THE MALEGAM COMMITTEE REPORT: IMPLICATIONS FOR WOMEN - Archana Prasad & Franco

THE report of the Malegam Committee to study the “Issues and Concerns in the Microfinance Sector” released on January 20, 2011, makes several important recommendations that will impact on the future of women borrowers and self help groups (SHGs) which form a bulk of the clientele of the microfinance sector. It also needs to be analysed in the context of the aborted attempt of the government of India to bring in the Microfinance Sector (Regulation and Development) Bill in 2008. At that time the democratic and other progressive women’s groups, had highlighted the exclusion of NBFC’s and MFIs from the ambit of the bill. They had pointed out that the issue was not merely one of regulation, but how such a system would impact the lives of women who formed the bulk of the borrowers in this sector. Hence the question of registration of all institutions doing lending in the microfinance sector, capping of interest rates, and the need to evolve a locally responsive framework of monitoring and compliance was raised in the campaign for bringing about meaningful changes within the bill. However despite the political mobilisation by the Left which had provided outside support to the UPA, these issues were ignored by the central government. The political impasse created by the movement resulted in the stalling of that bill because the government was not able to reconcile the interests of the end users (namely urban and rural poor) and the microfinance institutions (MFIs) who had begun to increase their penetration rapidly. Seen in this context, the increasing penetration and control of the microfinance sector by the MFIs has been a result of the effort of the government to resolve the long-term contradiction between the interests of the SHGs and lending institutions. Several policy measures were undertaken to make women borrowers more and more dependent on the MFIs. This has resulted in adverse impact on the lives of women as seen in the case of the suicides by borrowers in Andhra Pradesh. In the light of this, any regulatory framework, including the one proposed by the Malegam Committee, needs to be assessed from the bench mark of increasing the women’s access to low interest bank credit and reducing their dependence on private for profit companies. Though their recommendation to prevent private institutions from collecting thrift is a very welcome one, the rest of their proposals are quite detrimental to the immediate and long term interests of the poor borrowers whose concerns this committee seeks to address.

DEFINING THE SCOPEOF REGULATION

Voices for women borrowers in the debate on regulation, have been arguing that all entities indulging in micro-lending should be brought under the ambit of regulation. In the main, there are three broad categories of institutions that do micro-lending to women: first is the banks (both public, cooperative, rural and private sector), the second the microfinance institutions, and the third several institutions, trusts, societies, and cooperatives which are meant to be not for profit and do some amount of micro-lending. Of these, the committee identifies the second category as needing the maximum amount of regulation and in order to cover such institutions it creates a new category called NBFC-MFI (that is a special category for a non-banking financial company operating in this sector). The report explains that the creation of this category has become essential because MFIs deal with vulnerable groups and their fate is intimately linked to the Bank-Linkage Programme.

Because of this, the committee defines the MFI as “a company (other than one licensed under Section 25 of Companies Act) which provides financial services predominantly to low income borrowers with loans of small amounts, for short terms on unsecured basis, mainly for income generating activities with repayment schedules which are more frequent than those normally stipulated by commercial banks..”. Under such a definition an MFI should be providing loans to people who do not have an annual income higher than Rs 50,000 and whose individual loans do not exceed an upper limit of Rs 25,000 per person. Apart from this, the 90 per cent of the assets of the organisation should be in terms of their loan portfolio (termed as ‘qualifying assets” by the committee).

What is most noticeable about this definition is the fact that it leaves out many institutions (trusts, societies, federations and Section 25 companies) who do microfinance on the side even though their main vocation may be to provide health or educational services. Some of these organisations have also been involved in microfinance on a not-for profit basis and have had a significant role in the SHG- Bank Linkage Programme. However, even in this situation there are instances where not for profit organisations used their leverage with the bank linkage programme and accumulated wealth to turn themselves into MFIs. Experience on the ground, especially amongst the urban poor shows that such organisations need regulation, for if no rules are set for them, their practices can be fairly exploitative. Hence it is important to regulate even not for profit institutions. In order to be successful in this objective, monitoring has to start from below. Hence it may be suggested that a mandatory committee of RBI, NABARD, lead banks and concerned lending organisations be formed under the district level bankers committee. In their current form, the recommendations of the committee will only encourage organisations to register small micro lending businesses as NGOs which will not need any regulation.

