There has been extraordinary media spotlight on MFIs, from about the time SKS Microfinance was listed. The contribution made by SKS in particular, and the MFI industry in general, in projecting a model that allows the poor to acces mainstream capital is steller. The turbulence in the last couple of months has rewound the clock and taken us back to where the politician and babus wanted us to be.

In over 4 decades of nationalisation, lakhs of PSU bank employees, and other bureaucrats in the RBI and finance ministry have made several attemps to pursue the goal of financial inclusion. However, not just the poor, but even ordinary middle class citizen find it virtually impossible to get a personal loan. And just when the MFI industry managed to change the rules by reaching 30 million poor families and giving them a viable option to money lenders, the controversies began. 

Let us see the backgroud! As a number of suicides were reported in Andhra Pradesh, which many alleged were due to coercive loan recovery by MFIs and exorbitant interest rates charged by them, the state govt. had issued an ordinance on October, 15 to control MFIs in the state.

The ordinance makes it mandatory for all MFIs to register with the district Registrar Authority. MFIs are in the business of extending loans to the poor who do not have access to banks. At present, there are no separate norms for MFIs. Those MFIs which in the category of NBFCs are governed by Reserve Bank of India (RBI) regulations. The RBI had set up a sub-committee to study interest rates among other relevant practices by MFIs, which would submit its report by Jan, 11.

We need to understand the interest rate differential being charged by MFIs and banks. About 85% of the loans given by MFIs come from the banks. as of the September, 10 quarter, the MFIs have lent over Rs. 30000 crore ($6 billion) to over 30 million customers. Since MFIs do not have access to deposits, they take money from banks to lend it further to their clients. While the banks charge interest rates in the range of 9-14% on loans given to MFIs, some MFIs in turn charge as much as 34 percent from their clients.

The interest rates are in percentage- but of the principal amount, and when small amounts are discussed percentages can be misleading. If MFIs charge 24-30 % interest rate and operate with a spread of 12-16%; this amounts to Rs. 600-800 more than what a bank would charge on an average Rs. 10K micro finance loan over one year. In the period of a year the customer has to be serviced 50 times, which is Rs. 16 per visit. The higher cost of Rs. 800 compared to the bank, comes with doorstep service for small, convenient instalment repayments, speedy, non-bureaucratic loan disbursals and access to borrowing without collaterals.

This cost must be viewed against the opportunity cost for the customer of loss in labour days if he has to access regular banking channels, in addition to the very high possibility of not getting any credit. Few examples: A young goat bought at Rs. 2000 can be sold at Rs. 5000 after six months of fattening. That is a 300% annualised return. A Rs. 15000 investment in a cow can fetch a revenue of Rs. 200 a day on daily milk and a profit of Rs. 3000 per month. That is more than 100% returns annualised, even accounting for non lactating periods.

Here we are not advocating the MFIs or otherwise. But, there has to some discipline everywhere. And pros and cons are part and parcel of all the revolutions. Now New Microfinance Bill will ban multiple loans. Borrowers taking loans from MFIs may have to pay back on loan before taking another. They may no longer be allowed to indulge in "multiple borrowing" from the same MFI or from more than one. Similarly MFIs may also not be permitted to lend to an individual who has an outstanding loan.

We must present the things in the right perspective to help the humanity.

"No matter how noble our intentions are, the world judges us by our presentations. No matter how perfect our presentations are, God judges us by our intention."

Has anybody cried when the people were and are dying because of money lenders, hunger, shelter etc.? Sea is common for all, some take pearls, some take fishes and some come out with wet legs. We should not see the one side of coin only. Let the system work with slight changes to improve further.

Rakesh Sharma

Research Scholar

M-09876300331

E-mail : rakesh9552000@yahoo.com