The microfinance industry and its supporters are an unhappy lot. Reason: The Rural Development Minister, Mr Jairam Ramesh's observation that the Micro Finance Institutions (Development and Regulation) Bill would hamper the self-help group (SHG) movement in India. This is because the Bill is “oriented to protect the microfinance institutions,” as rightly observed by him, not their clients — the poor borrowers.

Microfinance institutions (MFIs) booked heavy profits when many of the borrowers in Andhra Pradesh, which absorbed a third of microfinance deployed in India, committed suicide.

After the State Government enacted the Andhra Pradesh Microfinance Institutions (Regulation of Moneylending) Act, 2010, the harassment of borrowers has come down, but MFIs' balance sheets have started showing poor results.

For instance, SKS Microfinance, India's largest and only listed MFI, posted a net loss of Rs 1,361 crore for the financial year ended March 2012, against a profit of Rs 112 crore the previous year.

Attractive SHGs

Naturally the microfinance industry, therefore, opposes any legislation such as that passed by Andhra Pradesh. The Centre's Bill, unfortunately, seeks to supersede the States' enactments and puts the Reserve Bank of India in full charge of the microfinance industry.

The aim of the Bill is not to strengthen formal microfinance — the original form of microfinance deployment through SHGs launched in 1992, with the initiative of the National Bank for Agriculture and Rural Development (Nabard) .

Banks, which were cautious in the beginning, turned liberal later in lending to SHGs, as the recovery rate was close to 100 per cent, despite loans being given without collateral. Started with just 255 groups in India in 1992, the number of SHGs reached 69.53 lakh by March 2010. The aggregate outstandings in the formal microfinance sector were Rs 28,038.28 crore in March 2010.

Besides good recovery, banks had an added attraction of cheap funds to lend to SHGs. In fact, SHGs themselves kept their savings with the banks. It was Rs 6,198.71 crore as of March 2010 while Nabard provided refinance of Rs 12,861.65 crore (cumulative up to that date). So, banks' stake was just a third of the total lending.

Loan Sharks

The success of formal microfinance caught the attention of informal microfinance — where loans were routed through institutions rather than to the SHGs. Informal microfinance grew faster than the SHG type.

The thirst for profit made MFIs blind to the ground realities. MFI loans in AP, for instance, were 6.35 times more than the number of poor in the State. This rate in Tamil Nadu, Kerala and Karnataka was 2.77, 2.49 and 1.74 respectively. More than 60 per cent of MFI lending is concentrated in South India.

This practice of giving loans without bothering about the repayment capacity, the high rates of interest from 24 per cent to 60 per cent and coercive methods of recovery were responsible for borrowers' distress. Banks and governments cannot absolve themselves of responsibility with regard to the condition of the MFI borrowers. They actively supported for-profit MFIs.

Partners in Sin

They can't say that they have no network to reach out to people in remote areas. There are over 83,000 branches of all scheduled commercial banks, including 15,400 branches of regional rural banks (RRBs). There are about a lakh primary agricultural credit societies besides 12,000 branches of district cooperative banks.

There are plans to rope in post offices, too, for SHG savings and finance. There are some 1.55 lakh post offices and 1.39 lakh of them are located in rural areas.

Similarly, banks cannot escape responsibility on account of any funds paucity. According to Nabard's data, private and public banks have lent Rs 10,095.31 crore (outstanding as on March-end 2010) to 1,407 MFIs in India.

More distressing is that RRBs, which were established with the sole motive of finance to the weaker sections, too, have lent Rs 52.22 crore to as many as 103 MFIs, instead of directly lending to individuals and SHGs at low interest rates.

Banks lend to MFIs at about 10 per cent instead of directly giving loans to the SHGs. The MFIs in turn lend at high rates ranging from 24 to 60 per cent to the poor. In addition to banks, the micro-finance sector gets support from apex agencies such as Rashtriya Mahila Kosh and Nabard in several other ways. Also, as the Malegam Committee (a subcommittee of the Central Board of Directors of the RBI) found, banks were holding securitised paper issued by non-banking financial companies (dealing with microfinance) worth Rs 4,200 crore. Banks and financial institutions had also invested in the equities of such companies. The Committee found that over three-fourths of finance obtained by such companies operating in this sector is provided by banks and financial institutions. All this suggests that private MFIs make profits using public money. The proposed legislation, sadly, seeks to strengthen this type of system.

(The author is a researcher on rural credit issues.)

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