INTEREST RATES AND CREATION OF COMPETITION

One of the main features of the report and its recommendations is that it starts with the assumption that the interest of banks and MFIs is complementary to each other. It notes that about 75 per cent of the funding of the MFIs comes from SIDBI and the banking sector. As of now, the total outstanding amount owed by these MFIs to SIDBI was Rs 13,800 crores and to the banks was Rs 4,200 crore. This interdependence of the MFIs and the banking sector has to be recognised while determining the roadmap for this sector. Hence one of its main recommendations is that “bank lending to the microfinance sector both through the SHG-Bank Linkage programme and directly should be significantly increased” and bank lending to the MFIs should remain in the “priority sector”. In this understanding, the competition between the banks to lend to the MFIs would lead to the decreasing cost of the loans and therefore result in a “decreasing rate of interest”. The logic of this argument has to be seen in the context of the fact that providing bulk loans to MFIs reduces the risk and the operational costs of the bank as compared to reaching out to women borrowers and SHGs directly. Hence, the maintenance of the “priority sector status to MFIs” will further the direct link between SHGs and banks and have an adverse impact on the bank-linkage model which has the potential to provide loans to women’s groups at lower interest rates. People are forced to go to MFIs because bank’s are not providing adequate credit to the poor. Even SIDBI, which had earlier partnered many not for profit NGOs, is today routing the bulk of its credit through MFIs.

The committee recommendations on interest rates need to be seen in this context, where the focus of the report is not to ensure low interest rates, but to determine fair method of determining the interest rate. However an analysis of the proposals shows that it is going to rely on market mechanisms to decrease the interest rates for borrowers. The committee goes into details about how the rate of interest may be determined on the basis of the actual cost of loans. It recommends MFIs with an outstanding loan of Rs 100 Cr should operate at a margin cap of 10 per cent , where as the MFIs with outstanding loans of Rs 15 Cr to Rs 100 Cr should operate at a margin cap of 12 per cent. These margins (or we can say the percentage of interest charged over actual cost of loan) will be determined on the basis of the determination of their “actual cost of loans” which is based on the annual returns of the MFIs. The committee hopes that this measure will ensure competition between banks which will lead to a decline in interest rates. Further the proposal for the creation of a “Domestic Social Capital Fund” with “social investors” from which the MFIs can source funding will also create competition to ensure that the banks are forced to keep interest rates down when they lend to the MFIs. In the end this will only give the MFIs an incentive to increase both, their bargaining power with banks as well as their operations. More and more MFIs will become the intermediaries between banks and women’s SHGs, thus increasing rather than decreasing the dependence of women on the MFIs.

SHORT CHANGING INDIVIDUAL BORROWERS

The emphasis on the determination of interest rates on the basis of “margin caps” is followed by a recommendation that micro-lending should only be done only in groups ie, through SHGs or joint liability groups. Social pressure and liability is seen as a vital mechanism by which a person will be forced to repay loans in a scheduled time, as well as seek loans. This means that the power equations within a social group will play a major role in determining who can get a loan, and this may work to the detriment of the most needy and vulnerable sections that needs a loan. Since no interest caps have been recommended for group loans, the committee has given a license to MFIs to fudge their accounts and charge high rates of interest to SHGs and JLGs. Thus, the replacement of “collateral” with social liability has potential to be disadvantageous to the economically and socially vulnerable people in the group.

In addition to this, the report puts a cap of 24 per cent on individual loans, which itself is a very high rate of interest for poor women borrowers. It is thus ironical that the poor alone are being expected to pay 24 per cent interest apart from insurance premium and processing charges under these recommendations. Women’s groups have been demanding loans to SHGs at 4 per cent with inter subvention from the government. This is not an urealistic proposal as it has been implemented by the states like West Bengal, Kerala, Tripura and Andhra Pradesh for providing subsidised credits to SHGs in their own regions.

The report states at the very beginning that microfinance is a tool for poverty alleviation and that 75 per cent of the total loan portfolio of an MFI has to be for income generating purposes. However the loan ceiling of Rs 25,000 for every individual borrower is insufficient to meet the needs of any income generation effort. Further consumptive loans at times of social and economic distress will become more and more difficult, especially for individual poor women borrowers. In this context, women’s groups need to reiterate their demand for special income generation and credit facilities for SHGs formed by the poorest and most vulnerable sections of the society.

NEED TO REGULATE THE SECTOR

While the committee recommends that the RBI should be the regulator for the sector, it also emphasises on the need for self regulation of the MFIs. Ironically this is the same argument that the microfinance network has been making in the wake of the Andhra Pradesh crisis. Some of these MFIs give gold coins to the staff who are in charge of recovery who in turn coerce the borrowers. The committee goes a step further and says that state governments do not need to make laws to cover such institutions, a mere amendment to the RBI act is enough to ensure regulation. It also states that money lenders acts should not be applicable to MFIs and also states that the Andhra Pradesh Act should be repealed. Hence the committee has virtually said that that no new legislation is needed to regulate this sector. Thus, if the recommendations of this report are accepted there seems to be a remote possibility of the enactment of a socially just overarching law. In order to widen the base for this struggle there is need for a dialogue with the representatives from SHGs and the organisations fighting for their rights. Only then can we launch an effective broad based initiative to challenge the neo-liberal model whose interests the Malegam Committee report seeks to further.

