Regulating the MFIs
MURUGAVEL
MFIs are back in the news and once again for the wrong reasons - or probably the right ones. I am not talking about the sacking of Suresh Gurumani as SKS's CEO - days after the successful IPO.
The AP CM has again raised issues about the interest rates being charged by MFIs and has sought regulation of MFIs. Reports talk of some MFIs charging effective interest rates as high as 45% and about the farmer suicides ( The average lending rate is around 27-30%). A few years back - roughly 5 years back ( during Dr YSR's time) too, the AP Gov raised this as an issue. Issues have time and again been raised about the way MFIs do their business ...the only thing that remains to be done is regulation.
Most of the MFIs have ROA well above 2 % (SKS reported 3.07% ROA and Spandana - for instance reported an ROA of around 4.68%) in contrast to the ROA of around 1 to 1.5 of scheduled commercial banks ). There is a resistance among MFIs to bring down the rates. For instance SKS justified the ROA as being 'justified and appropriate' as the business was unsecured. While on the face of it , it appears a correct reasoning, the fact is that - the social / peer security structure that works when lending is done is as effective - if not more than secured lending. Most MFIs report neglible portfolios in stress ( basically overdue portfolio). The on-time repayment rates are upwards of 98% and ultimate repayment is much higher. Infact most MFIs trumpet this achivement of on time repayment when they seek funding assistance from banks , who would naturally be wary of lending money for on-lending small and unsecured amounts. It requires ingenuity to use the same point to argue both ways !
40% interest and 3% ROA are only a shade better than what money lenders make. And that ' shade better' is because these MFIs are sophisticated, organized , - some owned by management grads from premier institutions and have letter pads ....
SKS has the following mission statement
'Our purpose is to eradicate poverty. We do that by providing financial services to the poor and by using our channel to provide goods and services that the poor need'
The only point that I used to keep pondering over was ' whose poverty are these MFI's seeking to eradicate' ?. With the phenomenal success of SKS's IPO, I think I have the answer.
Regards
Murugavel
Vikas Singh
The issue of MFIs charging very high rate is almost as old as perhaps the MFI industry itself. The issues have been raised many times by many stakeholders. Therefore, it could be safely assumed that it is not the case that regulators or those who are responsible to solve this issue are not aware or do not recognise it. And once the issue is recognised, as we have already, the next logical step is to take action to solve it. Then, why there is no action being taken.
I can think of two possible reasons. One of them was also suggested by one of the high level officer from RBI Chennai during our summer project presentation. It was told that the MFIs are currently providing credit to those who were un-served by other formal channels. If RBI steps in and makes tougher regulations for the MFIs, it may turn out to be counterproductive. There is a chance of eliminating that source also from the hands of poor, who are otherwise in the hands of merciless unorganized moneylenders only. However, if the MFIs are allowed to continue, the market forces may finally do the correction in pricing and the rates may go down. If regulations make it difficult for MFIs to function than they will stop functioning (or at least slowdown their growth) and the regulator will be in even more difficult situation as one of its responsibility is to ensure nationwide financial inclusion.
However, at the same time he also argued against the banks for showing their inability to go and lend to poor. As per him the arguments given by bankers are that the cost involved in extending the facilities to the poor will be high due to extra operating cost. However, the counter argument was that they are willing to spend a big amount of salary and operating cost to serve a minority of population but at the same time they are not willing to increase that cost even marginally to serve the remaining large section of population.
Although the argument given in above two paragraphs hold some water the reality does not seem to be entirely that. If the MFIs are making really very good profit and the regulations will make it somewhat tougher why it would suddenly become completely unprofitable for the industry to continue the business. The regulations are not meant to kill the industry. Regulations are only to control the untenable manners in which they are functioning. Also, it will bring discipline in the industry and perhaps improve the system further. Therefore, I believe that their apprehension is unnecessary and unfounded.
The second reason that I believe is that there is something more going on under the cover than what is visible to outsiders. Perhaps the so called humanitarian and generous MFIs are actually being generous to the politicians or government. Or the government might also be afraid that if it pushes this issue harder and instructs RBI to intervene than other parties may take-up this issue and show government as anti-poor.
No one seems to take risk, neither government nor the regulator. And at who’s expense?
BIM, Trichy (26th Batch)
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DC
Since to see a debate about the way MFIs works. Attached an interview
of Vikram Akula (Founder of SKS) as a file rather than copying and
pasting it here.
Before concluding anything about the way MFIs works in india, we need
to see both side of the story.
Thanks
DC