Need for regulation

Need for regulation

An ordinance promulgated by the Andhra Pradesh government suspending the operations of unregistered microfinance organisations  has brought the focus on the functioning of these bodies. Andhra Pradesh has the highest number of microfinance clientele in the country and so the state of the business there is very important.

There have of late been many complaints and farmers have reportedly committed suicide, unable to bear the harassment and coercive methods used by loan recovery agents. The triggering of  suicides has been denied but after giving a margin for exaggeration, there is some truth in them. These methods go against the spirit and norms of the microfinance movement. They make them no different from the village money lenders whom they are expected to replace. 

Interest rates are sometimes as high as 30 per cent but they seem benign in comparison to compounded rates of above 50 per cent charged by the moneylender. Microfinance institutions (MFIs) also reach remote places where no banks go. Their social and economic importance cannot be overstated.

The success registered by the Grameen Bank in Bangladesh can be replicated in India if the idea is sincerely implemented. It has made strides in the country and has attracted entrepreneurs because of the huge potential. But some of the entrepreneurs are driven only by the profit motive and they seem to be using the cover of social responsibility and commitment  to make a fast and big buck.

There are many issues that can be debated. Should there be a cap on interest rates or not? The MFI’s  funds come from banks and so the rates have to be high, and the risk is higher than in the organised credit sector. But how high is high?  If the risks are high why do most MFIs make big profits?  Over-regulation is certainly harmful to the growth of a movement like this but there needs to be more regulation and monitoring than now.

Many MFIs do not declare their interest rates in public. There should be complete transparency and openness in their functioning and this should be enforced by the RBI and the government. It is for the MFIs to clean up their act and conduct themselves as responsible bodies. Otherwise they will invite too many shackles which will constrain and eventually might undo them. Politicians will enjoy making those shackles because they have smelt the big money in the small business.