Courtesy: www.pd.cpim.org/

MALEGAM REPORT ON MICRO-FINANCE DISAPPOINTS

IN a statement issued from New Delhi on January 20, the All India Democratic Women’s Association (AIDWA) has expressed disappointment over the recommendations of the Malegam committee with respect to the functioning of the micro-finance institutions (MFIs) and their lending practices. According to the organisation, the committee has failed to respond adequately to the problems that are being faced by a large numbers of vulnerable borrowers, many of whom are the poor women organised into self-help groups (SHGs).

While the committee has examined many of the current developments in some detail, and has given a comprehensive overview of the situation prevailing in the country, the AIDWA said its policy prescriptions are limited and faulty. Its focus is not on the needs of the poor borrowers, but rather on protecting the interests of the micro-finance institutions.

First, the definition of an MFI proferred by the committee is limited to the non-banking financial companies (NBFCs), leaving out a large number of non-government organisations (NGOs) and other unregistered organisations that have been operating unfettered in many areas. Many such groups have been offering credit and functioning as moneylenders, charging huge interest rates. It is clear that, given the committee’s definition of an MFI, these would not be brought under the purview of the regulation proposed by the Malegam committee.

Secondly, the report has argued for not taking away the priority sector status from MFI loans. This has been done keeping in mind the convenience of the banking sector, which finds it easier to meet the priority sector targets with the help of indirect loans in a liberalised financial set-up. However, the biggest reason why the poor are forced to take loans from micro finance institutions is that the banks’ linkages are weak and their credit outreach has been shrinking in the context of an agrarian distress. The policy approach should have been to ensure that bank credits at lower rates go directly to the end user, without intermediaries. This could also lead to healthy growth of the public sector banking system. As it stands, however, the committee’s recommendation will further dilute the thrust for banks providing direct loans to the SHGs. The vulnerability of those who are forced to take loans from these intermediaries will thus persist or in fact get strengthened.

The report qualifies that the advance to the MFIs which do not meet the various conditions laid down in the report (including interest rates) would be excluded from the priority sector status. But most banks would then need to adopt a case-by-case approach while reporting their priority sector advances, which is unlikely to happen. It would be difficult for the RBI to monitor whether such a distinction is being made by the banks.

Thirdly, the report recommends that the interest rate for individual loans be capped at 24 per cent. In addition to this, it also recommends an “average” margin cap for the MFIs. This cap is lower at 10 per cent over the cost of funds for the NBFCs and MFIs having an asset (loan outstanding) size of more than Rs 100 crore. It is higher at 12 per cent for the NBFCs with asset size of less than Rs 100 crore.

According to the AIDWA, both these propositions are unacceptable for two reasons. First, the interest cap of 24 per cent for individual loans is much higher than desirable and contradicts the repeated and long standing demand for low interest rate loans to women at a repayment rate of not more than 4 per cent. Second, an average margin cap on interest rates would not serve any purpose in restraining the rate of interest charged by the MFIs because such a rate would be based on the annual financial statements submitted by the MFIs about the annual cost of their loans. The MFIs would raise their rates of interest as and when their cost of funds (largely dependent on the rate of interest charged from them by banks) rises but not cut them as and when the general interest rates in the economy come down. The interest cap would thus not bring down the interest cost for poor borrowers in the long run.

Further, if we work the interest rate out on the current Benchmark Prime Lending Rates (BPLR) at which banks have been lending to the MFIs, the expected interest rate for each poor borrower would still be higher than even the 24 per cent cap prescribed for individual loans by the committee. Hence, such a capping of interest margin would not end the existing interest differential, and poor borrowers would still end up paying a higher rate of interest.

Fourthly, it is unfortunate that the committee has given sanction to group repayment of individual loans, when the person taking the loan is unable to repay in certain circumstances. In a situation where the harassment meted out to the borrowers is of such a high degree, and is linked to peer pressure, this would be a source of continued coercion by the MFIs.

Fifthly, as far as monitoring and compliance are concerned, the Reserve Bank of India (RBI) expects the MFIs and industry associations to take up a major role in ensuring self-regulation under the overall guidance of the RBI. It also asks them to run a grievance cell for this purpose. This proposition is ironical as these very entities are using micro-finance to enhance and expand their profits. Hence a more rigorous and effective method should be thought of for monitoring and compliance.

Thus, on the whole, in terms of recommendations, this report will do little to assuage the problems that are being faced by the actual poor who are at the receiving end of the unfair practices being adopted by the MFIs.

The AIDWA has therefore asked for a more pro-people approach. It has demanded that the government must re-examine the report in the context of the credit requirements of the poor, and ensure that their interests are adequately safeguarded.

Courtesy: www.pd.cpim.org/