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Q&A
Microfin cos have been neglecting the poor YH Malegam says his recommendations are a means to make microfinance cos lend more to those below the poverty line,something that MFIs of late have been shying away from
YH MALEGAM is the nations best-known chartered accountant.But he is also the man for every regulator,be it the Securities & Exchange Board of India or the Reserve Bank of India,to rely on whenever they need advice on financial market regulations.Mr Malegam has suggested regulations for the microfinance sector that was just getting wild.Of course,the industry doesnt like all,but he justifies every recommendation in an interview with Gayatri Nayak.
Your recommendations have evoked sharp reactions from both the Andhra Pradesh government and microfinance companies.Did you expect that
There are also a lot of both informed and uninformed comments.So people have problems with this report.Ill explain.
Your capping of profit margins seems to have attracted a lot of attention.
Whatever the cost of borrowing,you add 10% to that.But there is a cap of 24% on individual loans.If the average borrowing cost is more than 14%,you have a problem.As long as it is less than 14%,you dont have a problem.Every year there are banks that dont meet priority sector quota.So they go to MFIs and tell them they will buy their loans.When they buy their loans,the bank buys at a particular rate of interest.
When there is competition between banks,obviously one who pays the lowest interest gets the largest portion of the loans.We are trying to discipline not by regulation,but denial of benefits.What we said was that the cost of funds are largely beyond your control.But all the other elements are within your control.Therefore,when you put an interest margin cost,you should add to your cost of funds an amount which should cover all the other items.
Even the suggestions on the recovering costs
Having put these two caps,we also said there should be transparency.We said the recovery from the borrower can only consist of the processing fee which should not exceed 1% of the value of the loan,the actual interest which you charge,plus the insurance premium.We have also clarified why it is charged.The lender says I am giving you unsecured loan,how will I get back my money I can get it only out of your earnings. If the borrower dies,that earning stops.So you have insurance that is limited to the amount of the loan.We have only said you can only recover the cost of the insurance.Today,MFIs are recovering other charges like administrative charges for insurance.If your loan is.10,000,they may say the borrower has loan of.15,000,or something like that.This is the logic behind the interest rate cap.
Then there are also issues with the income criterion of.50,000 per annum.
The question of income criterion comes in because microfinance is meant for low-income groups.The practice has been that which is understandable,you have people below the poverty line,who earn around.6,000 per annum, then you have people who are slightly above the poverty line and people who have larger incomes. Now
MFIs have been substantially lending to people who have got larger incomes.The poor people are neglected.So this is one way to force them to lend more to them.The whole microfinance business was supposed to be a means towards which women can do some additional work which will generate them an income and supplement the household income.I readily admit that the limit for.50,000 per year may not be adequate.And this is something we will be examining. There is also this enduse where 75% of lending is to be for income generating which lenders are not happy about.
But you have to look at this in the context of the problems which have been created.Even internationally,it is debated whether microfinance has resulted in an improvement in the lot of the poor or has it only resulted in them becoming indebted.Now we recognise that you may need money for income generation.And you may also need money for education,medical expenses and for emergencies.What has happened is that MFIs have been giving money to buy household goods.It is all right if you give it as a donation.But if it does not generate additional income,then repayment becomes an additional burden.Then you will borrow it from some one else and repay it.
We are going to the root of the problem.The whole concept of MFI was intended as a means so that women can work their way out of poverty.This can happen if you use the money for income generation.We also recognise that you have problems like income smoothing,emergencies,education.We said all right,use 25% of your loans for other purposes.But at least 75% of the loans should be for income generation.After all,what we are saying is that all loans given by banks to MFIs will be priority sector.If you are giving priority sector status to someone who is giving it for buying household goods or television sets,or things like that,then that is not the reason for giving priority sector lending.
Former Governor YV Reddy said microfinance is another sub-prime in the making.
Dr Reddy made two points.One is that it is nothing but money lending.The second is sub-prime.Suppose,you ask a woman in the village to do tailoring and offer her aid to buy a sewing machine.If you only give her the money to buy a sewing machine and dont teach her tailoring,she doesnt generate the income.
Microfinance is not just microcredit.It also includes these obligations.
What about the Andhra Pradesh Act
There are certain good features about the Andhra Pradesh law and there are some bad features.Most of the features are good.Our proposals are in line with them.The bad features are two;one is that you have to register with the panchayat in the district every time you give a loan,and one can give a loan only in the presence of that person.That means the borrower will have to leave his job and travel that distance and do this.Secondly,there can be corruption.So thats the bad part.
Your suggestion on capital raising by them
There are some agencies,including foreign ones,who are genuinely interested in this social aspect.They are saying we will create a social mutual fund.For example,if I am interested in the social aspect of this and I dont want to give a donation,I will invest in the fund.I dont expect a huge return,I am happy with 10-12 % return.Then the social fund will in turn invest in MFIs.But it will only invest in those MFIs which observe social parameters.The other source is,if you have private equity investor who wants 25-30 % returns.He wants the share to be put on an IPO,so that he can make profit.We are saying why not issue preference capital with a coupon rate of 10-12 %.The investor is not interested in appreciation of his capital but only the return that he gets.The investor will make a reasonable return,and hence,the temptation for larger profits wont be there.
gayathri.nayak@timesgroup.com
* YH MALEGAM CHAIRMAN,RBI PANEL ON MICROFINANCE
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