This refers to the report “Microfinance bill to leave no space for state laws” (March 5). It is heartening to observe that the government is moving fast on putting in place a regulatory framework to protect a nascent wing of the financial sector which has the potential to safeguard against the exploitation of poor and small borrowers but was under pressure from greedy individuals who almost tried to kill the golden goose. The recent debate about microfinance institutions, the proposal to issue new banking licences and the pre-Budget discussions have helped bring to the fore the challenges faced by sub-sectors that constitute the country’s financial sector both as stakeholders in banks and as banks’ clientele. It is a revelation that a financial institution is different for different people depending on their financial status and banking needs.
This is the result of the post-1991 approach to the role of different agencies in the financial system. Till 1991, the country had a multi-agency credit delivery system in which each player had a defined role. The introduction of the liberalisation, privatisation and globalisation model was followed by a churning of roles and responsibilities. With this the wiser few in the private sector monopolised the creamy layer of business in the financial sector leaving all unremunerative and tough jobs like supporting the traditional priority sector to the public sector and cooperatives. As a result, some institutions now accept deposits at interest rates as high as 12 per cent per annum and provide credit at one third the rate to a major section of their clientele. Others source bank funds at an interest rate of 7 per cent or less and lend the ultimate borrower at more than four times that rate. The Microfinance Bill will partially address the need to regulate the second category of institutions.
Instead of finding a cure for symptoms, as has been done in the case of microfinance, the government and the Reserve Bank of India should take a complete view of the banking needs of agriculture, industry, service and export sectors, and small borrowers to plan a suitable institutional architecture.
M G Warrier, Thiruvananthapuram
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