Microfinance
is one sector about which the perception of common man, policy makers
and public media has witnessed peaks and valleys in short span of time.
The sector was perceived as Messiah for unbankables due to its
unprecedented success in South Asia. Many social scientists and various
political and business leaders looked at it as a panacea for poverty
stricken vulnerable and marginalized section of the society. There was a
strong advocacy to replicate the model across the third world
countries.
In
India the Microfinance was extended to remote areas with high euphoria,
and as a model which was perceived to reduce “poverty through profits”.
It was seen as a win-win model for financial institutions as well as
for the bulk of population which does not have access to financial
institutions. However within a short span of time microfinance
institutions were perceived to be blood sucker of the poor. They were
soon looked upon not only as anti developmental but also as a neo avtar
of moneylender of pre independent era who use to charge exorbitant rate
of interests and adhered to coercive methods for the recovery.
If
we critically examine this sector the reality of this sector lies some
where in between “messiah of poor” and “neo avtar of coercive
moneylenders”. To understand the realities of this sector we must
understand the basic issues in the model which resulted in its disgrace.
The following were the issues with model in India:
1.
In the absence of any regulation various Microfinance Institutions
(MFI’s) started charging very high rate of interests from their clients.
Although it’s a fact that disbursement of loans in the rural areas
involves high administrative cost and greater risk in the absence of
collaterals. Thus it is impossible to deliver the credits in rural
population on an interest rate at par with their urban counterparts.
However, the profit motives of many MFI’s eclipsed the developmental
goal of the sector. As a result exorbitant interest rates and opaque
policies were rampantly practiced.
2.
MFI’s deviated from the principle of disbursing the loans for the
productive purpose leading to debt cycle. The success of Microfinance
model rests on the fundamental principle of lending for the productive
purposes. In order to expand the clientele base various MFI’s ignored
this basic tenet and started lending for non productive purposes as
well.
3.
Overleveraging was also one of the major error which MFI’s indulged
into. Multiple borrowing from various sources resulted into
indebtedness much above the credit wroth of the clients and finally
resulted into bad loans.
4.
Leakage in the form of “ghost loans” and fraudulent loans by the staff
of MFI’s was also one of the major flaws in the model.
5.
In order to collect the loans the MFI’s adhered to coercive practices
which at times were extra legal and even illegal. Since this financial
model is complexly interwoven into socio-cultural and psychological
dimensions as well, the result of these methods was counterproductive.
Large number of suicides in Andhara Pradesh was the manifestation of
this fiasco.
In
order to deal with these issues, on the recommendation of Malegaon
committee, Reserve Bank of India (RBI) has come up with the regulations.
In order to regulate the interest rates by MFI’s, RBI has put a cap on
the lending rate of MFI’s at 26% per annum and a margin cap of 12
percent over their cost of funds, whichever is lower.
In
order to tackle the issue of overleveraging, RBI has now laid down a
rule that only two MFI can lend to one borrower and both together cannot
provide loans beyond Rs 50,000. The Information Technology is also
being used to create an authentic data base of borrowers to prevent
overleveraging.
The
legislation and regulations by RBI have to a great extent addressed the
flaws in the sector. Since the sector along with the financial
inclusion is based on social capital as well, it can play a big role
poverty elevation, empowerment and sustainable development.
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