This refers to “Small money big trouble” (Weekend, November 13/14). Assuming that microfinance institutions (MFIs) borrow from banks at 12 per cent and considering their cost of establishment in the rural areas, they should be able to make decent profits even at a healthy net interest margin (NIM) of 4 per cent — that is, if they lend at 16 per cent. Instead, they have been charging anything upwards of 28 per cent, which nobody considered usurious. Yet some courts have given judgments against public sector banks when they claimed quarterly compound interest rates at about 15 per cent (due to the penal rates for defaults), and allowed rates at about 6.5 per cent. Interest payable has to be compounded quarterly because banks have to pay quarterly compound interest on the deposits as well. When the banks raise their resources from the public in the form of deposits, they require an army of employees spread over many locations. And when it comes to lending, they are expected to jettison the basic principles of financing, lend on the whims of the politicians and keep bad loans under check. These are diametrically opposite goals that nobody can achieve. Against this background if public sector banks aim at an NIM of 4 per cent, politicians frown. Now, take it from me: in order to save the MFIs from the mess of their own making, the public sector banks will be asked to continue to lend to them even more aggressively, exposing these banks to more credit risks. Unless a sound credit culture is created, no institution can achieve the declared purposes of financial inclusion.
N K Murthy, on email