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The Government should work on completion rather than command and controls:
Comments on AP – MFI Ordinance
AP is known as the pioneer and hub of MFIs and SHG movement. With this Ordinance, AP also became the pioneer in MFI regulation and much needed discussion about various aspects of microfinance in India, including the alternative channels for microfinance, especially the SHG – banking. The purpose of this note is to raise certain questions for the debate on the subject and put the Ordinance in a perspective. The AP Ordinance does not address the real issues – (1) high interest rates, and (2) SHG women’s compulsions for going to MFIs.
1. High-interest rates:
It is a well-known fact that MFIs are charging an effective interest rate in the range of 30% to 40%. MFIs, which claim that they are working for poverty alleviation and for the poor, should explain, in which enterprises the borrower can earn 40% to 50% margins to repay their loans, without jeopardizing their financial well being. In the Ordinance, there is no cap on the interest. Perhaps it is beyond the jurisdiction of the State government. However, it did mention not to charge any hidden charges. Of course, as in all Government orders, there are some exemptions. The MFIs could add all their hidden charges to their rate of interest. The Ordinance has no provisions to prevent such practice. One potential benefit of having one interest rate, without any riders, is that it would enable the borrowers to know, what they are doing. The Ordinance could also insist on quoting the diminishing interest rate instead of quoting the flat interest rate, which is a very common practice in MFIs. It, again, may enlighten the borrowers about the gravity of their borrowing from MFIs. The Ordinance did not touch this problem. However, the Ordinance has a restriction that the total interest amount should not exceed the principal amount. As almost all major MFIs collect their loan in fixed 52 weekly installments, the interest amount may not exceed the principal amount in normal cases. However, collection of loans in fixed 52 weekly installments, irrespective of loan size and purpose, itself might cause severe pressure. Loan repayment terms should be based on loan size and purpose.
2. SHG women’s compulsions for going to MFIs:
It is really surprising to any person, who is monitoring the progress of SHG – banking in AP that SHG members (of SERP & MEPMA) are going in large numbers for MFI loans. As per the macro data provided by NABARD, AP is far ahead of other states in SHG banking. In 2008 – 09, SHGs in AP got about 45% of total credit disbursed to SHGs (over Rs.12,250 cr.) by all banks in the country. Further, as per SERP reports that SHGs in AP are getting more loans and amount than reported by NABARD. E.g. As per SERP progress reports SERP SHGs alone got over Rs.6,684 cr. credit from the banks in 2008 – 09 vis-à-vis Rs.5,509 cr. reported by NABARD for the entire state. Further SHG federations in the state have about Rs.1,500 cr. corpus for lending to SHGs/ members. SHGs have about Rs.2,500 cr. of their own savings. But SHG members are still going for MFI loans at very high rate of interest. It implies that presently available funds are quite inadequate compare to the needs of SHG members. Apart from this basic factor, there are many other factors aggravating the funds available to the members. These include.
a . To meet target pressures, the banks and field staff of promoting agencies (SEPP & MEPMA) are going for new loans for SHGs, well before complete repayment of old loans. They recover the balance of old loans from the new loan amount. In this way, the actual available funds for SHGs/ members are quite low compare to the reported macro data. Further, some banks are forcing SHGs/ members to purchase some insurance or other, every time a new loan is sanctioned. In facts, some banks are directly deducting the insurance premium from the loan amounts. Some banks are also forcing the members to make a part of the loan as a fixed deposit. Because of these practices, the actual loan amount reaching the SHG/ members is substantially lower than the sanctioned loan amount. Further, some banks, mostly RRBs, are not allowing the withdrawal of loan amount for 2 to 4 months, maybe due to a shortage of funds.
b. In many federations, the primary members/ Board members are not able to manage their microfinance operations. They are heavily dependent on project staff to manage their microfinance. As there is little control by, and, the involvement of, primary members in the management of their microfinance, there are so many mismanagements and misappropriations. There are also issues of repayment
c. Though SHGs were started on the principle of ‘saving first’, over the years, the SHGs, effectively became credit management groups. There is no regular rotation of internal funds. Whoever, most probably the leaders borrowed first and are just repaying interest only regularly. In some instances, even the interest is not being repaid. An overwhelming majority of SHGs, members do not know – what is their saving amount, where their savings are, etc. There is no return on members’ savings. As result members are just saving minimum ‘only prescribed thrift rate’ regularly. There are no voluntary savings. In fact, almost all SHGs return the savings to their members periodically. Some banks are forcefully impounding the SHG savings.
d. Despite the above-described problems, SHG banking in AP is a resoundingly successful story, worth emulation in all other states. Members have been getting loans year after year without fail. This assured source of credit encouraged the members to invest higher amounts on their lives and livelihoods. E.g. SHG members have admitted their children in quality/high-cost educational institutions. Many members have acquired assets like tractors, tempos, autos, bore well, land, housing, etc on credit. They need larger cash inflows (including credit) to meet their enhanced cash outflows. Last year, due to rumors of loan waivers, there was a marked decline in repayment rates. It in turn resulted in low bank credit to SHGs. SHG members are forced to borrow from MFIs to meet their enhanced cash outflows.
