Ramesh S Arunachalam
Rural Finance Practitioner
I was away for three weeks in Africa working with senior policy makers and hence, my silence on the blog. As soon as I came back to India, I came across a news item yesterday that said that the RBI is going to implement most of the Malegam committee recommendations from April 1st
I have serious reservations about some of these recommendations and would humbly request India’s Central Bank and the Malegam Committee to get deeper into these recommendations before implementing them. There are several issues here and I highlight them sequentially:
First, while the spirit and overall approach of the Malegam Committee Report (MCR) is commendable, its attempt to provide client protection through ‘artificial barriers’ must be strongly questioned.
While aspects related to Corporate Governance, Systems and other such aspects for NBFC MFIs are non-negotiables and need to be solidly enforced through a regulatory stipulation and also supervised diligently, the aspect of artificially restricting client level of borrowing, placing emphasis on the household income as an eligibility criterion and such aspects are practically untenable. As someone who has worked in over 550 districts in India and several other countries over the last 23 years, I can vouch safe that such measures cannot be enforced on the ground. And also, as these aspects cannot be supervised with any degree of reliability, they should not be regulated at all. And if this still needs to be done, it may be better to influence these by incentivising the appropriate behaviors through provision of preferential priority sector credit (and/or other incentives) for livelihood loans, loans lesser than Rs 50000 and the like
Client protection will not and cannot occur through restrictive regulation and the RBI must seek to regulate and supervise institutions for their governance, minimum systems, use of agents and the like rather focus on such client level issues. Client protection is best achieved through a program of enhancing financial, other literacy and empowerment of clients and making sure that clients understand what they are getting into when they borrow such large amounts from (many) MFIs
A second issue is the aspect of the Malegam Committee Report (MCR) trying to artificially scale up the Indian micro-finance industry and the associated presumption that this scaling up will automatically reduce interest rates and solve other problems. I would like to re-emphasise that much of the colossal damage that occurred in AP and other parts of India were caused by the large and fastest growing MFIs and the interested reader may want to look at the blog posts (given below) in this regard.
I have already provided solid data on how these large and fast growing MFIs grew and the havoc that they caused on the ground. Ignoring this (hard evidence) certainly spells doom in the long run for the Indian micro-finance sector
Therefore, it seems that the MCR is sort of self-defeating when it espouses the argument of “artificially” pushing MFIs to scale up. While being large may not necessarily be bad, let us not forget recent micro-finance history in India which suggests that very fast paced growth and bulldozed commercialization led to much of the problems in Indian micro-finance. Therefore, I clearly feel that the shortsightedness of the MCR in merely encouraging scaled up micro-finance - as a one stop shop solution - is a recipe for disaster. I sincerely hope that the committee and RBI take a re-look and focus on all necessary aspects of the regulation (= Governance, Systems in MFIs, Use of agents etc) and try and weed out those (like artificial client protection and scaling up measures) that could prove counter productive…
Have a great day!
Some relevant blog posts