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The Malegam report on microfinance is superficial
Submitted by admin on Sat, 02/12/2011 - 11:33
in
By Dr L H Manjunath, Executive Director, SKDRDP
Microfinance Focus, February 12, 2011:
Point to point response to Malegam committee`s report:
5.2 Income status of the borrower. Fixing an income limit is vague. Is it the family income or the individual income? is not clear. If family income of all the members should be taken or income from asset only is also unclear.
Fixing income proof for lending will not be practical. In India income certificate can be given by revenue tahasildar who is burdened with so much of work. He will depend on village accountant for this report. It will be time consuming and leading to corrupt practices. It will also delay the release process and will be detrimental to the very concept of microfinance.
5.3 fixing of loan limit of Rs 25000 is totally unreasonable. Today in India a 15 liter yielding cow will cost Rs 30,000. According to bank norms a unit of diary farm consists of two cows. As the customer develops relations with the MFI and becomes a mature borrower it is not uncommon to expect him to seek higher loans of up to Rs 1 lakh. Where should the borrower go for higher requirements? to banks ?? If so why can’t the bank meet the requirement of Rs 25,000 too??? The fact is that there is a large segment of community in our country who are not bank reliable. They have to depend on other sources for all their requirements big or small.
It will reasonable to say that the first cycle loans be restricted to Rs 25000 and not any further.
Indian SHG sector lends lakhs of Rs to mature SHG member. Malegam report in one shot has tried to kill the flourishing SHG sector too by its draconian fund restriction.
Further if an organization lends more than Rs 25000 to its member will that loan be out of the purview of microfinance and therefore out of the purview of malegam report should be made clear.
5.3 b. Statement made here is totally hypothetical and not based on any fact. Experience has taught us that poor are generally more careful than the affluent in either borrowing or spending. You cannot make one rule for the poor and another set for the rich. This is highly discriminatory and can be contested. This hypothesis is totally negative and set to keep the poor eternally poor.
Further what prevents a borrower from fund diversification even if the limit is pegged at Rs 25,000? Fact is such anomalies happen not because of over lending but because of poor appraisal, processing and monitoring. This paragraph to be deleted totally.
5.6 d of the report clearly indicates that the majority of the loans of the members of the group have gone for non income generating purposes which is a clear indicator that poor people want finances for their consumption needs. Yet the committee wants to restrict lending to non income purposes to 25% of the total lending. Clearly this move will drive the poor to the usurious money lender.
Interest rates;
The committee seems to have been influenced by the big MFIs while calculating the cost of the operations. While it is true that the small MFIs need to augment capital and therefore need to charge a slightly higher rate for this purpose, there is no reason for MFIs to be overtly usurious. MFIs should not be allowed to charge more than 6 percent over and above the cost of funds. Clearly the interest rate charged should take into consideration free reserves, capital available/used for lending and outside funds available in order to fix a very reasonable interest rate. At present there is no justification for charging more than 18% even for institutions completely dependent on public money for lending.
8.5. Security deposit act as a unique way of building internal capital for the borrower. This in fact promotes savings concept among the poor. In fact SHG concept itself is based on this. Bigger MFIs will be too happy to not to take security deposit as this will forever make the borrower dependant on the MFI. Therefore MFIs should be allowed to collect security deposit.
Banning of multiple lending is tantamount to depriving the right of the customer to choose the service provider. This is draconian and against human rights. When rich people can take loans from different sources why poor cannot?
Fact is incidences like coercion, pressure even abetting to suicides can be dealt with by the normal laws of the country and no special law needs to be passed.
The Malegam report is superficial and deprives the right to do business and to the right of an individual on the choice of services and this report needs to be rejected in toto.
PLEASE SCRAP THE MALEGAM REPORT.
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About the Author : Dr. L. H. Manjunath is the Executive Director of Shri Kshethra Dharmasthala Rural Development Project (R.) This MFI has recently awarded by The Micro Finance Institution of India award ,2010
Disclaimer : Views expressed in the article by the author are his own and do not necessarily represent those of Microfinance Focus. Microfinance Focus does not take any responsibility for correctness of the data presented by contributor.
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Blind Men and The Elephant
Dr.Manujanath's comments are valid to a large extent. But the unfortunate part is that every body does the classic "Aristocrat's fallacy ". SKDRP has so much access to free cash - donations. I do not think they ever waited at the doorstep of any bank for 1 month to get Rs.1 Cr loan OR have borrowed at any rate which is higher than 11% from Banks. There are lots of MFIs who borrow at 15% from PSU (all inclusive cost). As per Dr. M if pricing cap is restricted to 18%, then th eultimate sufferer is the customer as NBFCs will move away from this product to other secured products like used vehicle funding where you still get 24% pricing. SKS should have let the MBTs sell shares and use it truly for end customers. BASIX was caught operating at 40% - 60% while they were claiming that they are operaying at 24%. This MFI piece has become a case of Blind Men and Elephant with each seeing things they can or want to see. Awake, Arise and Achieve.
more damper less enabler : malegam committee
Pl see my comments on the subject point by point:
http://suran-asuran.blogspot.com/2011/02/malegam-committee-dampner-or-en...
