Governance of MFIs

In a recent S&P report, Venkataraman and Raj Sekhar of CRISIL term governance-related issues are the biggest challenge to the sustainability of Indian MFIs. They specially point out that NGO-MFIs are likely to be floundering on this front, in their quest to balance the transition from a charitable entity to a commercial one.

In the S&P report as well as in other general discussions around governance issues, the focus is usually on balancing social and commercial interests of MFIs. Terms such as ‘mission drift’ have become popular and are topics of concern at major conferences. I think the more pressing ‘governance’ concerns are far more fundamental, where far more needs to be done to ensure greater transparency in the figures reported and in handling accounts. Highlighting this might seem morbid, but given the infancy of the sector and the pressures of expansion, such fears are far from being unfounded. Add to that, my banker friend's concerns...

My friend, a senior banker from a prominent lender to MFIs in India was complaining about the dismal state of governance in MFIs. According to this person, the bank has almost decided to pull out of MFIs which did not follow governance norms stipulated by the bank, irrespective of the levels of profitability of the MFI. Apparently, over 90% of the MFIs in that bank's portfolio showed one problem or the other with respect to its governance structure.

This scenario is truly worrying and it is easy to see how any interference by banks will be resisted by MFIs as a transgression of their autonomy. However, these arguments are unlikely to sustain themselves in the present circumstances. With the Satyam crash and the CEO's revelations about inflated cash/bank balances, revenues and operating margins, among much else, there are bound to be genuine fears of such rot taking root in other organisations. I cannot imagine how MFIs will escape increased scrutiny in this light.