|Friday, 21 January 2011 00:00|
When microfinance major SKS’s shares rise 13% on news of the Malegam Committee report on MFIs, it’s obvious the report has said all the right things. And so it has when it concludes that RBI has to be the sole regulator for NBFC-MFIs since they, together with banks through the SHG-Bank linkage programme, pretty much cover 90% of the microfinance space. The margin cap of 10% has also been cheered by the market since the bulk of SKS’s loans are within this band. The decision to insist on transparency in interest rates charged, credit bureaus, restrictions on the number of MFIs that can lend to one person are all welcome moves and, to a large extent, will correct the perception that MFIs were taking hapless borrowers for a ride.
But many recommendations should sober the market as well as policymakers who’re looking at more than just grandstanding. First, there is enough evidence, in India as well as globally, that price caps hurt the market—the interest rate caps will ensure MFIs don’t lend to certain categories of more risky borrowers or those with smaller credit needs since these require higher interest rates to be viable—the ceiling of Rs 25,000 on the outstanding loan any borrower can have is part of the same problem. The stipulation that at least 75% of the loan has to be for income generation purposes is another antiquated idea—indeed, while the industry average is that 50-60% of loans are for consumption purposes, the only study the report cites puts the income generation share of loans at just 25%. Yet, that didn’t make the committee members pause to think this would just lead borrowers straight into the clutches of moneylenders. Equally curious is how the cap has been justified. The report cites, for instance, staff costs for larger MFIs as between 5.9% and 14.3% of the outstanding loan portfolio, an average of 8%. Yet, when doing the math, it uses a staff cost of 5%. Ditto for most other costs like those of raising loans and other overheads. Malegam says industry costs are high because it is loading development costs on borrowers instead of amortising them over a longer period—many in industry disagree, but ignore this. The important point is that a large portion of industry is going to get hit by the cap. Protecting MFIs is not Malegam’s brief, but if MFIs shutting shop means more business for expensive moneylenders, that can’t be a policy objective. Also, it is by no means a done deal that the Andhra law will automatically be repealed just because of Malegam; it will require some persuasion by the central government and who’s to say when that will happen. So keep that champagne corked. For now, it’s Round II to the bania.