Micro-finance institutions (MFIs) registered as non-banking financial companies (NBFCs) and self-help groups (SHGs) linked to banks, both answerable to the banking regulator Reserve Bank of India (RBI), between themselves account for 92 per cent of the micro-finance space. So, when the Yezdi Malegam Committee, set up by RBI, recommends that a separate category of NBFC-MFIs (they make up 58 per cent of the sector) be created and RBI regulate them, it is clearly upbraiding RBI for not ensuring better and more comprehensive regulation earlier. If that had been done, the whole crisis of the past several months could possibly have been avoided. Now that a comprehensive set of recommendations is available, there is a need to act on them speedily so that further crisis is avoided and growth is smooth and healthy.
Foremost, the committee makes two related recommendations — 24 per cent interest rate cap on loans and 10-12 per cent markup on cost of funds, depending on the size of the MFI. Other than insurance costs, they should levy only two charges — interest and processing charges. As the committee’s own calculations show that MFIs are earning an average effective interest rate of 36 per cent on their loans, there is a tough task ahead of the sector. Also, the effective rate of interest charged should be declared upfront, in a loan card given to the borrower which should contain all relevant details and the MFI should stop charging a security deposit on which no interest is paid as that is simply a way of charging a higher rate of interest than what is declared. To curb a key source of trouble, multiple lending, that has been perpetrated by hard-selling for-profit MFIs, which have been targeting self-help group members (this is what got the Andhra government on their backs), the committee has recommended that a borrower should not become member of more than one joint liability or self-help and not more than two MFIs should lend to one borrower. However, the committee has also recommended that an MFI only lend to a member of a joint liability group. The idea of joint liability should be given up (Grameen Bank has done so) as pressure to repay is the toughest when it comes from group members who are neighbours, and can have been a root cause of suicides.
The observations of the committee on two sovereign entities are not for RBI to implement. One is on the micro-finance Bill proposed by the central government. Only 8 per cent or less of the sector that falls outside of the purview of RBI can be covered by this Act. The committee is careful not to say so but the question arises, what good will the act do? The second involves the recently passed micro-finance regulation Act of Andhra Pradesh. The committee’s logic is that the need for the Act will go away if the other regulations recommended are adopted. Besides, if there are multiple regulations enforced by different entities, there will be mayhem and MFIs will be tempted to go regulation shopping. As Andhra Pradesh cannot be expected to scrap its Act, if at all, before RBI gets its act together, quick implementation of the detailed regulations recommended becomes all important.
