In 2005, then Reserve Bank of India governor Y.V. Reddy summed up the
central bank’s approach to microfinance when he said regulating the
industry would militate against its core spirit—informality and
flexibility—that had served it so well. Five years later, as a
microfinance Bill remains stalled, that regulatory gap still exists.
is perhaps because of this lack of oversight that the Andhra Pradesh
and Kerala governments have sought to bring some microfinance
institutions (MFIs) in these states under local moneylending norms. As The
Economic Times reported last week, the intent has been to control
the rates of interest charged on microloans to the poor. Moneylending
rules in Kerala, for example, specify interest rate ceilings that MFIs
under its ambit would be obliged to follow.
The interest rate
debate is important, and the high rates charged by some microlenders
have had influential critics. Most recently, RBI deputy governor K.C.
Chakrabarty cast doubts on the ability of microfinance to bring about
the financial inclusion that it aims at, citing the industry’s high cost
of lending. With such existential concerns, the debate over regulating
MFIs gains greater importance.
To be sure, regulation is crucial
in an industry that has come a long way both in terms of size and
complexity since its humble beginnings in the 1970s. The upcoming public
share sale of SKS Microfinance, India’s largest microlender, is a sign
of the increasing commercialization of what continues to be seen in some
circles as an exclusively social movement. Managing this new profit
motive and its accompanying moral dilemma, and balancing it against the
established ideas of inclusivity are the functions of regulation.
Besides, effective oversight has positive externalities on risk
perception, helping MFIs attract commercial investment and making them
less dependent on donor funds.
At the same time, a regulatory
stranglehold runs the risk of hobbling the industry. The commercial
viability of microlenders is relevant not just to the investors who put
their money in the sector, but also to the growth and outreach of MFIs
that will finally determine their effectiveness in bringing inclusion to
the excluded. Even in their search for inclusive practices, regulators
will have to ensure that competition and market forces don’t get crowded