Sans pragmatism

Malegam Committee On Microfinance 

The report of the Malegam Committee set up by the RBI to look into the problems of microfinance institutions (MFIs) disappoints.One recommendation seeks to make at least the bigger MFIs more robustly regulated,by converting them into a special category of non-banking finance companies,NBFC-MFIs.Where it falls short is that it fails to draw a line between the ideal and the feasible.Many of its recommendations,such as the cap on interest rates (24%) or on the interest margin,will be near-impossible to enforce.Such caps have not worked in the past and are unlikely to work in the future.Even assuming,for the sake of argument,that they can be enforced,strict enforcement will only drive potential borrowers into the arms of moneylenders.Likewise,it is going to be near-impossible to ensure compliance with the multitude of conditions required to qualify as an NBFC-MFI it must provide financial services predominantly (90%) to low-income borrowers (specified as those with annual family income of less than.50,000),loans must be unsecured,for small amounts and for short tenure,mainly for income generating activities,etc.Or to prevent those that do not qualify as NBFC-MFI from lending more than 10% of their total assets to the microfinance sector.It is wellknown that MF loans are largely of the nature of bridging loans that help the poor tide over a consumption-related funds crunch.Hence,insistence on loans being made primarily for income-generating activities may,once again,detract from their allure.