Government as a microlender

Government as a microlender

The Andhra Pradesh (AP) government’s plan to set up a non-banking financial company (NBFC) to make small loans to the state’s one million self-help groups with a capital of 200 crore needs a motive-check (“AP plans for self-help group members", Mint, 22 June).

One motive could be that the state government wants to plug a gap in the market and provide a service where the private sector is absent. However, AP is one of the states best served by microfinance companies and the reason for the government to step in is unclear. Another motive could be to show the private sector how to run this business without charging the “usurious" rates the private sector charged and the manner in which recoveries were made. This logic could work if there were evidence to show that the state does better than the private sector in financial services delivery. For 60 years public sector banks have failed to serve rural poor. Regional Rural Banks (RRBs) that were set up to provide credit to small and marginal farmers, artisans, agricultural labours and small entrepreneurs have accumulated losses that have eaten into the capital and deposits several times and have failed spectacularly in getting credit where it is needed. The report card of the state on both the counts is an F.

For the government to be present in an industry as a participant and be the entity setting rules is the ultimate conflict of interest and a less charitable motive would be to view this as an attempt to build a monopoly for the state in an area where the state sees a new method of rent-seeking. What gives the state the right to use public funds to get into a business that is already vibrant? Would not the money be better used to provide infrastructure, medical facilities and governance rather than seeking to replicate an RRB system that has already been shown to fail? Data shows that rural lending spikes in election years pointing to the government using state-run banks and financial institutions for political capital. We believe that the AP move is abuse of state power and a total waste of public money. The danger of this regressive move is not just that it takes us back to the time when the state was paternalistic and provider of goods and services, but that other states could follow this disastrous path. For the time being, one can only watch with dismay as the buoyant microfinance industry in AP is strangled to death. The AP moves smells of the 1970s and the draconian abuse of the power of the state.

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