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Micro matters

Micro matters
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First Published: Thu, Mar 15 2007. 12 05 AM IST
Updated: Thu, Mar 15 2007. 12 05 AM IST
Given the unique traits of microfinance, (unsecured loans, lack of credit history, et al.), it needs a specially crafted legislation. So, the Micro Financial Sector (Development and Regulation) Bill 2007, seeking to promote and develop the sector, to be finally tabled in Parliament this Budget session, is very welcome. But we have concerns if it is forward-thinking enough to help meet the goals of financial inclusion.
Growth in the sector is now a visible trend, as also a myriad of controversies, thanks to inadequate transparency on the part of the microfinance providers and excessive state-level interference. At the same time, the needs of the targeted individuals at the lowermost rungs of the economy call for flexibility in products and recoveries of micro-sized, tough-to-administer amounts. Which means any legislation has to cut a fine balance between control and freedom for creativity.
Indian microfinance providers have evolved into a range of microfinance institutions (MFIs) and self-help groups (SHGs) linked to banks. Clearly, promotion and development would happen with the inclusion of all. But the draft Bill excludes a huge chunk of the market—one that has significantly wider outreach and is growing fast.
An important corollary is that these MFIs won’t be able to accept savings—unlike others who will fall under the proposed law. The go-ahead for savings is a positive move per se—MFIs’ dependence so far on funds borrowed mainly from banks (at market rates) has meant exceptionally high cost of funds as share of total costs. Unfortunately, the move is not truly enabling, if we note the above exclusion, and the very low entry barrier for those who can take savings, which raises the risk for the poor depositor. This is a perverse move. Muhammad Yunus, head of the Grameen Bank in Bangladesh, also questions this, arguing that the Bill seems restrictive, not enabling.
There’s also a valid objection to the inclusion of cooperatives already allowed to accept thrift (read savings) by state governments—the MACS (Mutually Aided Cooperative Societies) Act has worked well by giving enough autonomy, in nine states, so far. A change may impose excessive control. Logically, the law should cover all microfinancing activities, irrespective of the form of the provider. The answer could be to include cooperatives for reporting information, not for thrift activities, as a strong database is crucial for sound policymaking.
The good news is that the government has recognized the high costs (of raising and administering funds) behind the higher interest rates and will not cap these. Equally positive is the provision of an ombudsman and accessible officers for addressing borrower grievances, but one is worried if this will be truly effective. Which raises the question why Nabard (National Bank for Agriculture and Rural Development) should be the regulator. For, not only is Nabard the promoter of the SHG-bank linkage programme and, therefore, a competitor, it also has not shown any outcomes from the microfinance development equity fund set up in 2001 for investing in MFIs that can’t access other funding.
Finally, the Bill should have covered the full gamut of microfinancial services that a poor household wants—loans, savings, insurance, pensions and at least within-country remittances for migrant labour. Financial inclusion should be read as such—coverage of the unserved, and coverage of all their needs.
At least, it’s a second-best solution for now, optimists suggest. But we would look for some basic corrections before the Bill becomes an Act.
(Will the proposed law for microfinance improve access to credit for the poor? Write to us at views@livemint.com)
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First Published: Thu, Mar 15 2007. 12 05 AM IST
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