Centre leaders have tremendous local knowledge and significant local support in villages; they are opinion leaders and can develop extreme familiarity with the microfinance concept, processes and procedures

Even as the proposed Microfinance Bill is being refined for being passed into a microfinance law, the concerned stakeholders need to understand how the agent phenomenon  operates in Indian microfinance. Basically, there are three types of agents: (a) Centre leaders; (b) Local political honchos and (c) Local moneylenders.

Each of them has distinct backgrounds and characteristics. They perform differing roles as microfinance agents. I attempt to describe these in multiple articles and start with 'the centre leader microfinance agent model'.

Profile of the centre leader: The centre leader agent is typically a women who has risen through the ranks in the MFI (microfinance institution)—i.e., from being a group member/leader to becoming a centre leader. Sometimes, they could have been appointed as a centre leader directly. Either way, the key point to note is that centre leaders generally have tremendous local knowledge. By virtue of this, the centre leader, usually, has significant local support in her village and is an opinion leader locally, who has been involved in extra-curricular activities in the village. She also perhaps has good support in the surrounding cluster of villages as well.

Irrespective of the path of progress, this kind of agent has extreme familiarity with the microfinance concept, processes and procedures and this gives her the domain knowledge that serves as another major reason for deriving clout. That this agent is also very familiar with staff and clients of MFIs is yet another reason for the huge local clout. Thus, good domain knowledge and superior information with regard to microfinance as well as good contacts in the local community and the associated social acceptability provide this type of agent the needed clout.



Operational Issues: The operational scope of a centre leader agent could typically encompass 7-8 groups initially. Centre leader agents over time generally handle 35/40 Joint Liability Groups (JLGs). Very senior centre leader agents look after even 75 to 100 JLGs—at which point their case load is much greater than the normal case load of a typical Grameen MFI loan officer. In fact, if you see the data for the fastest growing and largest MFIs in India during the period April 2008-March 2010, then a lot of this will become clear.

Of course, a centre leader's ability to grow depends on her experience, age, clout and also capacity to position key support staff in the neighboring villages in the same/adjacent cluster. Often, group leaders working under her, graduate to become agent associates, each one supervising the operations in the village where they live, while she, as the main agent, covers the entire cluster of villages. This is the decentralised model in its complete sense where authority for disbursement and collection of loans is fully localised as also money management.

One further point—in some of the cases that I have seen, the agents tend to have a local support group comprising of their husbands or younger brothers or sons or other male relatives, etc.,-basically, a male brigade, in the 20-55 year age bracket, that can talk tough with any stakeholder, including clients and/or MFI staff, as and when required. As noted by an industry commentator, "The centre leader, usually a more affluent woman, uses her position to hold on to some of the borrowers' loans. If she oversees, say, 8-10 groups (about 40-50 women), she retains and uses a part of the overall loan portfolio—for consumption, or to put into her own business. While the loans continue to be in the names of the members, the centre leader makes the repayments. For this to happen, the field executive and the branch manager have to outsource the responsibility for disbursing and collecting money to the centre leader. She then decides whom to lend to." The above aspect has been diagrammed in Figure 1.

Roles and Functions: Among other things, the centre leaders, as agents, perform the following key functions:

•  They act as primary catalysts in the acquisition of new groups (JLGs). This calls for significant manoeuvring at the local level and this is where their clout becomes immensely handy.
• Sometimes, they assist loan officers in new JLG formation by pulling out clients from SHGs or JLGs belonging to competitor MFIs/agents. Much of the Guntur (AP) problem in 2005/6 happened because two large MFIs were involved in breaking each other's JLGs and taking over each other's clients. Centre leaders, as agents, played no small role in this.
• They also assist in the formation of greenfield JLGs-although this is rare as these centre leaders work towards building scale rather than do the hard work of greenfield group formation.
• Many of them supervise the working of the JLGs and maintain tight control over these JLGs and their members through loyal group leaders (who function as associates)-often guarding them from takeover by other centre leaders and agents. Therefore, constantly servicing clients with loans becomes an absolute imperative and there is no escape route whatsoever.
• They organise (informal) meetings for disbursement and recovery of loans and meet with their clients on a weekly basis (at least).
•  In several cases, senior centre leaders with a large territory may be involved with several MFIs and they certainly play the most important role in negotiating and scheduling meetings with the various MFIs. So, when new MFIs try to enter a new area, these centre leaders help schedule their weekly group meetings through mutual discussion and negotiation with other MFIs/agents.
•  Many of them maintain records and facilitate the MFI with regard to the KYC documentation, to the best extent possible. However, this is where serious frauds and shortcoming occur.
•  They disburse and collect on behalf of the MFIs whose field level contacts are limited to the agent and her associates. Hence, MFIs do not know the last mile end-use clients as the emails in the previous Moneylife article clearly indicate.