Apart from the above-described cash flow related problems, there are many non-financial issues compelling the SHG members for going to MFIs. As per available evidence, some of the advantages perceived by members in MFI linking vis-à-vis AP/ SERP SHG model are described below:
|Parameters||MFI model||AP/ SERP SHG model|
|Meetings and time required||No meetings and no thrift are required to get loans||In SHGs, SERP has imposed weekly meetings and a notional thrift rate of Rs.10 to Rs.20 per week. The field staff used to recommend bank loans only to those SHGs, which opted for weekly meetings. SHG members are being used for all kinds of works like a watershed, NREG, distribution of pensions, agriculture products procurement, NTFP trade, etc and all kinds of meeting like celebrations of state functions, visits of ministers, higher officials, foreign delegates, VIPs, etc.|
|Loan processing||Simple||Complicate, lengthy and needs a number of person-days|
|Quality of service||Door delivery of loan amount and recovery of loan installments. What SHG/ members need is the clarity about their loan amount and timeliness||SHGs, even in AP/ SERP have many uncertainties about their bank loans. These are:
|Loan installments||Weekly||Though the Majority of SHGs in the state have a weekly meeting, they have monthly installments. Some members, who have daily cash flow, want to repay their loans in very small and more frequent installments.|
|Savings||No saving is required||SERP has weekly nominal thrift rates. SHGs have to pay additional amounts for weekly bookkeeping. There are no internal controls and checks and balances to protect members’ savings. There is no interest payment on members’ savings|
|Ownership over people’s institutions||No institutions to own||Though there is a network of about a million SHGs and federations, the sense of ownership is conspicuously missing on the part of primary members. The institutions from SHGs to district level federations are by and large externally driven institutions. A small proportion of leaders are also driving the institutions without real internal democracy.|
Without addressing the above mentioned crucial issues, the Ordinance proposes to put restrictions on the functioning of MFIs and borrowers. Like most of the administrative control measures, this Ordinance may result in throwing out the baby with the bathwater. The Government should focus on competition or strengthening of alternative channels to overcome the monopolistic and exploitative practices of MFIs.
However, any democratic government can not be a mute spectator to the exploitation of the poor and vulnerable sections. It is laudable that the Government has acted promptly to the problem. But given limitations of the State Government, the Ordinance has several limitations. At the same time, the Ordinance does not look fair and practical. Compliance of various provisions of the Ordinance may result in a steep increase in the cost of operations of MFIs, which may further add to the burden of borrowers. Some of the shortcomings and possible suggestions are discussed below.
|Appointment of PD of SERP and MEPMA as implementing authority at the district level||PDs of SERP/ MEPMA have stakes. Appointment of them as controlling authority over their rivals is not justifiable. Further appointment of district-level registering authorities is too cumbersome to comply. An Independent Authority may be created at the state level to implement the Ordinance/ regulations over microfinance. The Authority may be empowered to review the restrictive practices of banks, SERP, MEPM and other stakeholders.|
|Restrictions on multiple loans and membership in multiple institutions||These are the strategies adopted by the poor to get minimum/ sufficient financial and other services. Without addressing the supply-side bottlenecks, as discussed above, restrictions on borrowers only add to their woes.|
|Prior approval from the Registering Authority for lending to members, who have active loans||This is a cumbersome process, may fillip corruption. MFIs may force the borrowers to get those permissions.|
|Freezing of lending and recovery until MFIs get registered with district/ town authorities||Freezing of recovery may lead to the collapse of the MFIs in the state. Therefore, recovery may be allowed. If registration is not done within the stipulated period, they may be prosecuted|
|Exhibiting of interest rates||The Ordinance must have provision to exhibit the diminishing rate of interest instead flat rate which is widely prevalent in the sector and potential to mislead the borrowers|
|Covers only SERP and MEPMA SHG members||It should cover all borrowers of MFIs|