In a country where the weaker sections of society still find themselves financially marginalised with the extant banking industry being either grossly inadequate to reach them or too risk-averse to roll out credit to the poor, the concept of microfinance has but become fashionable.
Though no evangelist of Grameen Bank founder Muhammad Yunus of Bangladesh emerged in India, the need for providing basic financial services such as savings, credit and remittances for the public work programmes the poor do was felt widely. Besides, the moneylenders, who charge usurious rate of interest on the indigent, there are also many societies, companies, trusts and corporate houses which are engaged in providing advances. But it was the self-help groups (SHGs) that originally paved a patchy path to financial inclusion in the 1990s.
But as the range and reach of the SHGs remain restricted, the gap was deftly seized by the so-called microfinance institutions (MFIs). The country's banking system, which remained dormant in the area for quite sometime for reasons obvious, had suddenly taken a fancy to give advances to the MFIs that mushroomed across the country in recent years. This is borne out by the figures of the Reserve Bank of India (RBI) which reported that the outstanding credit of scheduled commercial banks to MFIs during the last three years rose from Rs. 5,572.15 crore in March 2009 to Rs. 7,960.21 crore in March 2010 and to a mammoth Rs. 15,467.58 crore in March 2011.
But following the fracas of a few leading MFIs, particularly in Andhra Pradesh, slapping exorbitant interest rates which led to suicides of hapless and harried borrowers, the State government enacted the Andhra Pradesh Microfinance Institutions (Regulation of Moneylending) Act 2010. Though this halted the harassment of borrowers, MFIs' balance sheets suffered a jolt as they could not be run without profit — particularly when they borrow from banks at a relatively huge cost and end it advancing to risky borrowers at inordinate interest with uncertain recovery.
In order to help gain grounds to MFIs, the RBI accorded bank loans to MFIs the status of ‘priority sector' subject to certain riders in May 2011. These include, among others, providing for margin cap at 12 per cent for all MFIs, interest cap on individual loans at 26 per cent per annum for all MFIs, no penalty for delayed payment and no security, deposit/margin to be taken. The Union Finance Ministry followed up this with the introduction of the Microfinance Institutions (Development and Regulation) Bill in Parliament on the last day of the Budget session on May 22.
The Central legislation has at its core a remit to prune the insatiable thirst for profit of MFIs which turned them impervious to the plight of the indigent borrowers .This is clear with more than 60 per cent of MFI lending being focussed on South India and the high rates of interest ranging from 24 per cent to 60 per cent that was worsened by coercive recovery by MFIs, led to borrowers' agony forcing many to commit suicide. It is a travesty of justice to the poor that the country's banking system actively assisted the MFIs that ran for profit, instead of helping the financial inclusion cause through small SHGs that were the pioneers in the field of microfinance.
The original concept of microfinance stemmed essentially from SHGs that were launched in 1992, with the initiative of the National Bank for Agriculture and Rural Development (NABARD). But the saga of success of formal SHGs, which utilised the banking system to do micro-transaction, that was reinforced by refinance by NABARD to the SHGs unfortunately caught the fancy of many a fly-by-night MFI. The latter ran purely on profit motive and resorted to all the harsh measures to drive the small borrowers to the edge with the sole aim at only battening the MFIs.
Though the Central Bill has come out with a national legislation, taking into view the suggestions of Malegam Committee and other stakeholders, it has given full regulatory powers to the RBI, besides proposing the Microfinance Development Council to advise the Centre, State Micro Finance Council and a district micro finance committee. All this supervisory powers with the apex bank might help regulate the MFIs that are too ambitious and reckless but this will not help strengthen the formal SHGs that are the real driving forces of financial inclusion to the really needy in the country.
geeyes@thehindu.co.in
