Opinion

Why Assam’s micro-loans deal is a win-win

Rouhin Deb | Updated on July 03, 2021

While providing relief to both borrowers and lenders, the deal incentivises prompt repayment and credit discipline

The primary objective of any party’s manifestos during the election season is limited to luring the public with over-the-cloud promises. And, many of these are seldom fulfilled after the government is formed. One of the most common promises that repeatedly finds a place in party manifestos is loan waiver.

Post-election reality in States like Andhra Pradesh, Madhya Pradesh and Chhattisgarh give one enough reason to believe that promises such as loan waiver are classic examples of where politics has squarely and unfairly trumped economics.

However, the recently signed Assam micro-finance deal between the State government and micro-finance institutions (MFI) seems to be different, with all the stakeholders supposedly happy with the deal. The government keeps its promise, the borrowers get interim relief and it is business as usual for the MFIs in Assam.

The amicable outcome, given the gravity of the problem, is welcome, especially at a time when governments either forget their pre-poll promises or shift the blame on MFIs for exploiting the public, all of which ends in a lose-lose situation. But the story of loan relief (not waiver) in Assam, by Chief Minister, Himanta Biswa Sharma, has been a win-win till now — the BJP on its promises won the elections and Sharma kept his word.

Assam has traditionally been an agrarian economy with almost 85 per cent of the farmers owning less than a hectare. This presented a perfect ground for MFIs to create demand for micro-loans in the State. The State today has micro-borrowing indebtedness of more than 6 per cent, which is twice the national average of 3 per cent.

The situation is worse in specific districts of Upper Assam, where the number goes up to 11 per cent. Upper Assam, which mostly produces tea, has seen a decline in production the last few years and tea garden workers find the micro loans handy, to meet their expenses in the midst of declining income from the fields.

In Assam, these loans amount to around ₹12,500 crore. Of the 26 lakh borrowers till March 2020, 40-50 per cent are currently on the default list. But MFIs are not the only ones that have suffered. There have been several instances of borrowers in the State committing suicide because of their inability to repay the instalments.

This led to the introduction of the Assam Microfinance Institutions (Regulation of Money Lending) Bill, 2020, which many MFIs termed an overreach.

The unrest against the MFIs started to intensify around 2019, in Dibrugarh district of Upper Assam. Sensing the movement involved a large section of the voter base across the State, several political parties tried to come into the picture to gain traction amongst voters.

However, it was Himanta Sharma’s promise that struck a chord with the voters. His announcement of loan relief to the women borrowers prompted them to come out in large numbers and vote the BJP to power again.

What sets the deal apart?

Within a month of coming to power, the Assam government signed the micro-finance deal, much to the relief of the women borrowers and MFIs alike. However, what sets this deal apart is that, in its present form, it is not a waiver with unconditional support.

The relief package doesn’t have a blanket cover, but is graded. All standard borrowers with outstanding debt of ₹1.25 lakh to three lenders are set to get ₹25,000 from the government as a relief to service further debt in future. Of the 26 lakh borrowers, nearly 24.2 lakh have less than ₹1.25 lakh of outstandings to three lenders.

Regular borrowers are also set to get relief and the State will pay the EMI of the defaulters. A few months after the loans taken by the borrower turns standard, the government will fund some part of the outstanding loan. The whole exercise is set to cost the State exchequer ₹8,250 crore and the rest, amounting to ₹4,000 crore, is expected to be written off.

The plus point of the process is that the government has come forward to support both borrowers and lenders. Out-of-the-box thinking and encouraging prompt repayment by giving incentive to standard borrowers are steps in the right direction.

The microfinance deal of Assam not only ensures the incentivisation of the regular clients but also takes care of NPA clients, with the objective of bringing them back to the banking fold.

The focus on bringing in credit discipline in the State is evident from how the whole process has been undertaken. Assam has shown a way. Whether other States will follow remains to be seen.

The writer, an empirical economist, was a member of the Assam BJP election manifesto committee

Published on July 02, 2021

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