A comparative analysis of three crisis situations NBFC situation of The Satyam The Andhra Pradesh and Indian micro- Description the 1990s episode of 2009 finance crisis of 2010 Legal form(s) The legal entities Legal entities were Legal entities are mainly MFIs registered were different companies engaged as NBFCs. kinds of deposit- in providing a range There are other forms of MFIs including taking NBFCs. of products and non-profit and mutual benefit, but the services. large MFIs that dominate the market are mainly NBFCs in terms of their legal form. Regulation By the Reserve Registrar of RBI for NBFC MFIs. and Bank of India Companies. In addition, SEBI for listed NBFC MFIs. supervision (RBI). For listed companies, Registrar of societies, trusts and Passive by most SEBI in the matter of cooperatives (central and state standards. market regulation. governments) for respective legal forms. Minimal, but for RBI for banks, including local area banks. legal compliances NABARD as supervisor for cooperative with market banks. regulator. Compliance checklist type regulation for NBFC MFIs. No serious asset side supervision for most MFIs. Growth and Explosive growth. Rapid growth to keep Burgeoning growth, through the years and competition Significant up with competitors. especially from April 2008 onwards. competition. Significant Significant competition in several Special schemes competition. pockets–especially urban and peri-urban to woo customers areas. – which asked Several areas became totally saturated and whether customers witnessed intense competition and can spot Rs36 multiple and successive lending became lakh in this rampant as a result of this. advertisement and ‘Fastest to disburse’ became the most things like that, important criteria and clients/JLGs were offering abnormal shared between MFIs with different MFIs returns. servicing the same clients/JLGs on successive days! Increasing level of frauds as admitted in the financial statements of MFIs. Group Group companies Group companies Several entities under an MFI group, companies present. present. some of whom are companies, MBTs, Complex Complex trusts–all these tend to be engaged in institutional institutional similar or related activities. arrangements. arrangements. Tremendous complexity and very difficult to understand the relationships. A comparative analysis of three crisis situations NBFC situation of The Satyam The Andhra Pradesh and Indian micro- Description the 1990s episode of 2009 finance crisis of 2010 Non- Funds diverted to There was Possibility of non-transparent transactions transparent group companies. widespread between group entities not ruled out. and related speculation of this There are clear cases of significant related party funds diversion. party transactions between group entities transactions A proposal to and promoters–like loan given by MFI to facilitate this fund promoters to buy shares in the MFI and transfer in fact led to the like (Professor Sriram’s article in the the 2009 crisis, Economic and Political Weekly of June caused by 2010). shareholder activism. Governance, NBFC had weak Despite the various Despite corporate governance and other systems, MIS, governance, poor corporate governance awards, many MFIs have weak etc. MIS and internal awards, the company governance as espoused by the controls and very and its group had happenings in recent years, till 2010. little risk very poor MIS is rather nascent and suffers from management. governance, systems several weaknesses, too, including lack of and the like–as it aggregation across geographies, clients became clear later. and products. First large company Internal controls and audits are also to illustrate the fact nascent and risk management is almost that a very high absent. profile board does A perfect setting for institutional failure. not necessarily One large MFI had an extremely symbolise or ensure successful IPO, but the sudden subsequent good corporate sacking of the CEO (who led the company governance. through the spectacular IPO) raised It appears that MIS serious questions about the company’s (including records) governance, including board roles, was fabricated as compensation, etc. (Article in The proved by fraudulent Economic Times, by M Rajshekar, in financial transactions October 2010. undertaken by the In my opinion, the above illustrations of company. Controls not-so-good governance, along with client also seemed to have suicides, was among the major triggers of been manipulated. the present microfinance crisis. Self-confession led Everything else, more or less, follows the ‘cat’ out of the from it. bag. Operational Ghost plantations Ghost invoices to The audit statements of some MFIs point issues—ghost and fraudulent boost operating to the presence of ghost and non-existent invoices and transactions were results and a whole clients, misappropriation of client A comparative analysis of three crisis situations NBFC situation of The Satyam The Andhra Pradesh and Indian micro- Description the 1990s episode of 2009 finance crisis of 2010 non-existent a major range of fraudulent repayment collections and several other clients phenomenon that and very complex kinds of frauds, primarily caused by the caused failure. transactions led to use of the decentralised agent-based MFI the collapse of the model that perhaps uses different kinds of financial system in broker agents. The present year’s financial the companies statements just confirm the above trends. concerned and this It is