Compensation: Initially, the centre leader (agent) gets the incentive of a higher or additional loan-with passage of time, the centre leader slowly begins to understand the importance of the crucial role she plays and is slowly able to extract more monetary payment, which also includes larger loans for some of her colleagues, out of which she takes a straight cut. As she gets more clients and disburses more loans, she begins to talk a new language—payment per loan (irrespective of size). Over time this gets converted to a commission per loan (which makes her payment proportionate to loan size).

At this stage, the agent does everything—from KYC (Know Your Customer) documentation to recovery and remittance at the MFI branch. The agents also take a cut/fee on loans disbursed from clients. Therefore, in reality, they get monetary payments from MFIs (including incentives) as well as clients (by servicing both of them) and hence, are best called as broker agents in the decentralised microfinance contract. When centre leaders take an agent's cut from the loan to the client, the effective interest rate to the client shoots up. Sometimes, they also mark up the interest rate and this is one of the major reasons as to why there could be a difference in the nominal and effective interest rates stated by MFIs on paper and those observed in practice on the ground-a remark that many industry observers have made in the past.

Credit Risk and Problems: While the credit risk may not seem huge, it nonetheless remains—there is very little that the MFI can do to tackle the agent, in case of the agents reneging on their implicit and/or informal contractual obligations. This aspect becomes exacerbated by the fact that the MFI rarely knows the end-user client. It is the lure of greater wealth (through larger portfolio growth) and promise of future incentives that perhaps keeps this kind of an agent under check. This apart, I have seen several other problems in the centre leader agent model:

• Ghost/benami clients with money taken entirely by the centre leader and used for various purposes including money lending. The same money could be re-lent as a separate money-lending operation and I have seen centre leaders split the two for strategic reasons.
•  I have also seen the case of real clients who part with some amount of their loan (a proportion) which is then used by the centre leader for various purposes ranging from money-lending to own consumption as well as working capital for other businesses that the centre leader could be running locally. The extra money could also be got by enhancing the loan amount and giving the correct amount to the clients with the balance being pocketed by the centre leaders (again observed a lot in the field and among MFIs that charge margin money to pay the lien deposit to SIDBI (Small Industries Development Bank of India) and other lenders.
•  A third possibility is to provide larger loans to clients, using names of several small clients and this is something that can happen despite regulations recommending a loan ceiling size and/or loan outstanding of Rs50,000 as was the case before the Malegam Committee recommendations.
•   I have seen cases where the centre leader and staff collude and take a much higher loan and disburse the required amount to the client and divide the balance amount amongst themselves.

Let me reiterate here that centre leaders, as agents, are engaged in activities similar to what they were originally doing along with branch staff and that is the secret behind the burgeoning growth of (much of) Indian
microfinance. However, there appears to be one major difference—when pushed to doing it independently, there have been no checks and balances on these centre leaders and that is where the problem started.

As an aside, internal audit departments are very weak in many MFIs and they often report to senior and/or line management, who have very little incentive to hear about systemic flaws in operations that they manage and oversee—this is the classic conflict of interest problem. Rarely have I seen internal audit departments report to the board as they should and this conflict of interest in reporting to the CEO or COO has prevented the effective functioning of such departments. I know of an internal auditor who quit a then growing MFI (it is one of the largest MFIs today) when he came to know that the very mistakes that he uncovered in the field were indeed sanctioned by his seniors. This is a real incident that happened in 2005/6 in Andhra Pradesh.

Therefore, with very little real time internal audits, many of the MFIs took a more withdrawn approach to grassroots functioning in their quest for growth and greater efficiencies—this can be seen from the fact that case loads for MFI loan officers increased very significantly from the 200/300 clients range per loan officer to sometimes as high as 600/900 clients—and the centre leader agents took the decentralised model to its extreme, and this led to several problems such as multiple, over and ghost lending, coercive repayments, diversion of funds and the like. Thus, the centre leader agents, who are numerous across the country, unless regularised and brought under formal supervision can continue to play havoc with clients, using public deposits and priority sector funds from banks. I hope that the proposed authorities and concerned stakeholders take these ground realities into consideration while finalising the proposed Microfinance Bill that is likely to be introduced in the Parliament in the forthcoming Winter Session.

  ⁱPlease see previous Moneylife articles on microfinance agents - http://www.moneylife.in/article/how-and-why-did-microfinance-agents-become-a-part-of-the-indian-microfinance-business/19301.html and http://www.moneylife.in/article/implementation-safeguards-against-notorious-agents-are-an-imperative-for-the-proposed-microfinance-bill/19017.html

(The writer has over two decades of grassroots and institutional experience in rural finance, MSME development, agriculture and rural livelihood systems, rural/urban development and urban poverty alleviation/governance. He has worked extensively in Asia, Africa, North America and Europe with a wide range of stakeholders, from the private sector and academia to governments).