Editorial

Microfinance, macro challenges

It seems incredible that the fortunes of the microfinance industry, especially of the companies at the top, should have changed so drastically in just a matter of months. Though new to organised finance, microfinance has grown rapidly in recent times, particularly in the southern States, with Andhra Pradesh in the lead. With an estimated Rs.22,500 crore lent to some nearly 2.7 crore active borrowers, it has entered the mainstream. Microfinance institutions (MFI) have been active in remote places where commercial banks do not exist. Their claim of providing “the last mile connectivity” and that too to the poorer sections is not without basis and this is extremely relevant in the context of the policy thrust on financial inclusion. In several ways, the MFIs complement the commercial banking system. Banks lend the MFIs the money. Since these loans fall in the priority category, the banks have an additional incentive to lend them. The MFIs have a very good track record of recoveries, having successfully adapted the traditional bank loan documentation model of joint liability for the group. A default by a single borrower impairs the ability of the group to receive credit.

The average size of individual loans of the MFIs is small and the typical rural borrower is one without any security to offer. Yet these have not stood in the way of the MFIs making a commercial success of their activities and earning huge profits. In fact, it is the high level of profits earned by the MFIs and the general lack of transparency that have shown the business in a bad light. In the past, some of the MFIs have justified the high rate of interest on their loans — in the region of 30 per cent — by citing the high costs of funds available to them and the high default risk they have to reckon with. However, the abnormally large profits of the industry leaders and the high monetary rewards accruing to the promoters and senior executives, among other factors, strengthen the case for lowering the lending rates. The Andhra Pradesh government has, through an ordinance, required all the MFIs to register with the district authorities and avoid coercive recovery practices and multiple lending. The RBI has appointed a committee to look into the governance issues. There are reports that Nabard might be asked to regulate the industry. It is obvious that the MFIs face an extremely challenging environment. They should welcome uniform regulation, more transparency in their operations, particularly interest rates, and governance. They are providing a valuable service, and only by being transparent and sprucing up their governance can they acquire legitimacy in the financial mainstream.

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Printable version | Mar 3, 2021 5:47:21 PM | https://www.thehindu.com/opinion/editorial/Microfinance-macro-challenges/article15671260.ece

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