Don't malign the MFIs

The controversy over the role of microfinance institutions (MFIs) refuses to die down. While one side believes MFIs are ripping off customers and adding to indebtedness of households, which has resulted in higher suicide levels, the other side presents equally compelling arguments. It points to how MFIs are saving rural folk from moneylenders, how their interest rates are lower than moneylenders, how they're more convenient for borrowers, and so on. While the political class, especially in Andhra Pradesh where MFIs have their largest business, have come down against MFIs, even the Malegam Committee of RBI has seen some merit in the arguments—yet it has put many curbs on how MFIs are to function, on the interest rates they can charge, and so on. While the importance of microfinance in consumption-smoothening should not be underestimated, it has a larger impact when the loans are given for productive assets. Evidence from Bangladesh and Indonesia indicates that high-quality, dependable, receptive and long-term oriented MFIs for the poor can go a long way in improving access to finance (Morduch and Rutherford, 2003). Recent studies have also pointed to the crucial role that can be played by MFIs by providing composite services; given the wide array of financial transactions that typify the financial life of the poor.