People's Democracy

‘Malegam Report on Micro-Finance Disappoints’

IN a statement issued from New Delhi on January 20, the All India Democratic Women’s Association (AIDWA) has expressed disappointment over the recommendations of the Malegam committee with respect to the functioning of the micro-finance institutions (MFIs) and their lending practices. According to the organisation, the committee has failed to respond adequately to the problems that are being faced by a large numbers of vulnerable borrowers, many of whom are the poor women organised into self-help groups (SHGs). 

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, the AIDWA said 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.

First, the definition of an MFI proferred by the committee is limited to the non-banking financial companies (NBFCs), leaving out a large number of non-government organisations (NGOs) and other unregistered organisations that have been operating unfettered in many areas. Many such groups have been offering credit and functioning as moneylenders, charging huge interest rates. It is clear that, given the committee’s definition of an MFI, these would not be 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 liberalised financial set-up. However, the biggest reason why the poor are forced to take loans from micro finance institutions is that the banks’ linkages are weak and their credit outreach has been shrinking in the context of an agrarian distress. The policy approach should have been to ensure that bank credits at lower rates go directly to the end user, without intermediaries. This could also lead to healthy growth of the public sector banking system. As it stands, however, the committee’s 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 thus persist or in fact get strengthened.

The report qualifies that the advance to the 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 that the interest rate for individual loans be capped at 24 per cent. In addition to this, it also recommends an “average” margin cap for the MFIs. This cap is lower at 10 per cent over the cost of funds for the NBFCs and MFIs having an asset (loan outstanding) size of more than Rs 100 crore. It is higher at 12 per cent for the NBFCs with asset size of less than Rs 100 crore.

According to the AIDWA, both these propositions are unacceptable for two reasons. First, the interest cap of 24 per cent for individual loans is much higher than desirable and contradicts the repeated and long standing demand for low interest rate loans to women at a repayment rate of not more than 4 per cent. Second, an average margin cap on interest rates would not serve any purpose in restraining the rate of interest charged by the MFIs because such a rate would be based on the annual financial statements submitted by the MFIs about the annual cost of their loans. The MFIs would raise their rates of interest as and when their cost of funds (largely dependent on the rate of interest charged from 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.

Further, if we work the interest rate out on the current Benchmark Prime Lending Rates (BPLR) at which banks have been lending to the MFIs, the expected interest rate for each poor borrower would still be higher than even the 24 per cent cap prescribed for individual loans by the committee. Hence, such a capping of interest margin would not end the existing interest differential, and poor borrowers would still end up paying a higher rate of interest.

Fourthly, it is unfortunate that the committee has given sanction to group repayment of individual loans, when the person taking the loan is unable to 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.

Fifthly, as far as monitoring and compliance are concerned, the Reserve Bank of India (RBI) expects the MFIs and industry associations to take up a major role in ensuring self-regulation under the overall guidance of the RBI. It also asks them to run a grievance cell for this purpose. This proposition is ironical as these very entities are using micro-finance to enhance and expand their profits. Hence a more rigorous and effective method should be thought of for monitoring and compliance.

Thus, on the whole, in terms of recommendations, this report will do little to assuage the problems that are being faced by the actual poor who are at the receiving end of the unfair practices being adopted by the MFIs.

The AIDWA has therefore asked for a more pro-people approach. It has demanded that the government must re-examine the report in the context of the credit requirements of the poor, and ensure that their interests are adequately safeguarded.