|
Microfinance’s tangled story
Some of New Delhi’s busiest thoroughfares wear a deserted look as street vendors have been banished till the end of the Commonwealth Games. Ostensibly for the great- er common good. The finance ministry appears to be inclined to do the same to street vendors among financial intermediaries –microfinance institutions (MFIs)–by resorting to indirect measures to administer interest rates. For the greater common good, apparently.
The Indian financial land- scape is divided into haves and have-nots despite the efforts of successive governments over the last four decades. Into this vacuum stepped MFIs, nimble intermediaries growing fast in an unregulated environment. There are two kinds of MFIs. Self-help groups (SHGs), largely favoured by public sector banks for on-lend- ing to the excluded, and non-banking financial compa- nies (NBFCs) which have even managed to raise funds from sources as diverse as equity markets and securitization of loans to the poor.
It is a fact that most microfi- nance loans carry an effective cost of over 25%. SKS Microfi- nance Ltd, one of the success stories in the sector, charges 28% on average. Through a letter, the finance ministry has ask- ed public sector banks to ensure they do not on-lend to microfi- nance lenders who charge more than 24%. The ministry’s move may have been prompted by good intentions, but the out- come is bound to be adverse.
Public sector banks largely lend to SHGs. Any move which restricts public sector bank lending will largely affect SHGs which, generally, offer the least expensive microfinance loans.
SHG loans often involve an ele- ment of cross-subsidy as SHGs have links to government devel- opment programmes. The even- tual impact of an attempt to in- directly administer interest rates to SHGs is bound to be negative in terms of financial inclusion.
The finance ministry’s recent letter merely foreshadows what is in store for all MFIs. An inter- nal committee of the Reserve Bank of India has recommended that MFIs be excluded from ac- cessing inexpensive priority sec- tor loans from banks. This move will affect all MFIs, as NBFCs largely source money from pri- vate and foreign banks.
It is hard to understand why the government and the central bank independently want to check MFIs. MFIs exist simply because the effective cost of a bank loan for the poor is far higher than the official interest rate. The poor care about effec- tive costs and not advertised interest rates. An MFI’s interest rate is really the effective cost of a loan to the poor, as the money is delivered at their doorstep and is unsecured. The tendency to meddle with interest rates of MFIs will eventually undermine the overarching aim of financial inclusion.
MFIs: trouble ahead? Tell us at views@livemint.com
|