Sunday, December 26, 2010

అగ్రిచుల్తురె, పొలితిచ్స్ అండ్ Credit


The eight-day fast of the Opposition leader of Andhra Pradesh in the cause of a host of relief agenda for the farmers unfolded yet again the nexus between agriculture and politics. Many questions and few answers emerge from the episode in a State that still has a share of 23.9 percent (at constant 1999-2000 prices) in State GDP in the primary sector. There would appear to be a peculiar psyche of the farmers and the downtrodden. 62.2 percent of working population in the State is still dependent on rainfall and this is copious during the season – but at wrong time and with heavy flooding of farm fields destroying either the total crop or rendering unsuitable for consumption. The gross area sown in the State has gone up to more than 140lakh hectares during 2010-11 compared to 135.67lakh.ha. According to the State Government acreage under irrigation increased by a little over 5lakh ha.

The total food-grain production in the State reached an all time high of 204.21lakh tons during 2007-08 even amidst the adversities. Credit disbursed under priority sector in the State jumped from Rs.24346cr in 2004-05 to Rs.51487cr by March 2009 despite a host of relief and write-off packages in the interregnum. The estimated crop loss in paddy, cotton, and tobacco alone, not to speak of vegetables and other stored crop is in a little over 5lakh ha. Under the RIDF, NABARD created additional irrigation potential to an extent of 21.58lakh acres that enhanced the demand for credit from those farmers. Last year there were torrential rains and flooding of the most unusual order in Kurnool and other districts that led to the worst-ever flood calamity that still haunts the State Government due to poor delivery of the announced relief packages.

Then there is a spate of suicides on one count or the other. And yet the spate of farmer-suicides in December 2010 alone touched 137 – and just in October and November 2010 we heard of the suicides of the micro-finance victims in good numbers. Last year, there were suicides to bemoan the death of the former Chief Minister, YSR. Cash relief was announced to all these suicide-affected families from time to time either from the exchequer or the political parties. 63.41lakh farmers in the State got relief under the All-India Agriculture Debt Waiver and Debt Relief Scheme, 2008 to the extent of Rs.11353cr. 37lakh farmers got the benefit under the State Government relief package of Rs.5000 per farmer not covered by the AIDWDR to the extent of Rs.1820crores. The 16-suicide prone districts got the PM’s special relief package of Rs.9650.55crores. The package included interest waiver, loan reschedulement, irrigation, watershed, animal husbandry, plantation and horticulture etc. Where all these relief packages got delivered? Were they delivered in full? Why this phenomenon of suicides is rampant in Andhra Pradesh compared to the rest of the States that faced similar natural calamities. Is it inadequacy of package or improper delivery of the package or the agrarian structure or a combination of all these responsible for the politicians to reap a rich harvest?

State Government from time to time announced a slew of packages:
• Organic farming with an outlay of Rs.31cr to encourage use of vermin compost and improve soil fertility;
• Seed village scheme with the supply of foundation seed at 50 percent cost
• National Agriculture Insurance Scheme with village as insurance unit;
• Pilot weather based Insurance Scheme
• Farmers’ field school;
• Agriculture Technology Management Agency with 90:10 :: Central Government :State Government
• 3percent per annum rate of interest for prompt repaid agricultural loans
• Revamping the rural cooperative credit structure under Vaidyanathan package with about Rs.2100cr of which Rs.1872cr already released;
• Increased power supply to the farm sector at an enormous subsidy.
• Special efforts to increase area under pulses
• NABARD provided liquidity support to the State Cooperative Bank and RRBs to tide over the temporary liquidity stress caused due to implementation of relief packages of the order of a little over Rs.50000cr.
Still, not all the perfumes of Arabia could sweeten the little hands. The consumer in Andhra Pradesh, known as granary of rice, supplying huge quantity of rice to the central pool, pays Rs.25-30 a kg.

Structurally, the State has the largest sub-divided and fragmented holdings; there were no mutations carried out; owners migrated with farm riches to the urban and metro areas with investments in real estate, hotel and film industry. Nearly 85percent of the actual farmers are leaseholders and yet the joint liability group finance ‘innovated’ by NABARD (it is actually a rehash of the aborted group lending scheme of State Bank in the 1970s) did not take off. State Government’s persuasion also did not succeed with the Bankers in an environment of distrust and high risk of the clientele prone to high political interference with every party demanding at the time of repayment a write-off. Most of those who demand for such write-off are private money lenders and they have a vested interest in such write-off so that the money they lent could easily get recycled. I wish a detailed study into this aspect by an independent institution would disprove this hypothesis.

