On the six factors which cumulatively added up to India’s unprecedented cash squeeze

India’s current cash crunch is a real enigma.

To begin with, there is its sheer unprecedented nature. In all the years since Independence, India has never seen something like it. “We have heard of coin shortages but never a cash shortage,” said MS Sriram, visiting faculty at the Indian Institute of Management-Bangalore’s Centre for Public Policy. “I certainly have not in my life. This is new.”

How the shortage played out is odd too. It is acute in some states but not in others. For instance, in Tura, the largest town in Meghalaya’s Garo Hills, an official at the main State Bank of India office, which disburses cash to the bank’s other branches in the region, told Scroll.in that cash reserves had dwindled to almost a fifth of the required amount. “There is pressure from other branches to release money, but we have not been able to give even half of what they have been demanding,” the official said.

A clutch of other states – including Bihar, Assam, Maharashtra, Telangana and Karnataka – are facing shortages too. But states like Delhi are less affected.

The discrepancy is visible within states too. In Maharashtra, Mumbai is fine but Nashik is not. In Tamil Nadu, big banks in Hosur say they are getting all the money they need but their counterparts in surrounding villages say the situation is bad. “We contact our sister branches to see if any of them has surplus cash,” said the manager of a public-sector bank in Belathur, a village about 20 km west of Hosur.

There are other puzzles. The cash squeeze showed up not gradually but suddenly. Reports began coming in from several states from February. If the cash squeeze was only due to a growing mismatch between cash supply and the demands of the growing economy, it should have shown up gradually, experts say.

As a report in Scroll.in noted earlier this month, several theories emerged to explain the shortage, covering the gamut from obvious to plausible to off-the-wall. Shortly afterwards, several Scroll.in reporters fanned out across the country, speaking to people in both cities and villages, to try to identify the genesis of this shortage.

Here is what we found.

Out today, with my colleagues Abhishek Dey, Mridula Chari, Vinita Govindrajan and Arunabh Saikia, a more deeply reported piece (than the previous one) which seeks to trace this cash squeeze back to its (idiotic) origins. Do read.

the new, new contours of financial inclusion

from the et special issue on modi sarkar completing 100 resplendent days in power, this story on financial inclusion…

Every two years, India’s financial inclusion drive reformats itself into a brand new, entirely unrecognisable avatar. Till about three years ago, it starred banks, the Reserve Bank of India and banking correspondent companies. Then came DBTs and the finance ministry, with its common banking correspondent (BC) auctions. Also came Aadhaar, opening bank accounts and keen to become sole authenticator for all financial transactions. In 2014, the landscape has changed again, partly due to Narendra Modi’s Jan Dhan Yojana.

RBI opposes NDA financial inclusion plan

The new financial inclusion push, Sampoorn Vittiyea Samaveshan, which Prime Minister Narendra Modi is widely expected to unveil on August 15 does not quite have the central bank on its side. Top government sources told ET that the Reserve Bank of India (RBI) was in disagreement with three critical elements of the drive.

it opposed the Rs 5,000 overdraft, the credit guarentee fund, and the aggressive timelines. on all three counts, it was over-ruled. a quick story with my colleague dheeraj tiwari, this one.

the bandhan experiment

early in april, the rbi surprised most financial sector watchers by granting a banking license to bandhan, a microlender with most of its operations in eastern india. in a story out today, my colleague atmadip and i take a closer look at this decision. and say that this is a high stakes experiment — for the rbi, which is looking for fresh ideas on how to deepen financial inclusion; for the mfis, which, given rising competition from banks, mobile companies and banking correspondents, are looking for new ways to survive and grow; and for bandhan itself, which has to pupate into a bank without losing its quick response times, but while guarding against mis-selling of financial products to its vulnerable client-base.

Yet more stand behind tiny counters and sell nimbu paani or bhelBSE -0.80 %. The nature of enterprise is local, small and on the edge of subsistence.

with the standing committee rejecting the mfi bill, old questions come back to haunt MFIs

and, after a long time, i write again on india’s search for regulatory mechanism for microfinance.

With the Standing Committee on Finance rejecting the latest avatar of the microfinance bill, old questions about the microfinance sector have resurfaced. Since 2010, when the controversial Andhra Pradesh ordinance made it all but impossible for Microfinance Institutions (MFIs) to operate in their largest market, the industry has been hoping that the passage of the bill would result in the removal of the ordinance.