The mF practitioners were the first to appreciate , now have started to realise the issues and concerns . the report has few goof ups too
Cheers
Suran
reaction to Mr Patel, Mr Agarwal's comments.
Thankyou for the response. My reaction has already been sent to RBI in response to the invitation from the RBI for comments.
My response is based on my work experience of 21 years in a commercial bank and a decades exposure to the sector as the chief of a fairly large NGO-MFI. I might submit here that the entire episode has errupted due the AP ordinance on MFI(now a law)which itself is based on the reports of people commiting suicides due to debt traps. My concern is that the governamnet and the civil society is adopting double standards when talking of rich and the poor. For instance when lakhs of farmers are committing suicides due to heavy loan burden( and these are not microfinance and most of thes were given by coop banks and coomercial banks) the governament or civil society does nothing to take the banks to task Why? why is not govt pointing to banks when farmers committed suicide??? Why are you not putting a cap on the farmers borrowing? Is there no multiple boorowing by the big farmers in this country who also figure in the list of those committed suicide???
Simillarly no new laws are brought to reign in the menace of multiple credit cards.many rich people take several loans at the same time and some of the cheapest loans are for consumption purposes including housing and car loan etc etc. When you want rich people to have choice of their sevice provider and entice them through SMS, Emails to borrow more and more and for what ever purposes why are you depriving the poor the choice of the service provder, purpose of loan and the right to take more than one loan at a time?
One more question. Educated in this country chose jobs and not self enterprise and therefore after they get a job the banks give them loan only for consumption and not for livelihood. When it comes to poor why do you want to lend them only for livelihood? Do you think the poor in our country are more capable than the affluent to run enterprises?? Fact is all poor in our country also have some "JOB" in which they are happy. Mr Patel will know that the reluctance of the poor to start livlihood activities was the major reason for the failure of the famous IRDP( the biggest poverty alleviation program in the world!!!). However poor need money for a variety of reasons which are simillar to that of the rich. The governament supported livelihood programs are failing one after the other for this very reason. This was the reason also for the govt to comeout with the SHG program which for the firs time gave the freedom of choice for borrowing to the poor.
Now the whole thing is being reversed. It appears as if the malegam committee wants microfinance activity to be another livelihood program.Funniest part is that while the report tries to reign in the MF activity as a whole it doesnothing to control the profiteering nature of the MFIs. It should have been taking a much serious look on the profits earned by mfis and the way these are spending them. Instead of trying to reign in the borrowers by restricting the size of loan, choice of service provider and freedom to take loans for consumption and development purposes and the freedom to enjoy more loans the committee should have restricted the erring mfi severely restricting their pofitability, enhancing transparency in their operations and the efforts made by mfis to build the capacity of the borrower.
This report is like pushing the poor from the frying pan to the poor. The little bit of comfort poor had in accesssing financial services is now being snatched away from them.Even if a single recomendation of the report is implelemented it will severely impact the sector (read the poor)
Malegam Committee Report on MF: Dr. ;Manjunath' reply
while i respect the views of Dr. Manjunath, i do not subscribe to his views that as farmers are otherwise committing sucide in AP/elsewhere or being overfinanced by banks, why we are objecting to sucides by borrowers of MFIs. Even 1000 wrongs will not justify another wrong. If MFIs would have to have any relevance to the poor, they have to do an introspection of their working style, take corrective steps so as to be real savious and not exploiters of the Poor. They should not be turning out as sharks in the name of sustainability, financial viability, promoting equity holders' interest or their pricing to the borrowers still lower than that of the money lenders. MFIs will have to be more transparent, accountable and with good governance and clearly professing and acting pro poor,rates of interst on loans being reasonable and lending within the repaying capacity while earning profits but not profiteering.There have to the norms for cost of management to check over costing of funds raising and or administration, social audit, and self regulation. MFIs would have to think seriously as to why AP Govt have to step in and the RBI appointed Malegam commmittee. if some of its recommendations are considered harsh, unpracticable but still in the interests of the Poor, a mid way has to be found out and that is why RBI has invited comments of the MFIs and others on it. A more stricter regulation of MFIs both with profit and without profit is a must. Thanks and regards
Malegam Comittee Report
He could have analyzed each recommendation on the basis of data available of SKDRD MFI right from its inception till 2010 & arrived at statistically valid conclusion rather than reacting as an MFI staff with graduate qualification & holding an officer's position. I personally appreciate the Committee's recommendation & suggest all learned executives with field experience heading 1000s of MFIs in the country should give their in-depth analysis of each recommendation to RBI to facilitate taking correct decision. Dr Amrit Patel [Ex-Dy,Gen.Mgr Bank of Baroda]Edison, NJ 08837 USA[732-553-0825]
Malegam committee report-Dr. Manjunath's comments
it would be unfair to condemn the whole Malegam committee report and suggest its scrapping. RBI has already invited comments and it would be more appropriate if comments are sent to it by the author( Dr. Manjunath)
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