Yes, they will, but indirectly Not directly, but definitely. The effect will be through the reduction in the number and outreach of MFIs, particularly in the financially excluded regions, where moneylenders thrive. By putting a ceiling on interest margins (10% for MFIs above . 100 crore of loans and 12% for smaller MFIs) as well as on loan size (no more than . 15,000 for a one-year tenure), the Malegam committee report (MCR) will push MFIs to lend in those regions where operating costs are lower.
This will lead to a complete neglect of financially excluded states like Uttar Pradesh, Bihar, Jharkhand, Madhya Pradesh, Chhattisgarh and the North-eastern states, because legitimate operational costs in these regions make it impossible to operate with an interest margin of 12%.
Even within states, the same problem will arise — for example, in Maharashtra, MFIs will hesitate to work in the poorer Vidarbha and Marathwada regions.
Another effect of the MCR will be that MFIs will hesitate to give out loans below . 10,000, which are just not remunerative at the 24% interest ceiling, and these will be replaced with loans as close to . 15,000 as possible.
This will lead MFIs to discourage smaller borrowers, most of whom are women. Women engage in rearing small livestock like goats, and in activities such as vegetable vending, bangle selling and running tea and bhajjishops, which can generate a living wage by employing as little credit as . 3,000.
As MFIs would no longer find it possible to lend to such borrowers, they will either have to drop the activity altogether or go back to wholesale traders-cum-moneylenders who lend typically at 10 to 15% per day.
Finally, by raising the entry level capital requirement for MFIs to . 15 crore and specifying a minimum capital adequacy ratio of 15%, the MCR ensures there are no MFIs below . 100 crore.
But it is smaller, localised MFIs of . 10-20 crore size which reach the poorest borrowers in financially excluded areas. This is the third way the MCR will drive poor people back to moneylenders. Of course, none of it was intentional, I am sure!
Chairman, BASIX & President of MFIN
No, recommendations will help MFIs The refrain that the Malegam committee report will push poor women back to the moneylender is quite unfounded. First, we need to distinguish between reaching the unreached and multiple-financing of the already-reached.
Indeed, there are areas where, other than the moneylender and the primary agricultural credit cooperative, only NBFC-MFIs have reached. In these areas, any obstruction to their lending may well drive current borrowers back to the moneylender — though how the Malegam committee report can obstruct their work is beyond comprehension.
That said, NBFC MFIs often work in areas where self-help groups have already been established. They are not really reaching the unreached. The Malegam committee received several reports of multiple financing by different NBFC-MFIs to the same persons, and also of multiple loans to the same household. There has been some talk that smaller MFIs need higher margins than suggested by the committee.
If one reads the committee's report with a discerning eye, one will notice that the smaller MFIs have done much better, working on lower costs and margins than larger MFIs.
NBFC-MFIs resemble moneylenders. And just as moneylending laws remain ineffective against moneylenders, it will be impossible for any law or regulation to ensure that hundreds and thousands of NBFC-MFIs dotting the countryside act responsibly.
This is one reason why we felt the need to have MFIs grow into larger institutions. In 2009, the top 15 MFIs had 85% of the total loan portfolio. In other words, the bulk of the MFI business was anyhow being handled by the larger players.
The Malegam committee has attempted to respect the original mandate of MFIs, to respect their need to be profitable and grow, and to provide the support they need in terms of access to priority sector loans, social capital funds and so on — of course, with much stricter supervision. None of this should come in the way of any responsible NBFC winding up its MFI business and resulting in poor women turning to the moneylender.
Member of the Malegam Committee
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