Getting regulation right

Getting regulation right
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First Published: Tue, Nov 02 2010. 08 25 PM IST
Updated: Tue, Nov 02 2010. 08 25 PM IST
Microfinance in India is undergoing an upheaval that may determine the future of the sector— one that can go some distance in furthering financial access. In itself, such churn isn’t bad—it helps redirect and strengthen business processes, and checks the entry of unscrupulous players. But it is important that this nascent sector be channelled in the right direction.
Accusations of coercive recovery practices and resultant borrower suicides against microfinance institutions (MFIs) haven’t been substantiated. But they have added to suspicions about “usurious” interest rates, and the travails of SKS Microfinance have generated concerns about corporate governance. In this uncertain environment, regulatory reflexes have been prompt.
To be sure, there are indications that profiteering has crept into the sector in the wake of commercial successes such as SKS, especially in the lower rungs of MFIs. These tendencies need to be reined in. And while repayment rates have been decent, the anecdotal evidence on coercive practices should not be altogether ignored.
But private MFIs remain structurally superior to state-led financial inclusion measures. The prime among these, the self-help group-bank linkage programme, suffers from bureaucratic shortfalls that MFIs have overcome, making the latter more accessible to borrowers.
Thus, it is difficult not to see the Andhra Pradesh ordinance as legislation that protects state enterprise by putting a leash on private entrepreneurship. Andhra, with its high concentration of MFIs and a pro-poor government, is particularly prone to such a public-private face-off. Knee-jerk regulation, which seeks to arm-twist business, is typical of an ill-governed state. The irony is that this only weakens the governance mechanism.
The finance ministry directive to banks to monitor MFI lending rates has been another setback. The high rates have some economic justification, though the larger MFIs have the space to lower rates. But crimping credit lines to MFIs based on a flawed socio-economic argument would likely hurt the small microlenders, many of whom provide the real social backbone to the microfinance business.
As microfinance gets bigger, there is surely need to regulate it. But capping interest rates and curbing the operating flexibility of MFIs will be akin to throwing the baby out with the bathwater.
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First Published: Tue, Nov 02 2010. 08 25 PM IST