But now, with the bill going back to the drawing board, says Mathew Titus, the executive director of industry association Sa-Dhan, banks will be nervous about the risk of further state-level interventions…

The other question is on how to regulate MFIs. After the 2010 AP Microfinance crisis, it seemed that a large part of the institutional response would take the form of this Bill — “The Micro Finance Institutions (Development and Regulation) Bill, 2012.” However, with the Standing Committee returning the Bill, that question is wide open again.

also, see these. on the need for the states to have a stay in mfi regulation. another story on the draft bill. on how to regulate mfis – story 1, story 2, story 3. and the need for regulation: story one, story two, story three, story four and story five.

the transitions of indian microfinance

india’s beleaguered mfis are making a set of fundamental changes to their business models. in a bid to survive, one bunch is diversifying beyond microfinance into lending for cycles, vehicles, homes, tractors and whatnot. another lot is sticking to microfinance but making some significant changes within that — like who they lend to and how they lend.

in the process, they are all going through a bunch of massive transitions — from unsecured loans to secured loans, from group loans to individual loans, from the poor to those well above the poverty line. my latest story on the mfis discusses this transition and then talks about the issues this diversification poses before regulators.

(Usha) Thorat fears that if the NBFC arms lend the way MFIs did during the boom years of microfinance, there might be a surge in secured loans, but without enough due diligence into the end use of that loan, the borrower’s repayment capacity or the worth of the asset. For example, if a poor woman uses a loan to buy a house in a slum or an informal tenement, she won’t have a title. How can that serve as collateral then? There’s also the risk of priority-sector funds being used for other purposes. R Bupathy, former president of the Institute of Chartered Accountants of India (ICAI), says this risk is greater in a holding-company structure with many subsidiaries.

do take a look.

MFI Regulation, Part four. Why states should have a role

all right. so, here is something puzzling.

Microfinance practitioners insist their embattled industry should not be regulated by state governments. State governments, they say, do not know how to regulate financial organisations. Keeping microfinance institutions (MFI) under the purview of the state government, they add, will leave microlenders vulnerable to political pressures.

It is a set of arguments that has been accepted by an expert committee that wrote the draft microfinance Bill. The draft Bill, put up by the finance ministry, promises to override state laws. It also proposes that state advisory councils be set up to, among other things, monitor MFIs’ field-level conduct and give a feedback to the central government. Further, it says that if the RBI feels an MFI’s actions are hurting clients, it can issue orders to stop the functioning of the organisation.

It is not clear, however, if these measures can protect the MFIs’ poor and vulnerable borrowers.

think about it. the RBI is overloaded. and, even otherwise, incapable of monitoring field level conduct of MFIs with their poor borrowers. the state advisory councils are pointless. the bill is silent on how complaints will reach them, on how they will be investigated, and on how grievance redressal will take place.

all these are functions that only state governments can perform. they must have a role in regulating the mfis — at least their conduct with the borrowers. the whole argument, here.

on the draft bill that seeks to set microfinance right

With the Finance Ministry completing its draft Microfinance Institutions (Development and Regulation) Bill, another large piece of the puzzle on how to regulate Microfinance Institutions has fallen into place.

It has been a tough puzzle to crack. In the beginning of last year, when complaints about women being pushed into debt traps were gathering pace, the RBI and the FinMin were flummoxed by the diverse array of microfinance providers – NBFC-MFIs, co-operatives, non-profits, trusts – all answering to different regulations. The business itself, built around multiple, small transactions in farflung areas, made it hard to verify claims about collection methods and interest rates.

Today, looking at the draft Bill, it is evident that the FinMin has managed to find a way out of some of these perplexities.

needless to say, the bill is not perfect. but, then again, bills rarely can be in a rambunctious democracy given the need to accommodate diverse viewpoints. further, it has just been opened for comments. so, now to see how it evolves from here on. for now, the main thing is, a regulatory regime for the MFIs is gradually taking shape. the journey so far, here, here and here.

MFI regulation: Part Three

With SKS Microfinance challenging Andhra Pradesh’s controversial microfinance law in the Supreme Court, India might soon have an answer to the question: who should regulate microfinance institutions (MFIs), the Centre or the states? This is a question that needs an immediate answer. As non-banking finance companies (NBFCs), MFIs are regulated by the RBI. Being financial corporations – as per the Seventh Schedule of the Constitution – they come under the Centre. See them as moneylenders and the same Seventh Schedule makes them a state subject. This ambiguity in law is one reason why, despite MFIs getting desperate, neither the RBI nor the finance ministry can get the Andhra Pradesh government to abandon the Act.

Slowly, the regulatory regime for the MFIs takes shape. The thing I am marvelling about, though, is this. The new regulatory regime looks like it will be the amalgam of the steps taken by assorted institutions trying to fix the problems they see — the AP Ordinance plus the Malegam committee recommendations plus the Microfinance Bill plus the Supreme Court verdict. As opposed to, say, a unified policy response to the crisis in/by the sector.

