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A bulging microfinance pocket

A bulging microfinance pocket
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First Published: Wed, Feb 02 2011. 08 17 PM IST
Updated: Wed, Feb 02 2011. 08 17 PM IST
It is evident from a report that appeared in The Economic Times a few days back and another, which is being run in Mint, that the chief executives of microfinance companies get paid a lot of money (it would be accurate to say that in most of these cases, they pay themselves a lot of money). Mint’s report shows that some of them earned far in excess of what the CEOs of large and efficient state-owned and private banks did. The message behind the numbers is clear: These people view microfinance as a for-profit business; ergo, that’s how it should be treated by the media, regulators, and the government.
Yet, it isn’t only the microfinance companies themselves that have done the business of microlending a disservice. A committee set up by the Reserve Bank of India is an equal offender—and for two reasons. One, the committee, headed by the venerable Y.H. Malegam, has chosen to look at microfinance in isolation. In a country like India, these firms have the potential to serve as vehicles of financial inclusion—for not just credit, but also insurance and other financial products. Many of them have the networks and business models required to access hitherto unbanked or unserved areas. Two, after having first recommended some inexplicable norms for microfinance firms, Malegam, in subsequent interviews with several publications, has suggested that everything is negotiable. Which doesn’t take us back to where we were in the first place, but does take us close.
The success of microlenders shows the existence of a market for their services, and also highlights their ability to reach places banks could not. The commonsensical solution to the problems facing microfinance would appear to be to treat it as a business, but a priority sector one, which would mean that banks continue to perforce lend some proportion of their money to such companies. These institutions should then be made to follow all the laws of the land—those pertaining to companies, banks, non-banking financial firms, and microlenders themselves. This will not just address the issue of the obscene salaries, but also ensure that microfinance companies continue to play a part in India’s financial inclusion efforts.
Is high compensation for microfinance CEOs justified? Tell us at views@livemint.com
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First Published: Wed, Feb 02 2011. 08 17 PM IST