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Protect poor from pro-poor financiers
It was the successful, Nobel prize-winning Muhammad Yunus’s experiment through the Grameen Bank in Bangladesh which made microfinance an attractive option for social entrepreneurs like US-returned Vikram Akula of SKS Microfinance, giving it market wings. It seemed to combine the virtues of capitalism with that of socialist concern. It has been said that it is possible to run for-profit financial institutions while serving the social goal of meeting the financial needs of the poor.
Microfinance has been the boom sector in this decade but it seems to have overreached itself. The Andhra Pradesh government has issued an ordinance suspending the operations of unregistered microfinance organisations after a spate of suicides, which have been traced to the strong-arm tactics used by agents of the microfinance institutions to recover loans.
The ordinance has been challenged in the Andhra Pradesh high court. Apart from the legality of the state government’s decision, what seems to have alarmed sector leaders is the high financial stake itself. According to Microfinance Institutions Network chairman, Vijay Mahajan, the ordinance has put at risk loans amounting to Rs9,000 crore. According to estimates, the total microfinance turnover is placed at around Rs30,000 crore.
Debates are on in financial circles, including the RBI, about the usefulness of microfinance institutions. They have been seen as reaching areas and people without access to regular banking.
About 80% of the funds of microfinance institutions are from the banks themselves. They are part of the financial mainstream. But the problems too have come to the fore. It has been found that microfinance institutions’ real lending rates are as high as 24% to 30%. It has turned out that microfinance institutions are really the dreaded and hated moneylender of old in a new incarnation.
There is a need for regulation of the sector. Abuses have no doubt crept into the system and vitiated its usefulness. The argument that regulation will choke its success does have some merit given the hamhanded manner that governments have in strangling private enterprise, but it is clear that the sector is in need of a watchdog. The Andhra episode has shown that all is not well or clear in the sector, and that the ostensible financiers of the poor have to be checked from exploiting the poor. It would be a folly to throw the proverbial baby with the bathwater, but it cannot be denied that a clean-up is required.
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