As prologue to the BSP’s (Bangko Sentral ng Pilipinas) National Microfinance Stakeholders Summit held on April 5, the Rural Bankers Association of the Philippines Microenterprise Access to Banking Services (RBAP-MABS) with support from USAID/Philippines and the Microfinance Council of the Philippines (MCPI) jointly held a pre-summit seminar on April 4 discussing “How to Avoid an India-type Microfinance Crisis in the Philippines”.
Opening the forum, RBAP President Corazon Miller described the India microfinance crisis as “a wake-up call for microfinance practitioners in the Philippines to begin the proactive process of strengthening transparency, following consumer protection practices, improving governance, and becoming better at communicating the value of Microfinance services.”
Led by Ms. Elisabeth Rhyne, Managing Director of ACCION International’s Center for Financial Inclusion and organized for the microfinance stakeholders in the Philippines particularly rural banks, NGOs, credit cooperatives and others, the seminar provided interesting discussions on some of the issues that led to the microfinance crisis in the India.
Ms. Rhyne outlined the developments leading up to the crisis in India, particularly in the southern state of Andra Pradesh, where the largest microfinance institutions are located. Some historical notes provided context to the build up of the crisis there, as she traced how the banking industry in India had risen from years of operating only state owned banks to the time of privatization after the financial sector was liberalized. She also pointed out that the microfinance industry in India is an “orphaned” sector because the regulators did not pay attention to the industry. Even after some of the institutions did become regulated as formal financial institutions, the regulations kept them in a tight leash allowing them to offer only group loans and prevented them from offering deposit services.
With group lending models basically imported from Bangladesh, microfinance in India grew at a very fast clip. In the last two years leading up to the crisis in 2010, microfinance in the State of Andra Pradesh experienced astronomical growth as the “cult of scale became the yardstick to measure a microfinance institution’s relevance.” Thus, growth measured in millions, and the race to draw even more new clients was driven harder by the entry of equity from profit seeking investors. Andra Pradesh, the state with the largest microfinance sector, experienced astronomical growth with at least 10 million new clients in a short span of two years. In a bid to draw in more clients, one particular bad practice was employed by some MFIs there: the use of agents, paid or unpaid, which led to uncontrolled groups of borrowers.
To sum up the main issues, Ms. Rhyne listed the most important factors that have led to the crisis in India as follows:
- Extreme rapid growth with the loss of portfolio quality,
- The entry of commercial investors with high valuation expectations,
- Location of branches in already saturated markets,
- Harsh collection practices,
- Weak industry associations, and
- A lack of action by microfinance institutions.
Ms. Rhyne also contrasted the crisis in India with the one that occurred in Bolivia over a decade ago. The Bolivian crisis was triggered by the introduction of consumer credit as well as the unbridled growth in microfinance credit services. However, this crisis did not shut down the microfinance sector, which actually recovered quickly and became much stronger. Some of the steps taken in Bolivia after the crisis included:
- A shift away from group lending to individual lending with a focus on cashflow lending and proper repayment capacity analysis;
- Strengthened underwriting standards, especially regarding total client indebtedness;
- Product diversification including a stronger focus on savings;
- Private credit bureaus strengthened to include all players both regulated and non-regulated institutions;
- Codes of conduct adopted; and
- Strong associations that had a regular and constructive ongoing dialogue with regulators and politicians.
Will similar microfinance crisis come to the Philippine shores? From the data presented during the forum by Professor Ron Chua, sector-wide indicators on outreach indicate a very modest growth that has been tapering off in more recent years. Some consolidation has also been taking place.
Ms Rhyne noted that the trend in the Philippines has also taken the microfinance providers away from mono-product and group liability lending as they offer more diversified products and services to their clients. Such products and services have included credit for agriculture, housing, microinsurance, remittance as well as microinsurance services. There has also been an increasing use of technology, such as mobile phone banking services, to improve delivery and bring down costs. When it comes to the microfinance players in the banking sector, where over 200 offer microfinance services, the Philippines has the most pro-active regulations for microfinance that have become a model for central banks in other countries. However, while there are good regulations for banks, there is still the concern raised on the lack of regulation over the non – government organizations that provide services to at least two-thirds of the microfinance borrowers. On a positive note, she noted the impressive level of stakeholder cooperation and supportive regulators and active industry associations.
