Dr.B. Yerram Raju and
Dr. V. Jalma Rao
1.Unequal access to finance is associated with unequal productive opportunities:
MFIs have come to stay and they are reinforcing the efforts of the RBI in ensuring financial inclusion of the poor to ensure one, economic growth at 7.5 percent per annum and two, to see that the growth percolates to the poor. ‘Almost all micro-enterprises operate outside the formal legal system, contributing to widespread informality.’ The unorganized and informal firms at the micro level are moving more into services sector than manufacturing sector. Therefore, at a time when they are unlearning the old and relearning new ways of doing things, easy access to finance ensuring equal productive opportunities for the poor is extremely important. With all the efforts made so far, the average loan disbursed is a meager less than Rs.5000 per individual.
Rules that constrain market entry and expansion would have a chilling effect. How should these rules be framed and who should frame these rules?
2. Enforcement Systems:
The UN document on UNLEASHING ENTREPRENEURSHIP: MAKING BUSINESS WORK FOR THE POOR says: “Cruel and arbitrary informal enforcement systems limit the ability of entrepreneurs to be productive as well. Local debtor prisons and mafia-like punishments can hurt an entrepreneur’s full access to crucial human inputs.” A like system operating at the firm level is more disastrous in the guise of informality and easy access. Will self-regulatory mechanism be the best option for MFI-growth and entrepreneurs getting a level playing field in the market-led environment?
3. Structural Issues:
The long term future of the micro-finance sector depends on MFIs being able to achieve operational, financial and institutional sustainability. Some of the NBFCs operating need to reach the threshold levels of equity prescribed by the financial regulator. Without disturbing the flexibility in the structure and content of MFIs, what conditions should the regulators prescribe for their engagement in the activities they are pursuing? Or should the structures be subject to a critical scrutiny to ensure the objectives they intend to serve keeping the safety, security and liquidity as the cardinal principles governing the delivery of finance? Is there a need to prescribe minimum responsibilities, and functions that are to be carried out by the MFIs? What is a better delivery model?
4. Interest Rate Regulation:
‘For financial institutions, expanding the client base has much to do with scale, which is often too small.’(WDR 2006,p183) Overcoming high transaction costs for small volumes and the large cost of expanding reach is a major challenge. ‘Microfinance is best viewed as a complement and not a substitute for more equitable financial reform and core financial development.’(ibid) There are number of instances dotted all over the globe-Bangladesh, Afghanistan, Philippines and India, lately, where microlending has not always been a happy outcome. In the context of less transparent balance sheets of a variety of MFIs large-scale defaults in microfinance go unnoticed. Hedging high administrative costs and loan losses in interest rate risk cover could lead to excessive interest rates. In a liberalized financial environment what would be the best means of regulating interest rates of the MFIs?
5. Regulations and Governance:
Government of India recently announced that it is examining the prospect of tabling a legislation empowering NABARD to regulate the growth and functioning of MFIs as the Reserve Bank of India is overburdened. Can NABARD implementing the Bank linkage programme of SHGs be also a regulator? Will there not be a conflict of interests?
What to regulate, when to regulate and how to regulate arise from the objectives and interests these MFIs intend to serve.
What should be the governance structures of different MFIs operating in the country?
In a liberalized environment, where multiple firms operate in diverse situations, protecting the interests of the vulnerable becomes the state responsibility. Is it necessary to incorporate rules of boundary management so that excessive state interference does not drive away the enthusiastic MFIs from helping the poor? If so what could they be?
Plurality in regulatory mechanism:
There is a plurality in regulatory mechanism -RBI, GOI and State Governments. How should this plurality need addressing as plurality by itself may be required in terms of the roles that different agencies need to discharge?
6. Systemic and human failures:
Players in MFI sphere require being distinguished on several fronts: players with consistently good performance players inadequately performing, players badly performing and some medium players who are entering new areas with confidence deserving encouragement. Those who committed mistakes should be made to learn and quickly correct themselves.
There are institutional maladies and systemic failures. These need to be carefully analyzed and appropriately tackled. These require a particular speed of correction and transparency so that they would not decimate the structures affecting the interests of the poor. How should this be done? Who should oversee this operation?
Market-oriented business systems accommodate a variety of firms operating with a symbiotic relationship. When it is established that the outreach to the neglected sectors of population pursing limited economic agenda, like the women, small and marginal farmers, tenant farmers, non-farm micro enterprises engaged in exploring livelihood opportunities etc., would be possible only through MFIs, informal structures need to be preserved and protected to ensure financial inclusion. There is plenty of reason for hope.
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