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Nabard is equipped to take responsibility for MFIs….DINESH UNNIKRISHNAN
U.C. Sarangi will step down as chairman of the National Bank for Agriculture and Rural Development (Nabard) on 3 December after a three-year stint. In an interview, he spoke about the ongoing crisis in the microfinance sector and Nabard’s readiness to take up the role of sector regulator. In the last three years, Nabard’s annual disbursements have risen to `57,000 crore from `29,000 crore while the total balance sheet size increased to `1.36 trillion from `81,000 crore. Edited excerpts:
How do you assess Nabard’s perfor mance as a development organization during your tenure?
I am satisfied. When I joined Nabard, I tried to ask myself what Nabard was established for. I found that though we had sufficient funds available, the level of utilization was low. Hence, scaling up disbursements was a major challenge. One of the most important initiatives Nabard spearheaded immediately after I took over was the implementation of the `60,000 crore debt waiver scheme. In just one month, we could list out all the beneficiaries of the scheme to facilitate implementation.
Nabard has been closely associated with the microfinance and selfhelp group (SHG) movement in India. The microfinance sector is currently facing a crisis following the Andhra Pradesh government ordi nance. What is your take on the en tire issue?
My reaction is what was happening (in the microfinance industry) was of concern. What is happening now is a greater concern.
Could you elaborate?
The microfinance programme was expanding very fast over the past (few) years, at a year-to-year growth of 70-80%. It benefited a large number of people in rural areas who did not have access to capital owing to the inaccessibility of bank branches. The overall costs of microfinance institutions (MFIs), when started, were very high compared with the returns, and their portfolio at risk was very high. To stay afloat, higher interest rates became the only possible solution. But as their business ex- panded, their return on assets increased and portfolio at risk went down significantly; the cost also declined. Then, it was possible for them to reduce rates, (but) this did not happen.
Has the ordinance helped address the issues?
The basic thing is that we do not want microfinance, which provides the poor access to credit, to stop altogether. We want that to remain, but with some arrangement for disciplined behaviour from the part of MFIs. Now what has happened is the Bill has impacted both new disbursements and recovery. That will not be to the advantage of anyone. Also, banks have thousands of crores of exposure to MFIs, which is deposit money.
Who is responsible for the issues that the microfinance sector is currently facing?
The prevailing situation is an outcome of the profit motive of some of the MFIs who did not guide the sector in a manner that ensured sustained continuity, on the one hand, and justice to the poor, on the other. If you look at certain developments in the past one year, people started not-for-profit agencies, primarily (using) donations, to cater to the poor, which later became non-banking financial companies and for-profit organizations. When a Micro-Credit Rating International Ltd study said nine of them have more than 5% return on assets, there one has scope to say that yes, extra profiteering in terms of business became an objective for some of the MFIs.
Do we need large profitoriented MFIs, or should they be retained as small entities to cater to the poor?
There is an advantage for large MFIs, if regulated. The advantage is the scale of business operations enables them (to) do business at a much lower cost. Cost of funds goes down when the size of operations increases. If that helps you charge low interest rate and sustain business, then it is good. But microfinance has to be a localized operation. Small MFIs, who work in a district or two, will be more successful because of their intimate contact with the borrower. It requires personal, one-to-one contact with the provider and receiver, and that is where I totally agree with former Reserve Bank governor Y.V. Reddy that it (MFI operations) has to be informal.
Ever since the ordinance was intro duced, there has been a slump in loan recovery. What is the way out?
See, there are two solutions–a localized solution, and a national-level solution. The local solution is that Andhra Pradesh needs to look into its Act immediately…and not put excess control.
Excess control is as counter- productive as no control. Do not stifle the system. Getting an Act in place is not objected to, but it should ensure and serve the purpose the government of Andhra has been striving for in the last 15 years. Andhra was the first where state support for self-help group-bank linkage programmes came into full scale with the creation of more than 10 lakh SHGs.
Which aspects of the ordinance need to be changed?
Each of them needs to be looked into. Many of these provisions (in the ordinance) can be counter productive. For example, interest cannot be more than principal. Now this does not help solve the problem. Most of the loans do not have a tenure more than one year. If you take a one-year loan, can the interest be more than principal, even if you charge 40% or 50%? So, they did not put a quantitative cap. What is the use of this provision?
Then, you have to register with multiple authorities. MFIs operating in Andhra Pradesh’s 22 districts have to register with 22 different authorities. The amount of workload for an organization with respect to the paperwork and queries rises, and that will increase the cost and will ultimately lead to an increase in interest rates. Will it help? Also, by doing so, you are permitting too many people into the system as so-called regulators. Everyone will use the power available to him in his own way. I am saying it has to be one authority.
Another change that has visibly im pacted MFIs in Andhra is the change from weekly collection to monthly. Does this need to be changed?
There are two arguments. One is, weekly collection helps frequent borrower contacts and, in a sense, induces discipline in the borrower since the repayments are regular. Now, monthly contacts mean less frequent customer contact. But the point against this is, if you give me `5,000 to start a business and ask for repayment at the end of the first week, how does one generate the surplus to pay back. If you take that view, a monthly schedule is reasonable. As far as multiple lending is concerned, it should be avoided as it pulls the individual into over-indebtedness.
Do you believe that Andhra Pradesh did the right thing by issuing such an ordinance?
A lot more thinking could have gone into it before this ordinance came so that it will become useful in serving the purpose for which AP had taken a large number of steps over the last 10-15 years. The regulation in place today is not adequate and, in the Andhra ordinance, the regulation intended is excessive. We have to find some midway.
We should decide whether each state be allowed to have their own ordinances, or there should be national-level legislation, empowering a single agency. If you create a national regulation and at the same time states have their own systems, then dual control will lead to more conflicts. In my opinion, national-level legislation should come.
So should state governments re frain from similar legislations?
I think so, and there should be national-level legislation.
Nabard has been proposed as the regulator of MFIs in the proposed microfinance lending and regulation Bill. Is Nabard equipped to take up the role?
Yes, Nabard is happy to become the regulator and is equipped to take the responsibility for MFIs. Nabard has sufficient experience and expertise in the way these programmes work and should be able to devise means for putting appropriate regulation in place.
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