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Outing the outliers…..Yoginder K. Alagh
Finding the right regulatory touch for microfinance institutions Around two decades ago, when we first heard of the self-financing movement in Bangladesh, they had not yet come on the global radar. We knew of the Comilla Academy and the efforts of Akhtar Hameed Khan Saheb, a great Gandhian, but the self-financing institution (SFI) was a new concept. Some of us were on the advisory board of NABARD and a team was set up to study the SFI phenomenon. They corroborated the activity of the groups and then went on to show that there were, in fact, many such groups in India, but they would not report themselves because they charged high interest rates as compared to the primary cooperative societies, and this was not legal. Now we have known from the first Rural Debt and Investment Survey that what is euphemistically called the informal rural rate of interest is 30 per cent-plus per month and the ugly fact continues according to the latest State of Farmers Survey. Rural credit provokes a lot of talk, but in fact very few people have gone there.
There have been great wars between people like me who said the question is access and others, some my seniors, who wanted both access and cheap credit. When rural banks were thought of, I was not too happy and wrote on some file asking, why not have regular banks give rural credit? That thought was hushed back then. It is not fair to say now that banks don’t give any rural credit, but a majority of farmers are outside their domain, if the statistics have to be believed. When they give credit, it is subsidised since the cost of delivering credit in a faraway village is not known and a recommendation of the Sukhamoy Chakravarty Committee that econometric cost studies should be done, and presumably rural credit delivery losses worked out on the basis of normative efficiency costs and should be subsidised by the state, is never discussed. And so it goes on, and the politician promises deliveries without working out costs and implications and they remain largely on paper. However, to be fair to the credit of SFIs or more appropriately, microfinance institutions, the situation is different now.
We were excited when the professionalisation of microfinance institutions working in rural areas began. In the initial phases, I remember that one of the most articulate and successful ones would send an SMS when a landmark was crossed. Many of them maintain a high standard of transparency and integrity. Some, in fact, swear by the non-profit criteria and I know a relatively small one in Ahmedabad run by Jagat Shah, for example, which makes a point of keeping interest rates low. The sector expanded. Its refinancing needs from the banking system became larger. Actually while there are interesting numbers floated, nobody really knows its full size.
Meanwhile, newer forms of MFIs are emerging, some offering a cafeteria of financial services in communities as small as two thousand. There is great scope for expansion. But of course this is not the self-financing model, however desirable that is.
Since it is commercial and financial, the case for lightly impacting regulation is obvious. The finance minister has wisely opted out. Self-regulation has a moral hazard to it. At one stage NABARD could have done it, but it is no longer independent of the government since the RBI has, sadly, sold its equity to the government. A possible way out is for the RBI to set up an advisory group of stake-holders and monitor “agreements”, and gently neutralise the outliers.
The writer, a former Union minister, is chairman, Institute of Rural Management, Anand express@expressindia.com
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