|Respite from Malegam|
|Thursday, 05 May 2011 00:00|
With even erstwhile critics of the Malegam Committee report—mainly big microfinance (MFI) firms—hailing the new RBI guidelines on MFI lending, it’s obvious RBI has diluted the Malegam recommendations. Since the Malegam Committee was set up in the aftermath of the political problem in Andhra Pradesh where politicians said MFIs were ripping off poor customers and legislated against MFIs—and there was a danger of this spreading to other states—Malegam suggested putting a cap of 24% on what MFIs could charge, RBI has raised this to 26%; Malegam suggested a margin cap of 10-12% for different types of MFIs and RBI has adopted the upper end of the ceiling. The biggest changes are in the caps on the maximum amount of loans that can be given, the absolute level of indebtedness of the borrower and an income ceiling beyond which loans can’t be given. So, Malegam was of the view MFIs should restrict their loan to R25,000 and that this also be the ceiling for overall indebtedness of the borrower; in addition, it suggested that loans be given only to families whose annual income did not exceed R50,000. Since this would mean really restricting MFI lending to very poor households which would probably ensure a poor repayment record, RBI has doubled the individual loan ceiling as well as the overall indebtedness; as for the maximum incomes of households who can get MFI loans, this has been raised to a more meaningful R60,000 in rural areas and R1,20,000 in urban areas.
That said, some big glitches still remain, starting with the overall approach of a cap on lending rates. By its very nature, a cap means MFIs will not lend to more risky segments, so this means the more vulnerable borrowers will have to stick to moneylenders. Since the Malegam Committee had said interest on MFI loans range from 31% to 51%, with an average rate of 37%, the 26% cap suggests a sizeable section won’t be entitled to MFI loans. While Malegam suggested a cap of 24%, and gave a normative costing model, the committee assumed costs lower than what it said was industry practice—the average staff costs were 8% according to Malegam, but while coming up with the 24% ceiling, Malegam assumed a 5% staff cost. There are several other such instances. Most problematic is the restriction that at least 75% of the loan given has to be for income-generation. The only study Malegam cites says just a fourth of MFI loans are given for income-generation! Such a stipulation will further lower the scope for MFI lending. There is nothing wrong with RBI wanting to restrict the exposure of banks (after all, MFIs get loans at the lower priority sector lending rates from banks), but it should be clearly understood the various caps/stipulations will restrict lending.