Mumbai: Andhra Pradesh’s principal secretary Reddy Subramaniam is one of the architects of a controversial microfinance law the state introduced last year after a series of suicides reported due to alleged coercive methods by some microfinance institutions (MFIs) to get their money back from poor borrowers. The state government is now ready to set up an apex cooperative society in the state to give loans to millions of poor borrowers, at much cheaper rate.
In an interview, Subramaniam justified the state’s decision to introduce the law, the idea of floating an apex cooperative society, among other issues. Edited excerpts:
What’s the idea behind launching a government-controlled cooperative society?
There is a need to boost the credit availability of rural poor, especially when they do not avail loans under the self-help group (SHG)-bank linkage programme. The MFIs have tried to take this space. Although there is nothing wrong in it, what they are providing is high-cost money, which the borrowers are not able to service. We thought to have a peoples’ body which can be built on the strength of the people. Unlike in other states, in Andhra Pradesh there is a huge strength of SHGs. We want to use this strength.
There is a fear that this new firm will crowd out MFIs.
The point is that we are not for or against any particular sector. We are only for the poor who need credit at a reasonable rate. Naturally, inefficient MFIs, whose cost of operations are high, will be out of the picture, because they don’t address the requirement of the segment they are trying to serve. There is absolutely no comparison between the two. SHG is a people’s body, whereas MFIs are a business venture. It is not as if there are two private players who are trying to compete with each other.
How will the new body raise funds?
The strength of the apex cooperative society is one crore members of various SHGs operating in the state. The society would mobilize the savings of these poor women. There is already a resolution that every member of SHGs will save Rs 50 per month from now with this apex society. That means Rs 50 crore monthly deposit mobilization and Rs 500-600 crore every year. This is one major source. Primarily this is going to be their resource mobilization strategy. There will be other methods, including assistance from banks.
A section of the market believes you won’t be able to sustain the model.
The proof of a concept is in experiencing it. You will see it becoming fully operational. There could be difficulties and we are aware of that. We are confident we will be able to push this forward despite problems.
How will you give cheap loans?
MFIs are operating to make profits out of their lending operations. This is a cooperative society, supported by government. Primarily, it is the SHG members’ own money. There is a radical difference between the two.
MFIs’ operating cost is as high as almost 20% in many cases, that is why they charge 30-36% rates. Their level of efficiency is very low. On the other hand, the society operates through people. The entire due diligence is done by gram samakyas and loans will be given through mobile banking and e-banking system.
What is your assessment of the MFI sector after the state law was introduced?
The situation is still evolving. When we talk about making credit available to the poor, the situation is still unsatisfactory. That is why we are very keen to see that this particular society (new firm) gets going. It will start operations from 6 October. The MFI industry is going through a process of churning. There is a lot of thinking of where they have gone wrong and this is good. They have now agreed to restructure loans of poor borrowers.
Some believe that the state law should have targeted only faulty MFIs and not the industry.
The problem was with the business model and not with individuals. We have nothing against anybody in person. All of them are good. But their operations were inefficient. They used coercive methods, violating the fundamentals of financial prudence. They tried to drive credit into the rural economy by a target-based approach without looking at the credit absorption capacity.
Everybody did the same mistake, although some of them were better. I have great respect for people like Vijay (Mahajan) but I have a problem with the business model, even with Basix (Mahajan’s firm), although it is somewhat better than others.