Thursday, February 03, 2011

Malegam committee on microfinance

The Malegam committee's report on MFIs came out a while ago. The intention is good: they want to rein in MFIs and subject micro-credit to norms and disciplines. But micro-management of the microcredit by the RBI, which is what the recommendations amount to, is not the right approach. It will be difficult for the regulator to ensure that not more than two MFIs lend to one borrower, that the total sum borrowed does not exceed Rs 25,000 or that the cap on interest rate is always observed.

My solution: put the onus of credit discipline by banks. The way to do this is to subject all lending by banks to MFIs to a consortium. Then, it will be up to the banks to see what limits they want to impose on borrowers, what the interest rate caps should be, etc. The banks will also be obliged to monitor the end-use of funds and they will be able to ensure that runaway lending by MFIs does not happen. More on this in my ET column, MFIs: Malegam misses the point.

Incidentally, on the very day the Malegam report came out, the RBI decided to allow banks to restructure loans made to MFIs. This display of regulatory forbearance was uncalled for. Clearly, the attempt is to sweep under the carpet the losses to banks on account of loans to MFIs. But does the RBI believe that, after restructuring loans made to MFIs, banks will be in a mood to resume lending in a big way? There is not the ghost of a chance.


K.R.Srivarahan said...

I agree with your view (expressed on many occasions) that commercial banks have unfortunately failed to play a leadership role in direct extension of microcredit and have thus made it possible for loan sharks masquerading as MFIs to thrive. Availers of microcredit unlike SMEs do not have bargaining strength and are at the mercy of MFIs. RBI could have prodded the commercial banks to play a more active role in direct microcredit. RBI did this for SMEs.

You have also raised a pertinent governance issue arising from conflict of interest caused by RBI's Board members being appointed as members of committees on various operational issues. RBI should respond to this.

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