I recently joined GlobalRisk Community, a B2B platform for risk managers. I started a discussion on the proposed norms for the Microfinance Institutions (MFI) in the India Risk forum.
My question was in continuation of the previous topic “Microfinance Institutions- Entitled to Torture”. I had written that finally the Government of India has woken up to the plight of Indian farmers. Andra Pradesh government has established a new law to monitor MFI. Reserve Bank of India has formulated a committee to establish new norms applicable to the country. SIDBI has taken responsibility for not effectively monitoring MFI. Now the proposal is that NABARD will monitor MFI. How is this move being perceived by bankers and risk managers in India?
I am presenting here excerpts of the discussion. Mr Sheshadri Chari and Mr. Deepak Kumar Shaw presented excellent viewpoints.
Mr. Sheshadri Chari is a senior banking and risk management consultant with + 25 years of experience. He has worked in many banks in India, namely Bank of Baroda, Lakshmi Villas Bank and City Union Bank.
Mr. Deepak Kumar Shaw has +8 years of experience in banking and financial services industry. He has worked in various capacities in private sector banks and mutual funds.
Sonia Jaspal : In the current situation what should be done and what will happen according to you?
Mr. Deepak Kumar Shaw: Till MFI will run for profit it’s not going to follow its core object of social uplifting of low-income groups. Basic idea behind establishment of these MFI was to save poor from moneylenders. But now they are no different from moneylenders in terms of interest charged by them and recent cases of forceful recovery strengthen this argument. With profit motive first there is pressure to distribute loans then to recover and these lead to malpractices. If this sector has to survive and wants to prosper then they have to do stick to their core objective i.e. helping the poor. In my view the following should be done:
First profit making MFI should not be allowed to operate as this will always lead to malpractice in the industry and if that is not possible then major percentage should go back to borrowers as relief or rebate. Benefit of priority sector interest rate enjoyed by MFI should be passed on to its borrowers.
Licensing should be stricter and only a few MFI should be allowed to operate in a region avoiding unnecessary competition between them.
Financial discipline should be brought to the sector in terms of reporting correct numbers. This could be done by introducing strict audit controls, preferably C&AG allotted audits. Finally a strict regulator like RBI should manage the MFI. This will help the industry to win back respect.
Sheshadri Chari : Government has been doing a lot – both on disbursement and waivers – which has been a contentious issue with commercial bankers. While the disbursements to weaker sections have been encouraged by a carrot and stick approach, using targets and subsidized interest rates, the waivers have been a dampener in terms of repayment psychology of the borrowers.
The MFI domain is a sensitive and challenging area. As Deepak points out, if social uplift is the primary objective of MFI, the profit motive becomes an anathema.
For a healthy growth of MFI sector, I believe there is a need for a balance between the social objective and profitability to ensure sustainability of MFI operations. That, first was the basis for certain target oriented lending approach – a policy stance adopted by the RBI. It is also not fair to ask the poor to bear the cost of their uplift by charging a hefty margin, though they should be morally inclined to pay back the society during their prosperity. Setting up of the committee by the RBI to review the position, in my interpretation, reflects this stance.
NABARD is the natural choice for regulatory role as it is the key player in formulating the schemes for social uplift in the context of rural poverty. In fact, the legislation on MFI should necessarily include tenets of financial inclusion that also touch base with urban poor.
At the end of the day, if MFI are able to reach out to the rural poor, energize them to achieve liberation from the debt trap and still make a decent margin through improved reach, business processes and a commitment to sustained service, such MFI should be allowed to flourish within the accepted banking practices for credit delivery and recovery.
MFI is essentially engaged in a banking activity and thus required to be brought under the purview of RBI regulatory framework keeping in view the specific objectives for which the MFI are established in the first place.
Sonia Jaspal: Deepak and Seshadri, thanks for sharing your viewpoints. I agree with you. I especially like your point that the poor should not bear the cost of their own uplifting by paying higher interests.
My concern is that though it looks like the government has finally acknowledged the problems, they will again issue paper policies and there will be no change at the farmer level. We will be back to square one and see many more farmer suicides.
What is your opinion regarding it?
Sheshadri Chari : My use of the term “sensitive” was to emphasize the nature of challenges in this sphere of financial activity and risk taking.
This segment is a good market – in the sense that it is a felt need. At the same time, given the Indian culture, particularly , political, it is a challenging task. Your concerns are shared by the states like Andhra Pradesh, West Bengal, and Kerala where the problem of higher interest rates and employment of recovery agents for debt recovery have drawn official responses resulting in the review by RBI.
I believe the solution lies in strengthening rural markets so that the rural poor have chances for poverty alleviation within their command area than relying on increasing the cost of marketing by looking to urban markets. In India, we need to move from Metropolitization to Ruralization – providing self-sufficient communities, who can expect to achieve a reasonable standard of living. Development of SEZ will provide a good market for the farmers – but this will, initially, at least need government intervention.
There are connected issues here as well. Such as the inflationary trends in basic food prices.
Well, are there solutions that do not create fresh problems?
I am veering round to the conclusion that life is one of managing solutions, not problems
Sonia Jaspal : Thank you for sharing your viewpoint. The takeaway is that stricter controls and monitoring process should be established by Government of India. Reserve Bank of India and NABARD should play an active role in monitoring MFI. The rural poor should be supported in their efforts for better standard of living. Benefits of lower interest rates, waivers and profit-sharing should be given to them.
As per World Bank estimates 42% of the Indian population is still below poverty line. Interconnections between low-income groups, volatility of food prices, and dependency of agriculture on monsoons should be considered while devising solutions. Government intervention and private participation is required to bring up farmers standard of living. Sincerity and commitment are essential to resolve this situation.
In invite you to share your opinion on the actions which Government of India should take to improve the standard of living of the poor farmers.