Lessons learned from both the Andra Pradesh and Bolivian experience, as well as the crisis that happened in South Africa and Morocco, among others, point to certain vulnerabilities that could trigger a crisis in the markets that microfinance institutions target to reach. Players and regulators are well advised to recognize these vulnerabilities and address them before they create a tidal wave. These vulnerabilities include the following:
- Overlending problem: In markets that have become highly competitive the challenge is how to avoid the tempest of over indebtedness. Ms. Rhyne warned that it is easy for lenders to make over optimistic projections on how much credit a borrower can get and that “clients are not the best judge of how much credit they can afford to borrow and competently handle.” There is therefore a need for the microfinance institutions to restrain the offer of credit. The industry players acting together can do something to avoid over indebtedness amongst their clients. The practice of using the cash flow analysis to determine the amount the borrower can pay is a good practice that lenders should follow. The regulatory authority can also be a source of proactive initiatives, and, here, fast tracking the implementation of private credit bureaus acquires much urgency.
- Public perception of interest rates: The idea of charging poor people more than charging non-poor is always going to be a point of vulnerability, especially when the sector has become much bigger. In the Philippines microfinance borrowers are estimated to number around three million, based on data from the PCFC. Because delivering micro loans to borrowers have a much higher cost than a loan of a much bigger amount, there is a need for better communicating this fact to the public. But at the same time, there is a need for the industry to practice fair and transparent pricing for their loan product, with full disclosure of the effective cost of credit to the borrowers.
- Collection practices. Offensive and harsh collection practices that are harmful to the clients and counterproductive for the lender should be avoided. The industry players collectively should review their collection practices and follow a proper code of conduct. This is especially a vulnerability for some of the Grameen replicators who follow sit down collection practices.
- Entry of bad players whose motivation is almost solely profits but put on a cloak of good intentions can damage the market.
- Political temptation. When a crisis gets blown out of proportion, there could be a tendency for the issues to take on a political color, with a temptation for politicians to take it over as a populist issue or become a hero to solve the problem of the poor. Unfortunately, there is an over present temptation to offer solutions, such as interest caps or condemnation of loan payments, which are counterproductive as they harm both the providers and clients of microfinance services.
Ms Rhyne then went on to share some of the proactive steps that the Philippine microfinance sector could take to avoid a microfinance crisis in the Philippines. These principles follow the Smart Campaign’s six client protection principles:
- Avoidance of over-indebtedness
- Transparent – and responsible – pricing
- Appropriate collection practices
- Ethical staff behavior
- Mechanisms to manage complaints
- Privacy of client data
At the conclusion of the seminar, a panel discussion led by Mr. John Owens of RBAP-MABS, Ms. Rhyne, Prof. Chua, Mr. Tomas Gomez IV of GM Bank, Ms. Lalaine Joyas of MCPI and Mr. Eduardo Jimenez of the BSP, discussed the various issues and challenges faced by the industry. Along with the other participants, they also discussed the practical steps that institutions and their associations can follow to ensure a healthy expansion of microfinance services in the Philippines.
By and large, the Philippine microfinance players across all sectors have a lot to learn from the crisis that other countries have already experienced. In her closing remarks, Ms. Mila Bunker, Chairperson of MCPI, reminded the participants about going back to the basics and reflecting on practices that may seem to be effective but actually harm clients, and “to be vigilant so that the India crisis does not happen to us.” She urged the participants to revisit their institutions goals, to take a look at implementing the 6 client protection principles advocated by the SMART Campaign. And in a call to arms, she reminded all microfinance providers – NGOs, cooperatives, banks – that no one provider is an island, that “we are part of a bigger sector and we need to unite in the goal of reaching the poorest and marginalized sector.” Ms. Bunker urged everyone’s cooperation in a continuing dialogue with each other and uniting to take proactive action especially concerning the credit bureau and having a code of conduct to serve as the norm for all microfinance players.