Amitabh Shukla / New Delhi
Policy makers are trying to regulate microfinance institutions so that they can become engines of progress
The Microfinance institutions operating in the country have come under an intense scrutiny, something which had not happened ever since they started operating in the country a few years ago, replacing the traditional money lenders in several places.
While a section in the government dubs them as modern money lenders, charging rates of interest unheard of in the banking sector, a section of cooperatives, farmers’ group, NGOs working at the grassroots level seem to indicate that they have brought in money in the rural sector and have helped a large number of self help groups.
Villains contributing to rural distress or institutions which have helped alleviate rural poverty that is the question dominating the policy makers, government, Self-help groups, NGOs and civil society activists now.
The public outcry led to a situation where the Andhra Pradesh government brought out an Ordinance pushing the microfinance institutions in the corner, a situation of extreme distress which they had never experienced in the recent past. Suicides of farmers in parts of Andhra Pradesh, Vidarbha (Maharashtra) were the reasons from the Ordinance along with political populism and pressure generated by the political parties.
A senior government official said that subprime lending or the loans extended to people with poor repaying capacity is one of the primary reasons for the defaults. He said this is followed by coercive methods, often humiliating, which have led to suicides in some cases.
Vijay Mahajan, President of the Microfinance Institutions Network (MFIN), a group comprising all the large companies in the sector, argues that 80 per cent of the microfinance institutions are regulated by the Reserve Bank of India as non-banking financial companies and they have to submit monetary statement to the banking regulator.Mahajan, who is also the Chairman of Basix, counters the allegations leveled against the microfinance institutions but also promises that certain things need to be looked into by the companies and they were already doing that.
He points out that some fly by night operators and those institutions not in the organized sector, have brought in a bad name to micro credit and even the organized players would help the government bring them to book. The top officials of the MFIN have been meeting the government officials to put forward their demands and seek a solution to the crisis in which they find themselves.
Due to the crisis, triggered by the AP Ordinance, the finance ministry plans to introduce a new legislation for the nation’s microfinance industry, Minister of State for Finance Namo Narain Meena said in a written statement to the Rajya Sabha. The new rules brought loan collections in Andhra to a near halt, leading to a plunge in shares of the largest micro-lender.
The Micro Finance (Development & Regulation) Bill, 2010, will be developed in consultation with the central bank, Meena said.
The Reserve Bank of India a few weeks ago appointed a sub- committee led by Y.H. Malegam to study the nation’s microfinance companies and recommend ways to make their interest rates “reasonable,” Meena said. The Malegam committee will submit their report in three months, he said.
At a function in New Delhi, Finance Minister Pranab Mukherjee too made it clear that the idea was not to strangulate the MFIs, but to regulate it so that the interest that they charge is not exorbitant and the method of realisation, under no circumstances is quick.
How these MFIs differ from the concept of Nobel laureate Mohammed Yunus of Bangladesh is that they work for profit unlike the not-for-profit model and work like a normal corporate entity and see giving micro credit as a business. While Yunus’ model is based on a mechanism to lift people out of the poverty cycle, the model of the MFIs is based on profits and they see it more as a business rather than anything else.Sensing that the noose is tightening around them, the prominent microfinance companies have agreed to reduce the interest rate to 24 per cent effective, initially to the borrowers in Andhra Pradesh.
They have also decided to switch to the monthly recovery system from the weekly system which causes tension in the households.The sops offered by the MFIs do not stop here. They have decided to announce a scheme of restructuring loans of their highly indebted borrowers, share the credit history of their borrowers and create a common database and affirmed that they do not and will not use coercive policies.Besides, they have decided to expose the unregistered entities pretending to the MFIs and promised to take strict action against their own errant staff for any violation of the MFIN code of conduct.
The other promises of the MFI’s include setting up of a telephone helpline to record complaints, establish regional Ombudspersons, set up an Eminent Persons Group to probe into the suicide allegations and bring in more transparency in the entire system.Now let us see why the MFIs are needed in a poor rural setting, more so in our country.
It is amply clear now that more than subsidies poor need access to easy credit. We have already seen that absence of formal employment has made most of the rural poor what is called non-bankable. The result is visible.
The moneylenders come in the picture and this cycle forces the poor to borrow from them at exorbitant interest rates as high as 100-200 per cent in some cases. In fact the loan taken by one generation continues to the other due to the high rate of interest.As the MFIs chipped in, the experience of the last over ten years, has shown that providing finance to small entrepreneur and farmers – the poor - is productive. Given loans at market rates, they repay their loans and use the proceeds to increase their income and assets. This is an eye-opener and least surprising since the only realistic alternative for them is to borrow from informal market at an interest much higher than market rates.
There are several success stories around the country how the livelihood of people have changed due to timely and easy credit, how women have become self-sufficient by running cottage industries with the help, how the unemployed turned small-time entrepreneurs and how the rural economies of a particular area has changed for the good.
Community banks, Self-help groups, NGOs and grassroots savings and credit groups around the world have shown that these micro loans can be profitable for borrowers and for the lenders, making microfinance one of the most effective poverty reducing strategies.
Not surprising that nearly half of the MFIs working today have come into existence in the last five years as Sa-Dhan, the Association of Community Development Finance Institutions, has pointed out in its handbook. This reflects the high growth of number of MFIs in recent years.
It also points out that the not-for-profit MFIs still dominate in the sector but the non banking finance companies (NBFCs) are catching up very fast.Lured by the mullah, most of the new entrants in microfinance and the erstwhile not-for-proft MFIs are converting into NBFC and they cover the overwhelming majority of collective outreach and loan portfolios of all MFIs.
Traditionally the southern region was the backbone of the MFIs but Sa-Dhan points out that even as it still retains the leadership in terms of concentration of MFIs, the eastern region has strongly emerged as the next preferred destination while the north-eastern region lags far behind.Before the big advent of MFIs, the Self Help Groups were there besides the moneylenders.
In SHG, credit is linked to savings, there is focus on capacity-building among borrowers and the rate of interest is almost half with option of monthly repayment.
What made matters worse is that in states like Andhra Pradesh, the MFIs chose the easy route of tapping into established SHGs for advancing loans. This was viable in the early stages but, over time, it has led to the problem of multiple lending and excessive debt burdens.Moreover, MFI credit, for the most part, went for consumption – for family weddings, buying consumer goods instead of income generation. What went to agriculture could not be returned back as returns in agriculture are so low that it is inconceivable that it can service interest rates of around 30 per cent that MFIs charge.
In some cases, MFI credit went for commercial agricultural farming and when the crops failed, it led to severe distress in the household, even leading to suicides.Government feels regulation is needed, it is a must. A delicate balancing act needs to be done in this as not to kill the availability of credit and also not to bring in a new set of moneylenders in the guise of MFIs. Weaving microfinance in and around livelihood seems to be the way out.
(December 2010)
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