Sans pragmatism-Malegam Committee On Microfin

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 well-known 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.


The committee is aware of these dangers. It points out that a balance has to be struck between the benefits of restricting loans only for income-generating purposes and recognition of the needs of low-income groups for loans for other purposes. But its recommendations do not seem to have taken into account the ground realities.

To the extent MFIs service 26.7 million customers with outstanding loans of 18,344 crore, of which about 75% is bank-financed, there is a need to keep an eye on them. But with an eye also on the cost-benefit trade-off and a danger of spreading regulatory resources too thin. In any case, the real threat to microfinance is from politicians who instigate loan default promising an inevitable waiver.