The finance ministry’s directive to banks to ensure that the micro-finance institutions they lend to in turn cap interest rates at 22-24 per cent while giving loans to villagers has not been liked either by the micro-finance institutions (MFI) themselves or the banks. The banks have reportedly said they are in no position to monitor what is done with the money they lend by the MFIs, while the latter claim such an interest rate cap is highly undesirable and might indeed lead to the collapse of 80 per cent of small MFIs. Both the government and the Reserve Bank of India talk endlessly about “financial inclusion”, a shorthand code for bringing unbanked areas into the banking fold, but the reality is that in a country with hundreds of thousands of villages without banking facilities it might takes ages for banks to set up branches, or even ATM machines, in all these areas. As of now, MFIs are the only bodies which make small amounts available to the poorest people in unbanked areas as collateral-free loans. They also provide the “last mile connectivity” between banks and people at the grassroots level — but it is estimated that while the amount of micro-finance needed is $51.4 billion, the availability is just $4.3 billion. Eighty-nine per cent of India’s MFIs are very small, and serve less that 10,000 clients. The largest of them serves 74 lakh borrowers in 10,000 villages, and has managed to achieve in five years what the father of micro-finance, Bangladesh’s Muhammad Yunus, took 20 years to do.
That said, it is perfectly true that MFIs borrow from banks at 12-14 per cent and sometimes even less, while lending to villagers at interest rates ranging between 27 to 37 per cent. But the MFIs argue that the interest rate they charge is still much less than what villagers are often forced to pay blood-sucking moneylenders who charge “pathani” rates of 100 per cent or more. But poor people who have no access to any kind of bank loans still go to the moneylenders as they provide money when it is urgently needed. The MFIs, who are trying to replace the moneylenders, often give loans of as little as `5,000-10,000 to start a vegetable kiosk or a kirana store — and make the money available at the borrower’s doorstep when he needs it. In contrast, the banks are notorious for not giving the money in time, and often even demanding bribes for handing over the cash.
It is believed in some circles that MFIs are earning undue profits, sometimes at rates higher than banks, but since they have to borrow funds from venture capitalists and private equity funds, they need a certain level of profitability just to stay afloat. While it is true that micro-finance pioneer Muhammad Yunus holds that profits in such cases should go back to the villagers, India’s MFIs note that Mr Yunus’ Grameen Bank in Bangladesh can afford to do that because it is actually a bank. Indian laws, however, do not allow MFIs to become banks — which would enable them to borrow cheap and lend cheap. Given that MFIs have brought thousands of unbanked villagers, including many women, into the banking system, they should be permitted to carry on — at least until the government is in a position to fill their shoes. After all, if they found the MFIs’ rates usurious and banks offered a better alternative, the poor villagers would be the first to shun the MFIs. What the finance ministry can and should do for now is to set up a regulatory mechanism so that fly-by-night micro-finance operators are kept in check.