Ramesh S Arunachalam
Rural Finance Practitioner
The issue of interest rates has always been hotly debated and I, for one, am not for capping interest rates of MFIs as servicing the last mile in micro-finance is indeed costly. That said, we however need to be absolutely transparent about interest rates in micro-finance and here is where I really appreciate the work of MF Transparency. However, as I travel through the field, my sense has been that there is a huge difference between intended and realized interest rates (both for nominal and effective interest rates). Part of the issue has been the use of the agent led model but even otherwise, I believe that there are huge differences between the intended and realized interest rates and please also recall that the media (in AP) had reported huge effective interest rates for some MFIs, after they had submitted data to the AP government, which were later explained away using the classic data error/data conversion concept.
Please recall that the RPCD division of the RBI did a great study on interest rates and the MFI model in Orissa in 2006. Therefore, I would like the RBI to do a national study on interest rates, agent models, shared JLGs/clients, on-going/prevalent multiple lending and the like – unless, it is done by the RBI, establishing their prevalence would be impossible and without that, corrective action cannot be taken. I would also urge RBI to video record the data and documents so that, there is absolute transparency and clarity on the ground situation. Otherwise, the MF industry, will continue to be in a denial mode which is okay but will not help us tackle the problems at hand.
Please read the tables on interest rates at the end of this post, taken directly from the e mail sent by APMAS and being used with their permission. I did not put up the individual calculations earlier but am doing so now (after randomly verifying some of the data which have been correct) and I have the exact file sent by APMAS via its e mail for proof. While I am no expert on calculating interest rates, I have cross-checked the calculations and they seem correct prima facie, to the best of my knowledge. Experts globally can use the same data set and come to their own conclusions. As always, I have protected the individual identity of the MFIs as well as their clients but that is also available for verification by RBI or MoF if required
Before, I sign off, I would like to relate a story from the Wizard of The Id
There was a king who was at battle with the enemies and one day, he was sitting in his chamber, when a soldier walked in and said:
“Your highness, Sir Rodney has come in with the Battle Report”
The kind told the soldier:
“Send him inside”
Sir Rodney walked into the Kings Chamber and as he was doing so, the King told him:
“Before you start sniveling you mush face, let me remind you of an old Roman custom. Bearers of Good News were rewarded with Wine and Wealth. Bad News brought unmentionable suffering to the bearer. So what is the Battle Report”
Sir Rodney to The King:
“Your Highness, I am tickled pink to tell you that your worthless fiefdom, mucky swamplands and unruly peasants are now the Responsibility of the Enemy”
I hope that the moral of the story is clear and the Indian micro-finance industry and its stakeholders begin to act to rectify the fast eroding ground situation…
Have a Great Week End!