Affordable Microfinance
Microfinance services have been making significant impact on the lives of the poor. Access to financial services has enabled poor to pursue their livelihoods for economic upliftment. There has been a dominant discourse in the world of microfinance that since poor has generally been excluded from the mainstream financial system that mere access to financial services would make the difference in the lives. Now with more than a decade of practice and experience in India, this myth has been exploded. What we have witnessed is that the access has come at a high price and the poor has been struggling to pay for the services.
From a poverty reduction perspective, this approach has proved quite counter productive to the very objectives that we set out to achieve. Poor is increasingly getting exploited. Mere access will not help. How affordable microfinance services are?
The stakeholders are now concerned about the issue of pricing. While it is nobody’s case that microfinance programmes shall be made sustainable by prop of grant, what is important to understand given the development perspectives involved, microfinance needs to be in the realm of development finance? And development finance doesn’t mean that the financial operations shall have to be subsidized. By the same token, it shall not brook unbridled commercialisation. In other words, microfinance shall be run as a sustainable business covering the cost and risk at a reasonable price. What is of concern now in the sector, is the streaks of commercial financing getting stronger and stronger and the whole purpose is getting drifted in the commercialisation process with intent of reeking in profits bordering on profiteering. De-regulation doesn’t mean freedom to charge interest rates, which are clearly exploitative. Laissez faire is not license for usurious practices. Laissez faire calls for greater responsibilities and restraint. It is incumbent on all the stakeholders to ensure that micro credit delivered to the poor is affordable. Access alone will not help.
Pricing of micro credit
It is a matter of concern that instances of charging exorbitant interest rates in the sector are on the rise. The price differential in the market between the mainstream system and MFIs so glaringly wide by more than 20% points clearly and justifiably attracts adverse attention. While it is well accepted that MFIs cannot match commercial banks in the interest spread, with volumes in the banks driving the spread to new lows, the present levels of spread in MFIs lending are clearly far from being reasonable and justifiable.
Therefore, there is a price to be paid to ensure affordability of microfinance for the poor and we need to evolve a mechanism for price watch for monitoring the interest rates, may be at the state levels with SLBC acting as a nodal agency. The sector could also think of evolving dynamic / flexible bench mark reference rates to be charged for various contexts – rural, urban, tribal, coastal, desert, etc., at client level by MFIs in each state involving all the stake holders under the over all monitoring of RBI. Self-regulation by the sector with strong commitment to transparency is the key towards orderly growth. May be to make the self-regulation tick, oversight by the RBI may be necessary in the initial stages.