now apparent that some MFIs resulted in (perhaps even many) have engaged in not- institutional failure so-desirable practices like multiple eventually. lending, over lending and even creation of non-existent borrowers (sometimes even to manage delinquency) and so on. This is yet to be examined seriously in terms of a national study, but available evidence provides some support for the above assertions. The regulators and supervisors must order a neutral and objective study of the same. Operational The same Duplicate invoices Same clients are borrowers of (successive) issues— plantations were had come from same loans from multiple lenders (multiple and multiple sales sold to many companies. sequential lending). There are also ghost and multiple investors. clients and other such practices, as lending admitted by some of the MFIs themselves. Use of agents Agents persuaded Not applicable It is now clear from several sources that people to deposit centre leaders and local political leaders money and functioned as MFI agents, pushed loans to disappeared. poor people and used coercive methods and greening techniques to recover the loans from them. Available evidence seems to suggest this, but the RBI would need to look into it carefully in a nationwide manner. The regulators and supervisors must order a neutral and objective study of the same. Impact of Loss of deposits Loss of work Loans wreaked havoc in the life of the products/ wreaked havoc on wreaked havoc on clients and the enhanced indebtedness is crisis clients who lost hired (regular as well certainly a very important factor for the their valuable as surplus) suicides. savings which is employees who The rural and urban low-income credit the first form of could not even meet system and economy are in shambles. insurance and their regular housing A comparative analysis of three crisis situations NBFC situation of The Satyam The Andhra Pradesh and Indian micro- Description the 1990s episode of 2009 finance crisis of 2010 safety net for the EMIs. Many of the low-income clients may lose rainy day. Shareholders took a access to finance in the long term as beating as the stock financial institutions may be more price of Satyam and reluctant to lend to them, especially in the related companies wake of the various problems identified plummeted. during the current crisis. Shareholders of SKS, the only listed MFI, took a beating as the stock price plummeted. Private equity investors were left without an easy exit strategy and many of them actually suffered huge losses as they had bought SKS shares at a rather high valuation. Target clients The majority were A majority of The majority low-income and financially middle income to middle-income to excluded people. economically economically well- Vulnerability of the clients and lack of well-off classes. off classes. sufficient livelihood opportunities rather huge and a major factor in their getting exploited by the system. Access to ‘Cheap’ and Shareholder funds By and large, collateral free, soft interest, capital unlimited public and other liabilities. condition-free (no personal guarantee), deposits and other loans–virtually unlimited scale during the forms of capital. years preceeding the crisis. Priority sector funding is surely soft and privileged money. Also, significant private equity investments into the MFIs, some of whom have used/are using the IPO route to raise huge resources. Some MFIs have had grants from donors which were subsequently capitalised. Role of Auditors and Auditors and others It needs to be ascertained whether auditors auditors others were were involved in the and others were involved in some of the involved in the frauds. non-transparent transactions. frauds. This is something that the regulators would need to study carefully. Issues No serious Regulatory arbitrage No single serious regulator–multiple concerning regulator and lack perhaps resulted in regulators with different levels of regulation of coordination the collapse of the supervision and lack of serious A comparative analysis of three crisis situations NBFC situation of The Satyam The Andhra Pradesh and Indian micro- Description the 1990s episode of 2009 finance crisis of 2010 among regulators. company. coordination among regulators and Clear case of Clear case of supervisors. regulatory failure regulatory failure and The industry appears to be moving and no serious no serious towards regulatory arbitrage with the supervision. supervision. Andhra government stepping in as well. There has been regulatory and supervisory failure and especially for the so-called systemically important NBFC MFIs that were allowed to grow without any sort of checks and balances. Consequences NBFCs failed, The Satyam fiasco The image of microfinance has taken a and future loss of money for dented corporate severe beating. aspects depositors, and India like no other MFIs are no longer considered the significant loss of event and we are still torchbearers of development and poverty faith in the NBFC recovering from the reduction. system within financial and image Not sure of where the future is headed, civil society. loss suffered. although I hope we will be able to achieve More stringent balanced enabling regulation and regulation/supervi appropriate supervision that provides sion of NBFCs. legitimacy, ensures certain minimum operational (including governance) standards and necessary systems for MFIs and also protects clients.
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