There is no case for the RBI to cap the interest rate at higher than the 24 per cent suggested by the Malegam panel report. Till early this month, there was an expectation among the various stakeholders that the Reserve Bank of India (RBI) would strike a balance on the contradictory responses to various recommendations put forth by its sub-committee — the Malegam panel — on a policy for microfinance institutions (MFIs). But the RBI's announcement of a MFI policy on May 3, broadly on the basis of the Malegam panel's views, throws up more questions than answers on the health of the microfinance model. An analysis of the key points of the RBI's policy suggests that the apex bank may be batting more for the big MFIs, leaving aside the smaller players and, more importantly, the poor. To begin with, the fixing of the interest margin and interest rate cap at 12 per cent and 26 per cent respectively would still leave more profit margins for the bigger MFIs in a sector linked with financial inclusion and economic empowerment of the poor. According to industry estimates, the average cost of funds for MFIs varies between 12 per cent and 14 per cent, while operational expenses for the big MFIs are 6-7 per cent. So, there is actually no strong case for the RBI to fix the interest rate cap at a liberal 26 per cent, against the 24 per cent cap suggested by the Malegam Panel. Further, the RBI also seems to have turned a blind eye to the fact that, over a period of time, the incremental cost of operations would be less for major MFIs, which have a presence in a large number of States. They can also take advantage of core microfinance operations for other businesses such as sale of insurance, mobile handsets, and so on. For instance, SKS Microfinance, which has announced plans to enter into lending against gold ornaments to tide over the microfinance crisis in Andhra Pradesh, will obviously use the same field force used for distributing micro loans, with little incremental cost but with augmented income. The business models could still be viable for big MFIs, even if the interest is capped at around 20 per cent. The RBI could well have gone for a two-tiered model for deciding the caps on interest margins and interest rates, taking into account the variations in the cost of operations across major and smaller NBFC-MFIs. If the RBI really wants to protect the entire microfinance sector, it should also take into account the situation of medium and small MFIs. It also appears that the banking regulator is rather silent on some of the serious issues that came to light in Andhra Pradesh over the last year. The root-cause of the MFI crisis in that State was the over-indebtedness of the poor, driven by multiple lending. However, as against the stringent norms in the AP MFI Act on multiple lending, it has been said in the policy that an indebtedness of up to Rs 50,000 could be allowed and a single member could take loans from two MFIs. This is worrisome, as the annual income of poor (going by the data of the AP Government) is below Rs 36,000 per annum. If one could get loans up to Rs 50,000, the maximum indebtedness, there can be multiple loans of different combinations for any MFI client. This means that the poor could be constantly in a debt trap from which they cannot escape because their indebtedness exceeds their annual income. Under these circumstances, it may come as no surprise if a similar situation to the MFI crisis in Andhra Pradesh crops up in some other States, following the saturation of their markets. The need to ensure a proper implementing agency has also been ignored in the policy. The question still remains: While on-paper regulation is done by the RBI, who is responsible for on-field regulation of MFI activities? A gamut of operations — from ensuring transparency in interest rates, maintenance of interest caps, harassment-free collection and disbursal of loans, to name a few — have to be monitored very carefully. By ignoring a reasonable contention of the Andhra Pradesh Government, that the lack of an enforcement mechanism is a serious problem, the MFI policy went along with the Malegam panel's suggestion that MFIs should be self-regulatory organisations. Even for lending under the priority sector category, banks may have no choice other than to go by the interest margin/interest rate submitted by the MFIs! Given the seriousness of the issue, the RBI should have also made a reference to the AP MFI Act in its policy. The outward impression in the industry is that, along with other recommendations, the RBI had also accepted the Malegam view that there would be no need for the AP MFI Act if all of the panel's recommendations were accepted. But the fact remains that the RBI is part of the Government. It cannot be silent on an existing Act that totally contradicts the much-awaited policy on micro-finance institutions. As the Andhra Pradesh Government is adamant about continuing with its Act, it remains to be seen how things will unfold.
BLine
