People's Democracy

MALEGAM REPORT

Paving Way for Consolidation of MFI Monopolies

K Veeraiah

THE much awaited report of the Malegam panel on microfinance institutions (MFIs), appointed by the Reserve Bank of India (RBI), has shattered the hope of all those who thought microfinance was a vehicle of financial inclusion. The panel has come out with 26 recommendations, spanning from capping the interest rate to capping the margins, limiting the borrowings, and leaving the mechanism for regulating the industry for open debate. When one sees a recommendation about capping the interest rates, whose high rates are the root cause of the current problems faced by the MFI industry, at 24 per cent, one feels whether the panel could not come out with more a stringent recommendation.

TWO MAJOR

DRAWBACKS

However, a completely different picture unveils before us when we dissect the implications of the panel’s recommendations. For one thing, the panel has not even considered the types of MFIs, their mode of functioning and how they emerged as a grassroots credit movement. As a consequence, panel recommendations pertain merely to how to deal with the for-profit corporate entities in the sector.

The first criticism of the Malegam report is that it refused to consider the MFI sector as a whole. In its stead, it confined itself to focussing on the problems of corporate MFIs. On the face of it, it looks like a recognition of the lacunae in the RBI’s regulatory set-up with regard to the non-banking financial companies (NBFCs). While reflecting on the Microfinance Regulation Bill which was introduced during the UPA’s first tenure, a long pending demand from the Left and other progressive sections was that the NBFCs must also be brought under the purview of the bill. As we know, though the duty of regulating the NBFCs rested with the RBI, it has not been able to discharge the same due to its priorities. The demand for creating a single category of the NBFC-MFIs is meant to allow for regulating of these institutions, whose unchecked proliferation would only help the dominant players to garner a large chunk of the profits whose quantum is diminishing with the mushrooming of the MFIs. A new category of the NBFC-MFIs would enable the RBI to extend its regulatory cover to these entities, which would be a good sign.

Another important recommendation of the Malegam is about raising the bar on the minimum net worth of an institution from Rs 2 crore to Rs 15 crore. This is higher even than the amount that is required to start a private bank. This would keep a majority of the MFIs, which are already functioning unregulated, out of the purview of the RBI’s regulation. This has also a serious implication: it would pave the way for the entry of big boys into the sector which was devised basically for catering the unorganised, under-banked category of people. If only those can get into the sector who can afford to invest Rs 15 crore, it means that only large corporations and firms having the capacity to mobilise money through equity from the market will be able to call the shots. This would also lead to drastic changes in the ownership pattern by opening the floodgates for acquisitions, as the panel’s recommendations would make an infusion of capital or equity urgently necessary for an institution to sustain the tag of an MFI.  In the hitherto existing set-up, all those with an ability to set aside Rs 2 crore as net worth, could start an MFI in a local area, and this made possible the setting up of decentralised lending mechanisms that could cater to the requirements of the unorganised, scattered set of people. Raising the bar on the net worth to Rs 15 crore also means that meeting the local needs with local entrepreneurial skills would become impossible.

CONTRADICTORY

RECOMMENDATIONS

The recommendation to raise the bar on the net worth and the panel’s recommendation about the need for competition in the field are in fact contradictory to each other. The reason is simple: raising the entry bar in regard to the net worth would automatically result in elimination of competition.

At another point, while harping on the need for making the sector more competitive, the panel’s opinion gives one the impression that it is not for allowing completion between different models of MFIs. In its stead, the panel confines itself to recommending competition only among the for-profit MFIs.

Secondly, the panel has assumed and argued that increased bank lending to the microfinance sector should result in a reduction in the lending interest rates. But if this assumption had been true, the recent proliferation of the MFIs as well as the enormous lending by the banks to these institutions would have resulted in a reduction in the interest rates. As we all knew, what has happened in reality is in sharp contradiction to this assumption.

Further, it is surprising that while indulging in an elaborate reasoning on capping the interest rates --- which it suggested should be done at 24 per cent --- the panel has overlooked the opinion of the Planning Commission’s subcommittee on the microfinance sector. The said subcommittee “felt that the best way to bring down the rate of interest is to expand the microfinance operations of the RRBs (regional rural banks) in a big way..…The advantage with the RRBs is that they are able to mobilise low cost funds and would therefore be in a position to charge reasonable rate of interest.”

The panel’s recommendation about capping the interest rates at 24 per cent may also lead to imposition of hidden costs, as has happened in the case of credit cards and other financial innovations, unless the regulator creates the scope for regulated competition which would include semi-government agencies like the RRBs and cooperatives. Also, the capping of margins would lead to a restructuring of the personnel. For example, Lok Capital Foundation informs us that to protect their margins they are going to extend their field staff coverage from 300 borrowers as at present to 900 borrowers. The MFIs will obviously find some other methods as well to ensure that their margins remain intact.

AGRICULTURE

OUT OF PRIORITY

The panel, which harped in detail on ensuring the priority sector tag to the MFI lending, has, however, refused to go into the issue of reducing the cost of borrowing for non-NBFC MFIs. On their part, the MFIs do seek a continuation of the priority sector tag for themselves, are surprisingly keeping the agricultural sector --- which is a priority sector --- out of the purview of their lending. But the panel has not offered any comments on this phenomenon.

In line with the public concern about multiple lending, the panel has recommended that not more than two MFIs should lend money to a single borrower and also that a borrower cannot be a member of more than one self-help group (SHG) or joint lending group (JLG). If implemented strictly, it would lead to a trimming of the overgrown customer base. To ease the burden on the borrower, the panel also recommended relaxation in the tenure of repayment which can give some relief to the borrower.

In sum, all but a few recommendations of the Malegan panel are such that, if accepted, they would ensure neither legitimate protection to the borrowers nor an orderly growth of the industry. In the end, the whole sector would end up with corporatisation and consolidation of the monopolistic, for-profit MFIs instead of diversifying the lending set-up with a boost to the non-profit institutions.