For the UPA Government, in support of the aam admi and financial inclusion so that the poor are not trapped by moneylenders, the unsavoury happenings on the microfinance front do not bode well. The sector has been reeking of high interest charges, coercive recovery practices and reported cases of suicides by the borrowers.
The main models of microfinance that are in vogue are the self-help group (SHG)-bank linkage model and the microfinance institution (MFI)-bank linkage model.
The former usually has 15-25 members with small regular savings in the bank constituting a key part of the group activity. This saving is revolved/lent among the members and this model entails the SHGs being financed directly by commercial banks, regional rural banks and cooperative banks. The Minister of State for Finance, Mr Namo Narain Meena, conceded in the Rajya Sabha on November 9 that as on end-March, there were more than 69.5 lakh saving-linked SHGs and more than 48.5 lakh credit-linked SHGs with loans outstanding of Rs 27, 950 crore.
Reach in States
In the MFI-bank linkage model, covering financing of MFIs by banks and other financial institutions such as Small Industrial Development Bank of India (SIDBI) for on-lending to small borrowers, the penetration is predominantly in six States — Andhra Pradesh, Tamil Nadu, Karnataka, Orissa, Maharashtra and West Bengal — though they also exist in Gujarat, Delhi, Rajasthan and Uttar Pradesh. Nabard has reported that in 2009-10, the banks have disbursed Rs 8,062.77 crore to MFIs — more than the Rs 2,665.75-crore loans provided to them by SIDBI.
MFIs' macro pain came to light when SKS Microfinance invited the ire of the Andhra Pradesh Government. By an Ordinance on MFIs in mid-October, the State sought to regulate the MFIs' lending practices, including inordinate interest they charged hapless small borrowers, and the crude recovery tactics practised by some. Even as the MFIs have challenged this Ordinance in the AP High Court, the Central Government has ruled out bringing in during the current winter session a Bill seeking to regulate MFIs to see that the States do not extinguish the institutions through regulatory excesses.
There are now 36 companies involved in microfinancing. They are registered as non-banking finance companies (NBFCs) and regulated by the provisions of the RBI Act, 1934, and the directions issued under it.
Official sources told Business Line here that the Finance Ministry has apprised the chief executive officers of public sector banks of the need to ensure that the rates of interest charged by the MFIs are plausible. The banks were also alerted to ensure that MFIs do not resort to ever-greening of loans to fleece the hapless small borrowers. The apex bank too chipped in through a circular to the boards of NBFCs to lay out appropriate principles and procedures and determine interest rates, processing and other charges.
The RBI recently set up a Sub-Committee of the Central Board of Directors under the Chairmanship of its senior Member, Mr Y. H. Malegam, with a three-month remit to study the issues and concerns in this sector — including ways and means of rendering interest rates charged by them reasonable to the borrowers.
Policy analysts say that when a few MFIs transform from a not-for-profit enterprise to for-profit outfit, they must perforce feed the insatiable appetite of the investors, who are invariably looking out for dividend and capital appreciation.
This ends up fleecing their main constituency, the small borrowers, through usurious interest rate and undignified recovery practices.
It is time the Government devised strategies to ensure that the MFIs do get ample supply of credit through legitimate financial channels so that the end goal of ensuring financial inclusion through affordable interest rate is not thwarted, they add.