‘Group' is better than ‘one'

The Malegam panel on toning up the functioning of the fledgling microfinance industry in India has come out with a number of suggestions impinging on both the borrower and the lender. But this article confines itself to the suggestions made by the panel that have a direct bearing on the borrowers. And these are that:

The interest charged should not be more than 24 per cent/annum;

75 per cent of the loans should be for income-generating purposes;

The annual family income of the borrower should not be more than Rs 50,000; and

No one should be given more than Rs 25,000 as microfinance assistance;

Given the fact that the almost usurious rates of interest charged by the microfinance industry raised a storm of protests, one did expect a definitive suggestion from the Panel on the issue. Capping of interest at 24 per cent seems to address the concerns of both the borrowers and microfinance providers.

It is a golden mean between avarice and indulgence. The industry had been rationalising its avarice and the huge spread between the average lending and the borrowing rate from banks by saying that microfinance is a different kettle of fish calling for a lot of leg work and frequent interactions with borrowers.

Even with a maximum interest of 24 per cent, the microfinance industry would enjoy a spread of around 12 per cent that should be sufficient to take care of its overheads and leave a tidy profit assuming it has no large scale non-performing asset (NPA) problem to contend with.

If and buts

Ideally, all loans must be given only to foster economic activities and therefore the Panel's suggestion that not less than 75 per cent of microfinance assistance should be provided only for income-generating activities is unexceptionable on the face of it.

It is certainly not desirable to encourage the notion that a micro-financier is standing by to pander to socially undesirable and unproductive expenditures such as dowry or lavish marriage beyond one's means etc. Nor should the message go out that microfinance is a euphemism for doles.

In the event, the Panel is on dot when it suggests that at least 75 per cent of microfinance should be made available only for income-producing activities. Indeed, this was the spirit in which Muhammad Yunus pioneered the idea of microfinance — giving a helping hand to the weaker sections of the society so that they live honourably pursuing whatever skills they have and eking livelihood out of them.

But then when top notch bankers have not been successful in checking diversion of funds by their wealthy customers, it would be too much to expect microfinance organisation with skeletal staff to ensure that the loan taken is not diverted for extraneous purposes by their modest customers.

What perhaps can ensure a modicum of discipline on the part of borrowers is the group pressure, the hallmark of the Grameen Bank initiative of Muhammad Yunus, but sadly lacking by and large in the Indian experiment thus far.

Restricting access to microfinance only to a person whose family income does not exceed Rs 50,000 is also well-intentioned.

But enforcing this too would not be easy, given that we in India do not have a databank establishing filial linkages and tracking aggregate incomes that can be flashed on computer screens at a click of the mouse.

Furthermore, in a country where family is not treated as a unit of income tax assessment — though Indira Gandhi, when she was prime minister, did toy with the idea on the ground that those married in heaven should not be separated on earth only to give it up presumably under intense pressure — it might not, after all, be such a good idea to assume that an idle son, for example, would be taken care of by his relatively better-off father, and vice-versa.

And the last suggestion that not more than Rs 25,000 should be given as an individual loan too might flounder at the implementation level in the absence of a data base that flashes at a glance all the loans taken by a person from across the financial landscape of the country.

Group model

The Panel could have done more. It could have commended the group model for adoption without exception in the microfinance industry.

As it is, loans are given to individuals qua individuals whereas Yunus's idea was loans should be given to individuals all right but qua members of a responsible group.

To an average Indian, holding his head high in biraadri is sacred. And group pressure does pack a lot of punch because one rotten fish can spoil the entire pond and the group would not want to risk such outright ostracism with long-term deleterious effects for each one of its members — compliant, deviant or defiant.

(The author is a Delhi-based chartered accountant).

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