceremoniously removed in October 2010. M. Rajsekhar
and M. Anand (The Economic Times) highlighted these governance concerns in an
article, which, in my opinion, changed the course of Indian microfinance in
2010, which had already plunged into a deep crisis because of previous happenings:
“It just doesn’t add up. This
May, the board of directors of SKS Microfinance gave CEO Suresh Gurumani a
50%-plus increment, hiking his annual compensation from Rs. 1.5 crore to over
Rs. 2.3 crore. It also awarded him a Rs. 80 lakh cash bonus. Three months after
that, Mr Gurumani helped complete a spectacularly successful IPO, the first by
a microfinance institution (MFI) in India and the second the world over,
fulfilling a key mandate the board had given him when he was hired in December
2008. The stock listed at a market cap of Rs. 8,000 crore, exceeding most
analyst expectations. And
yet, within two months of what was a landmark listing for India’s microfinance
sector, the board fired Mr Gurumani. No official explanation was offered by the
company, though CFO Dilli Raj, in a conference call with analysts, ruled out
any financial irregularity. Many directors, all speaking on the condition of
anonymity, chorus a one-line explanation for the termination—non-performance.
ET interviewed over a dozen sources close to both Mr. Akula and Mr.
Gurumani—investors, directors, current and former employees, bankers and
regulators. Sources on Mr. Akula’s side paint this as a difference in business
strategy. Those close to Mr. Gurumani say this was a personality clash, a power
struggle. They point to Mr. Akula’s changing roles in the company as evidence.…
Still, questions on the SKS board’s U-turn—giving a 50%-plus hike to the CEO
and then firing him five months after that—refuse to go away.”[1]
Thus, the popular
perception of microfinance had hit a low, and much of the good work done by
many stakeholders, including some MFIs, was beginning to be viewed
suspiciously. How did microfinance,
once regarded a noble profession, come to be viewed this way? To what extent
did the change in the microfinance paradigm (to hardcore commercialization)
cause this negative perception? What led to the now famous AP 2010 microfinance
crisis? What happened in AP in 2010 and before? Who was responsible for the
state of affairs that led to the AP crisis in the first place? What specific
and generic lessons can be learned from the crisis going forward, both for
Indian and global microfinance?
These and other questions started to flit across my mind and I decided to
pen my thoughts as a book - An Idea Which Went Wrong: Commercial Microfinance in
India, which will
be available from August 22nd 2014 at www.amazon.com
and through several other global and Indian outlets.
I made a set of ground rules to follow while writing the book. One, it
would have to be objective in terms of narration and content, but, at the same
time, it would have to try and analyze the various happenings in a candid,
analytical manner. Two, while describing problems and events, where there is no
conclusive evidence, it would have to offer plausible explanations and leave it
to the readers to judge for themselves the various cause–effect relationships.
Three, it would need to be forward looking, in terms of suggesting practical
lessons and strategies on what exactly would need to be done to re-engineer
microfinance to serve the needs of the poor and low-income clients.
From the outset, this book is clear in focus—it examines antecedents to
the commercialization of Indian microfinance and demonstrates that this
commercialization is an idea that went horribly wrong—both in design and
implementation—with significant ground-level consequences. Specifically, it
shows that improper design and poor implementation of the commercialization
strategy led to the 2010 AP crisis in the first place. And using empirical data
and hard facts, it seeks to debunk the hypothesis (or myth) that the Andhra
Pradesh government, by enacting the ordinance and the subsequent act,
effectively caused the 2010 AP crisis and/or killed microfinance in India.
I
state things as I saw them unfold over the past few years, backed by relevant
data wherever available, taking off from a little before the Krishna district
crisis of 2005–2006 in AP. Even before that, I narrate the story of Zaheera
Bhee and her daily struggle for survival amidst severe poverty and adversity,
to provide the readers with an overall context of (enthusiastic) financial
inclusion that preceded the 2010 AP crisis. This is followed by a description
of the antecedents to the 2010 AP crisis. I thereafter attempt to seamlessly
weave in various happenings during this crisis with my own field-based
analyses, before outlining the various lessons gleaned thereon with specific
examples from the Indian microfinance sector, backed by solid evidence, data
and facts where available!
The book is
organized as follows: Part I, which
includes chapters 1-2, sets the
overall context for the book; Part II,
comprising Chapters 3–11, looks at
the antecedents to the 2010 crisis and takes the reader through the various
happenings during the crisis and brings them up to date with events as of
December 2013; Part III, which
incorporates Chapters 12–34, offers
critical issues and lessons for global and commercial microfinance, as
discerned from the 2010 and previous microfinance crisis situations in India, with
regard to a number of specific topics-ranging from corporate governance to risk
management, compensation, MIS, internal controls, microfinance agents and
staff, client acquisition, effective interest rates, nonbanking financial company
(NBFC) regulation and supervision, priority sector lending (PSL),
self-regulation, code of conduct, and the like. This part also houses two important
chapters – one for redeeming the Indian microfinance industry and another for
reforming the agenda for global microfinance and the CGAP; and Part IV, concludes with a critical
chapter - Chapter 35, which is the
epilogue that focuses on the crucial aspect of making the RBI more accountable
to the people of India, especially in the light of the 2010 AP microfinance
crisis and recent events that occurred in the financial inclusion space. Part V is an appendix containing data,
tables, exhibits, and other relevant material including references and
glossary.
To reiterate, my sole
objective in bringing out the aforementioned book is to ensure that the key
lessons from the 2010 AP crisis and events thereafter are not lost for global and Indian microfinance. Other countries especially would not want to go through what India and specifically AP have gone through in
terms of financially excluding millions of poor clients (who were once
financially included) just because of a distorted growth process that had been adopted
by the MFIs (then)
It is my humble
opinion that the evidence, facts and examples provided in the book will serve
to educate various stakeholders including microfinance practitioners,
regulators, governments, investors, bankers, academics and several others
I hope you enjoy
the book
Thanks
Warm Regards
Ramesh S
Arunachalam
[1]Source: Quoted from “More to SKS script than meets the eye” by M. Rajshekhar and M. Anand, The Economic Times, October 8,
2010.
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