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Monday, 01 November 2010 00:00
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The problem in rural areas is not MFIs, it's banks, actually the lack of them

According to IIMS Dataworks, just 20% of rural folks borrow from banks and 8% from self-help groups that are, in turn, financed by banks

While the finance minister has done well to clear the air on micro-finance institutions, at the Economic Editors’ Conference in the capital a few days ago, the situation on the ground is quite different. The FM said he’d asked Andhra Pradesh chief minister Konijeti Rosaiah to take care of the harsh provisions of the state’s MFI ordinance, but what he was probably not aware of was that, till the report of the RBI panel headed by YH Malegam comes out, banks have started going slow on lending to MFIs—none want to be caught on the wrong side in case Malegam recommends some action against MFIs. So it’s not just the Andhra ordinance that has made it difficult for MFIs to function, the lack of bank loans is doing the rest. Of course this cuts both ways as the banks lose business—to the extent borrowers in Andhra stop repaying loans since the government has made it clear it will protect them against ‘harassment’ for repayments, even the banks will be hit, since 80% of MFI loans are monies they have borrowed from banks. Of the Rs 21,000 crore that banks have outstanding to MFIs, roughly a third comes from private banks.

 

A close look at the data makes it clear just how misplaced all the fuss is. According to the Invest India Economic Foundation’s IIMS Dataworks, just a little over one-fifth of the total borrowers in rural areas in 2007-08 actually went to banks for loans; another 8% or so went to Self-Help Groups that are, in turn, funded by loans from banks. As for the rest, 36% went to friends and relatives and another third went to moneylenders. The share of MFIs was just a little over 1%. All this fuss about lenders with such a minuscule proportion of total lending?

This has probably changed since MFIs are growing at a rapid pace, but the real story here is not about the MFIs, it is about the banks-SHG hardly being there. This is the real scandal, not the so-called usurious rates the MFIs are charging, but none of your Andhra politicians are talking about this. So much for all the talk of a government that cares so much it will not see any of its citizens having to pay high interest rates for their loans.

Interestingly, the government-led SHG programme, is rapidly losing market share to MFIs. Nabard data show that bank lending to MFIs was Rs 1,585 crore in 2006-07 as compared to Rs 12,367 crore to SHGs—that is, MFIs got 12.8% what SHGs did. By 2008-09, MFIs got Rs 5,009 crore versus Rs 22,680 crore for SHGs—the MFI share was up to 22.1% in two years.

The IIMS data, in fact, points to even more serious problems in rural lending structures. A fourth of all bank depositors in 2007-08, it found, were going to moneylenders for loans! So these people had money in the bank at various points in time, but the bank procedures ensured that they were not considered creditworthy—this figure is probably a lot higher now because of the proliferation of no-frills accounts. Nor is this because the loans were being taken for consumption purposes. According to the IIMS survey, over 70% of rural housing loans were taken from informal sources like relatives and moneylenders in 2007-08. That this should be the case in housing loans is important since housing loans offer good collateral and so should have been a sector banks would be willing to lend to.

All of which begs the question that if MFIs are to be put out of business, what is going to replace them? In the long run, once banks get their banking correspondent network in place, banks could well see their market share rise as lending rates have been freed up with the PLR being replaced by the Base Rate, but for now, the chances are the moneylender will just tighten his grip despite the higher interest rates charged by him.

Given the furore over the interest rates MFIs charge, it is instructive to look at them closely. The best way to do this is to look at what an MFI earns in a year, and compare this with the cost of setting up the network to service these operations. Once you do that, the numbers you get are quite revealing. According to Sa-Dhan, the median return on assets and return on equity for 264 MFIs was 1.6% and 11.5%, respectively. This is by no means high. Assuming that the government doesn’t believe these figures, why not ask RBI or banks how much it will cost them to start lending operations in rural areas—add that to the cost of funds and chances are banks will have to lend at higher rates than most MFIs.

Cracking down on MFIs for their high lending rates is a bit like cracking down on private grain traders for profiteering while the real issue is why the government’s PDS is not reaching more than a handful of states. Since the NAC has tried to solve this problem of the PDS not working by expanding the scope of the PDS by around 50%, going by the increase in PDS outlays caused by the change, perhaps the next NAC agenda item should be a Mahatma Gandhi National Rural Loan Guarantee Act?

 

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