Which is roughly what I had also seen while studying the drafting of the Forest Rights Act in 2009. Law making, unlike what Akhileshwar Pathak writes in Laws, Strategies and Ideologies,  can actually be the sum of disparate parts being strung together. (I should upload that paper soon. Soon, once I, sigh, finish its damn conclusion)

Also, this is my third story on how the regulatory regime has been evolving. The first one, written last June, looked at why complexity was nobbling the government’s attempts to fathom how to regulate the sector. The second, written a month later, looked at other regulatory alternatives before the government.

From Majority to Minority Shareholders

and a look at what debt restructuring means for mfi promoters.

“I have a 45% stake,” says a promoter of a leading MFI. “If we restructure Rs 1,000 crore of debt, my stake will drop to about 1%.” This will be a setback for promoters of MFIs such as Spandana Spoorthy and Share Microfin, which bought back large quantities of shares from their borrowers – mostly poor women – between 2005 and 2007 for a pittance just before their business took off. They built the business with an objective of going public at some point and realising those gains.

But if they are reduced to minority shareholders, they will not be able to realise those gains. more here.


a day after after the initial optimism, the mfis figure that the old adage of ‘what one hand giveth, the other taketh away’ fits the malegam committee report perfectly.

A day after a central bank appointed committee submitted its report, small microfinance institutions (MFIs) say the recommendations if accepted would wipe away their presence in the sector because of stringent capital requirements.

a story that i wrote with my colleague John Samuel Raja D.

SIDBI hauled up by RBI et al

In the past two months, RBI has informally directed Sidbi to not invest in any non-banking finance companies without its approval… Sidbi has also been told by the finance ministry to ensure that Indias MFIs do not levy onerous interest rates. Further,it has been told to commission a study on interest rates and to start a forum where banks can compare notes about MFIs.

Within RBI, Nabard and the finance ministry, the feeling that Sidbi could have done more to keep errant NBFC-MFIs in line grows. I cannot find the URL for this report. And so, here, a PDF of the page. ETD_2010_10_15_17 sidbi pulled up over MFIs

MFIs and the Priority Sector

A Reserve Bank of India committee headed by executive director VK Sharma, in its draft report, has recommended that the priority sector status, which is accorded now to banks’ exposure to Non-Banking Finance Companies, or NBFCs, should be withdrawn.

More, here.

The puzzling case of Unitus’ nonprofit ops

Roughly a month before the SKS Microfinance IPO , the Seattle-based charity Unitus, a large investor in the firm, unexpectedly announced it was shuttering its non-profit operations in micro-credit and laying off more than 40 employees. The decision sparked a controversy because Unitus stood to make $70-80 million from the sale of its shares in SKS.

An e-mail interview with Unitus chairman Joseph Grenny regarding the exit.

The Thanjavur Pilots

for two years now, a quiet experiment on how to deliver financial services to india’s rural masses has been underway in and around the ancient temple town of thanjavur, tamil nadu.

travel through the villages of pattukottai, thanjavur and kumbakonam and you will see branches — 57 of them — of a local “bank” called pudhuaaru after the local river. it is a recent entrant to this area. the first branch came up in june 2008. these branches, each occupying roughly 500 sq ft, with bright orange walls, with three youngsters sitting behind counters, with four or five rows of bright green wooden benches before the counters, offering loans, insurance and savings products with remittances slated to follow soon, are surprising rural finance professionals with their results.

the complete story here.

financial inclusion puzzles

Three decades after Independence, most poor Indians still lack institutionalised access to insurance, savings, remittances and loans. The outcomes are predictable. Migrant labour, carrying hard cash when they head back home, run the risk of being robbed. The poor rely excessively on loans to cope with a crisis — accidents, unpredictable weather, sick cattle — though insurance would be more appropriate.

KC Chakrabarty , Deputy Governor of Reserve Bank of India , on how to universalise financial services in the next 10 years.

Microfinance Messiahs?

On the ground… the MFIs’ growth is creating an unnerving situation. Even among those in the industry, there are fears of a mass-delinquency. In fact, Andhra is the most penetrated market in the world, on par with Bangladesh, says Daniel Rozas, a contributor at industry blog Microfinacefocus.com. “The state was already at 6% overcapacity a year ago. Explaining these numbers without allowing for extensive multiple borrowing is indeed a challenge,” he says.

an Economic Times in-depth report on rampant overlending by MFIs in Andhra Pradesh and Karnataka.

Through the scanner darkly

India’s booming microfinance segment is under the scanner, with the Reserve Bank of India (RBI) issuing a veiled warning that it could be taken off the priority sector lending list of banks if the industry fails to improve its governance standards… The RBI officials reportedly told MFI executives that the central bank was aware of the extent of benami loans being given by MFIs, the practice of writing off bad loans and sloppy corporate governance in some of the entities…

More here.

update: a couple of months later, these questions about corporate governance rose to a higher pitch when the bosses of sks microfinance decided to sell their shares in the company before its IPO. Also see this. And this.