The Hindu Business Line : No regulator for MFIs, please

YET another tome on rural credit - an Internal Group of RBI to examine issues relating to rural credit and micro- finance (the fifth report on the subject since 1999) — has found bank funds do not reach the rural poor.

Commercial banks have covered only 18.4 per cent of the rural population through savings-deposit accounts and a lower percentage of 17.2 per cent of the rural households by loan accounts. The Primary Agriculture Credit Societies (PACS) with about one-lakh outlets have had only "minimal" impact.

"The decline in productivity of the rural branches of the commercial banks, fragility of the co-operative credit structure and weakness of regional rural banks (RRBs) witnessed since early 90s, have further accentuated the problem of inaccessibility of banking services for a large part of the rural population," the Group notes, which is not new as many groups before have said the same.

The banking sector prefers large accounts; the number of loan accounts of small borrowers with credit limit range of less than Rs 25,000 has dropped from 5.88 crore in 1991 to 3.69 crore in 2003. Still the Government promises 8 per cent GDP growth. The distressing cry for help of the rural poor cannot be caught by the many dish antennae dotting various ministries in New Delhi. For New Delhi (including the Manmohan Singh government) the rural poor does not exist except when elections are on. The Working Group admits: "The potential to tap the rural areas for rising low cost deposits is high. It is now being widely accepted that by extending their reach to the vast numbers of untapped small and marginal clients in the rural areas at the bottom of the pyramid, banks can increase their business, enhance their profit and spread the risk. It is also increasingly recognised that the rural credit market offers good opportunity for profitable retail loan business."

As a remedy (or is it to justify its existence?), the Group has come up with the "Business Facilitator Model " and "Business Correspondents Model" to take funds to the rural poor. The Business Facilitator will link banks to the rural poor by tapping various agencies in civil society to identify borrowers and their needs, while under the Business Correspondent Model the business correspondents will provide aid on "behalf of banks" by disbursing small credit, recovery and other jobs. Is there need for two models when the two could have been packed into one; also, the two models seem to be a variant of the SHG-Bank Linkage programme (with Nabard acting as a facilitator with no fund stake), which has been doing well in the southern States.

The idea has helped meet the daily fund needs of the poor; it has not moved ahead in developing and marketing village products. The rural poor still walk the margin between unsure living and sure death. In Uttar Pradesh and Bihar, quality NGOs are scarce to run the programme. Clones of the SHG-Bank Linkage programme are being tried out in various parts of South India to suit local needs. Perhaps, the good thing about the Working Group is that it is against more regulations (surprising for an RBI working group) for the MFIs who in a way are behind the SHG-Bank Linkage programme.

At present, there are about 800 micro-finance institutions (MFIs) with about 3,000 entities facilitating the SHG-Bank Linkage programme. MFIs are amorphous entities. "For profit" MFIs under the Companies Act, 1956 and registered as NBFCs under the RBI Act, 1934 come under RBI; "Not for profit" companies under Section 25 of the Companies Act, 1956, are out of the prying eyes of RBI.

Some want a body to oversee MFIs and the Group contends: "This, however, leads to the question that if a new legislation has to cover all micro-finance activities undertaken by all entities of various institutional forms, there has to be clear definition of micro-finance from the regulatory perspective. This, however, is not amenable to an easy answer given the multi-dimensional aspects of micro-finance activities. Further, the utility of such new framework for the already regulated entities such as banks and NBFCs that are the major players in the micro-finance sector is very doubtful."

It is commendable for the Group to admit, "a separate and exclusive regulatory framework for the large number of highly diverse MFIs under different legal forms is not recommended, at least for the present."

A committed core of human beings is working for the rural poor and it is best it is left alone as the formal banking industry (including RBI) never had and has little time today for the inconveniences of being poor.

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