AIDWA notes with disappointment that the recommendations of the Malegam Committee with respect to the functioning of Micro Finance Institutions (MFIs) and their lending practices have failed to respond adequately to the problems that are being faced by the large numbers of vulnerable borrowers, many of whom constitute of poor women organized into Self Help Groups.
While the Committee has examined many of the current developments in some detail, and has given a comprehensive overview of the situation prevailing in the country, its policy prescriptions are limited, and faulty. Its focus is not on the needs of the poor borrowers, but rather on protecting the interests of the Micro Finance Institutions (MFIs).
Firstly, the definition of MFIs preferred by the Committee is limited to NBFCs and MFIs, leaving out the large number of NGOs and other unregistered organizations that have been operating unfettered in many areas. Many such groups have been offering credit, and have been functioning as moneylenders, charging huge interest rates. But these are not being brought under the purview of the regulation proposed by the Malegam Committee.
Secondly, the Report has argued for not taking away the priority sector status from MFI loans. This has been done keeping in mind the convenience of the banking sector, which finds it easier to meet the priority sector targets with the help of indirect loans in a liberalized financial set up. However, the biggest reason why the poor are forced to take loans from MFIs is that bank linkages are weak, and the credit outreach has been shrinking. The policy approach should have been to ensure that bank credit at lower rates is reached directly to the end user, without intermediaries. This would also lead to healthy growth of the public sector banking system. As it stands, this recommendation will further dilute the thrust for banks providing direct loans to the SHGs. The vulnerability of those who are forced to take loans from these intermediaries will persist, and infact, get strengthened.
The Report qualifies that the advance to MFIs which do not meet the various conditions laid down in the Report (including interest rates) would be excluded from the priority sector status. But most banks would then need to adopt a case-by-case approach while reporting their priority sector advances, which is unlikely to happen. It would be difficult for the RBI to monitor whether such a distinction is being made by the banks.
Thirdly, the Report recommends an “average” margin cap for MFIs. This cap is lower at 10% over the cost of funds for NBFC-MFIs having an asset (loan outstanding) size of more than Rs.100 crores. It is higher at 12% for the NBFCs with asset size of less than Rs 100 crore. However, such a cap would not serve any purpose in restraining the rate of interest charged by MFIs for the following reasons:
a) This is a cap not on individual loans but at the aggregate level. This margin would be worked out at the aggregate level based on the annual financial statements submitted by the MFIs. The Report recommends complete freedom to MFIs for pricing individual loan products. Hence, the capping of the interest rate at the aggregate level would not provide any concrete relief to the poor borrowers on the ground.
b) A cap on margins does not imply cap on interest rates of MFIs. The MFIs would raise their rates of interest as and when their cost of funds (largely dependent on the rate of interest charged to them by banks) rises but not cut them as and when the general interest rates in the economy come down. The interest cap would thus not bring down the interest cost for poor borrowers in the long run.
c) The Benchmark Prime Lending Rate (BPLR) at which banks have been lending to MFIs and the average rates charged by major MFIs in the country indicate that the present margin for MFIs is, on an average, around 35 per cent. Even assuming that the cap at the aggregate level translates itself to all loans made by the MFIs, the expected interest rate for each poor borrower would still be around 23-25 per cent per annum, which is still far higher than the rate at which banks lend directly to their borrowers. Hence, capping of interest margin would not end the existing interest differential in a liberalized financial system between poor borrowers and others. Poor borrowers would still end up paying a higher rate of interest as compared to others.
Fourthly, it is unfortunate that the Committee has given sanction to group repayment of individual loans, when the person taking the loan is unable repay in certain circumstances. In a situation where the harassment meted out to the borrowers is of such a high degree, and is linked to peer pressure, this would be a source of continued coercion by the MFIs.
On the whole, in terms of recommendations, this Report will do little to assuage the problems that are being faced by the poor, who are at the receiving end of the unfair practices being adopted by the MFIs. AIDWA calls for a more pro-people approach, and demands that the Government reexamines the report in the context of the credit requirements of the poor, and ensures that their interests are adequately safeguarded.