People's Democracy

(Weekly Organ of the Communist Party of India (Marxist)


No. 10

March 11, 2007



Regulation Or Strangulation? 




AFTER having approved the Micro Finance Development and Regulation Bill, 2007 in the cabinet, the government of India is now about to introduce this bill in the parliament. The passage of this bill will affect the lives of hundreds of working people, most of whom are women. According to the Economic Survey there are 26 lakh SHGs linked to banks as on December 31, 2006. These groups fall under the category of Micro Finance Organisations [MFOs] which are a subject of the regulation of this bill which include the Self Help Groups which have been formed under the aegis of the government, non-government organisations, women’s movements and cooperatives.


Left ruled states perceive these groups as tools for mobilising women and to some extent easing their poverty and not as a panacea. They have a holistic approach to poverty reduction which includes land reform, public provisions of health, education and other social infrastructure, universal public distribution system, community participation through the panchayats and access to credit. Kerala has a Kudumbashree programme which has 177645 neighborhood groups, Tripura has 23064 SHGs mostly promoted by the government and West Bengal has 4.2 lakh SHGs and it is the only state to have a woman cabinet minister for SHGs.


As stated in the preamble of the bill, it aims to “provide for promotion, development and orderly growth of the micro financial sector in rural and urban areas to facilitate universal access to integrated financial services by the population not having banking facility”. This perspective is itself flawed as it discounts the criticism that prosperity cannot be brought by financial services alone. In spite of 54 million borrowers provided with credit under IRDP and DWCRA prosperity could not be brought in. All the micro finance organisations are registered under one law or other like the societies act, cooperatives act etc and RBI has issued guidelines for their functioning. One more law can not be the solution. The obligations of the state do not figure in the bill at all. 


Further micro-finance organisations and institutions can not be seen as a substitute for the expansion of rural credit infrastructure to which these organisations should be linked and licensed. Experience shows that integrated financial services cannot be provided by MFOs which are smaller than cooperatives. The main problem is that the poor pay high interest rates to large NGOs which have registered as Non Banking Financial Companies or Sec-25 companies and who act as lending agencies to these micro-finance organisations/ SHGs. These agencies, which are called micro-finance institutions (MFI) are the main culprits of the micro-finance system and have created problems in the field due to their misdeeds. Some of these organisations have retired RBI or NABARD officials in their board. On April 20, 2006 the Hindu reported around 200 suicides in Andhra due to the coercive methods used and high rate of interest. Recently ICICI has stopped the drawal of funds to Sparks, Spandana, SKS and few other large MFIs which have credit limits of many crores because they have not adhered to accepted financial sector and banking norms.[The Economic Times, Feb 9,2007. Further, another dangerous trend to note is that big corporate firms like Reliance, Bharti and Muthoot Bankers have announced their plans to enter into micro finance in order to mobilise and channelise the savings of poor and profit from the credit operations.


That the bill is primarily meant to ease the way for the penetration of the MF- non banking financial institutions and Section 25 companies is evident from the fact that they are given power without responsibility. They can get representation in the Council of the National Body to regulate micro finance. They can also get government support for capacity building. In contrast the bill is silent on the nature of governmental responsibility towards the micro finance organisations which require their urgent support. Globalisation policies render income generation activities unviable and this has not been addressed.


That the bill is clearly made to protect the interests of the MFIs is evident from the fact that the question of the rate of interest has not been tackled in the bill. This is because World Bank and the supporters of MFIs say that these institutions should make profit and no subsidy should be given to the poor. The argument is that people are willing to pay any interest if the credit is given in time. The deputy chairman of the Planning Commission has gone on record to say that the rate of interest has to be decided by the market. If the corporate can negotiate interest rates with banks based on their classification under credit risk and get loans at an average of 8-12 percent why the poor should be left to the market? In fact with 95 percent repayment rates the SHG s are classified as low risk and there is a case for reducing the interest rates of banks to 4 percent and to have a cap on the interest rates to the ultimate beneficiary.


The bill permits anybody with Rs.500000 capital to accept thrift which is dangerous as any unscrupulous organisations can get into this and run away with the deposits of the poor. At present the savings of the members are deposited in the bank for a short time and then rotated as loan and the income earned is shared by the members. The savings rotated is often more than the loan from banks. It is not advisable to allow the MFOs to collect this as thrift. 


There is no provision created for the disadvantaged among the poor in this bill. Experience shows that these people have been left out of SHGs because of their inability to save and repay loans in time. Kerala is the only state where there is a scheme named ASRAYA under the Kudumbashree project to help the poorest. There is an urgent need to address this issue of availability of credit to the poorest through separate guidelines which will provide access to land, assets, employment and credit.


The bill provides for creation of provision for micro finance facilitators, a move which amounts to the outsourcing of the Field officers’ work and facilitates the control of the private sector in the control of MFOs. There have been many cases against ICICI and other new generation banks in which the courts have clearly ruled that banks cannot use unscrupulous methods to collect loan repayment. The facilitator’s role as envisaged in the bill is similar to this and goes against these decisions. The bank unions are up in arms against outsourcing.


That the bill has a narrow view of the role of MFOs in social and economic development is evident from the pivotal role that NABARD has been given in the whole process of regulation. There are more players other than NABARD like SIDBI, Rashtiya Mahila Kosh, National Minority Development Finance Corporation, Banks, Non Banking Financial Companies and numerous small NGOs. So NABARD cannot and should not regulate them as it is one of the players. Therefore the bill should look for an institutional alternative to regulate both MFIs and MFOs. This alternative can be in the form of the constitution of a district level committee under the guidance of RBI which will have representation from Banks, NGOs/Federations, Panchayat Raj Institutions and NABARD with adequate representation to the people’s organisations. At the national level there can be a Micro Finance Development And Regulatory Authority with state level branches which will be independent. It might be worthwhile to revamp the block level, district level and state level credit committees with representation to the women’s federations and PRIs and give them the regulating role. The Rashtriya Mahila Kosh, which was created to provide micro finance, does not find a place in the development council. In fact RMK which was created by the government of India exclusively for this should be given a prominent role with adequate finance and staff.


There are also other detrimental provisions in the bill like allowing farmers owning less than 2 hectares of land to become members of groups, getting a license from NABARD to continue the present activities of MFOs, creating another set of provisions for one more Ombudsman scheme which has not achieved the goal so far, giving authority to the central government for looking into appeals from MFOs while punished, getting approval of NABARD to appoint auditors etc which will only hamper the orderly growth of the micro credit movement.


Women empowerment, role of panchayats, issues related to equity and creation of market for their products etc are not talked about at all. One should also see that social sector spending is not adequately increased in the budget.


From the discussion above it is clear that what is needed is a proactive role of the state. There is need for creating institutions like Micro Finance Development Board similar to NDDB, institutions like IRMA to help promotion of micro enterprises, marketing networks, a commission like women’s commission to look into aspects of empowerment and the immediate need is to stall the bill and create a wide debate on the issues related to micro finance, women’s empowerment, equity and equality. It is for this reason that the All India Democratic Women’s Association and many women’s organisations have already appealed to the prime minister and finance minister to withdraw the bill in its present form and make it available for greater public discussion.