However, the question of ethical lending is also a key issue
Microfinance institutions (MFIs) should be allowed to serve as banking correspondents and keep deposits of poor customers, SKS Microfinance founder and Chairman Vikram Akula said today. He said MFIs were in discussions with the regulator and the government, and “hopefully” they would do something to “protect the interests of their customers”.
Akula, who is mired in the ongoing debate over high interest rates charged by MFIs, said it was unfortunate that MFIs could not take the savings of the poor and act as banking correspondents (BCs), while many other people, including teachers and grocery shops, were allowed to do so.
Speaking at the session on ‘Beyond Credit: Balancing the Portfolios of the Poor’ at the India Economic Summit, he said the government’s stand on not allowing MFI non-banking finance companies (NBFCs) to take deposits from people perhaps stemmed from the fact that some NBFCs had a bad history in India.
Janmejaya Sinha, chairman, Asia Pacific, Boston Consulting Group, who was moderating the discussion, disagreed, and said it was not about bad history, but a conflict of interest in allowing MFIs to take deposits.
Akula pointed out that savings as a non-credit product is more important to the poor than credit, as the poor do not have safe places to put their saved incomes. Most women in the rural sector use informal institutions to store value and one of the most common ways of storing value is by buying gold.
Sunand Mitra, President, Agriculture and Rural Banking, Axis Bank, said the banking system and MFIs could complement each other. He said commercial banks in India did not have the capacity to reach out to half a billion people, so it made sense to lend through MFIs, but at the same time the lending to these institutions should be conditional, because all the risk was on the banks.
More From This Section
The discussion also moved towards the issue of ethical lending by MFIs. Although MFIs were welcomed at their inception as they were replacing money lenders, they have not been successful in bringing down interest rates significantly. Interest rates paid by the poor are still as high as 24 per cent and a further reduction is necessary.
Akula said the cost of lending by SKS Microfinance was around 22.5 per cent. In order to bring down lending rates even further, costs would have to come down, which was possible only with greater access to technology, he said, and added that it was possible to have a business model in which rising profits co-existed with declining interest rates.
Jon Federick Baksaas, CEO of Telenor Group, talked about the potential of partnerships between the telecom industry and the banking industry to reach out to the rural economy.
Given that the penetration level of banks in rural areas is low, this automatically increases the transaction cost of going to a bank, and telecom service providers can play a vital role by providing services such as bill payment and money transfer thorough telephones, he added.
Thomas Davenport, Director, South Asia, International Finance Corporation, said that growth of non-credit products has taken off because it is as profitable as credit. Non-credit products infuse greater loyalty from customers.