In a study undertaken by the author in 2007 on farmers’ suicides, the revelation was that the costs of agriculture continue to rise with no corresponding rise in returns – this is accentuated further with the implementation of MNREGA that pushed the labour costs to nearly 40 percent of total production costs compared to half of it a decade back driving many to move to substituting with technology; ever widening social divide in the villages and inexplicable leakages and private lending at huge cost. Despite all that the Banks show as flow of credit to agriculture, how many new farmers and how much of new credit and for what new projects had access to such increase leave many doubts than answers. Periodical write-off of credit is a serious disincentive to the flow of farm credit as equity and payment ethics are running counter to each other. You can’t keep on demanding write-off of credit and yet ask bankers to keep increasing credit flow. Bankers justifiably view lending to agriculture as a high-risk portfolio not withstanding the more favourable risk weights released by the RBI to respond to Basel II capital adequacy norms. The politician knows it and various committees in the past clearly voiced against the write-off and yet, both the centre and state governments indulge in this wasteful luxury. Are the politicians chasing wrong ends? If so, what is right? Nowhere in the world farming progressed without timely and adequate credit that get recycled with prompt repayments and insurance and guarantee mechanisms to respond to natural calamities appropriately.

Too many institutions claim support to farmer absorbing most of the subsidies and grants more by the deliverer than the farmer. There are twelve ministries from Government of India that have to join to decide on any support system for the farmer. Added to this there are at least five ministries at the State level that require cohesion. None of them joins a round table even once a year to reduce the institutional burden and increase the delivery of benefits to the farmer – whether it is input subsidy or rate compensation or market access. Environment and weather are hostile. Exploitation is at the hilt. Still, the farmer is feeding this country! Series of reliefs and loan reschedulements are like the serial bombs that would explode in the hand that holds. Series of reliefs and loan reschedulements are like the serial bombs that would explode in the hand that holds. We have to find solution where the problem exists. There is a nexus between agriculture, politics and credit in this democracy where illiterate vote bank is the raison de etre for a politician’s saddle.
(The Author is an economist and presently Member, Expert Committee on Cooperative Banking, Government of AP. The views expressed are personal. Can be reached at

ల్యాండ్ స్య్స్తెంస్ బేగ్ ఫర్ చంగె.

Land systems need unconventional solutions for
Democracy to sustain and grow healthily
B. Yerram Raju*
Land in this country is the source of all problems – right from family to body politic. Landlords are the ruling elite and therefore no land reform would ever succeed. The Courts in India at all tiers hold around 3mn cases. Most such cases end up after decades of arguments with the either of the original disputants or both not surviving to hear the judgment. In fact, there are some who dare to buy the lands in dispute by taking the risk at a low price and invest in its development as well. Quite a few even made millions of rupees by the D-day. Corruption has its roots in land deals. In the rural areas, subdivision and Fragmentation of holdings has made operational holdings highly uneconomic. Small landholdings are denying the farmers access to technology, quality inputs, mechanization, post-harvesting facilities, integrated approach to farming and market intelligence as also the bargaining power for the farmers in the economy. The serious limitation for further progress in agriculture and for increasing farmers’ income therefore is lack of economies of scale. The farmer is caught in the vicious circle of low productivity, lower income, lower investment and low productivity leading to perpetual marginalisation. The problem exists in land tenures and the solution has to be sought there.
There is no alternative to providing economies of scale for our farmers to integrate farmers with the markets and make them the owners of the value chain in order to increase incomes. There was an aborted attempt of the Andhra Pradesh government aimed at consolidation of holdings on voluntary basis to maximize benefits to the farmers. It went into a spiral because of the tag of ‘cooperative’ attached. Such farming can be expected to integrate with animal husbandry, fisheries, sericulture, horticulture, post harvest operations and processing so that value addition takes place at the doorstep of the farmers. But voluntarism is hard to come by for such efforts. Institutionalisation of the initiative after a good public debate is the only solution.
The new initiative aims at (1) increased production and productivity; (2) reasonable remuneration for produce in time; (3) value addition; (4) linking production with processing and marketing within compact areas; (5) better access to credit; (6) Structuring a farmer-centric and farmer-participated reform in a novel fashion etc.,
There cannot be two opinions that a larger land holding is more suitable for adoption of modern agricultural technology. It is also agreed by all that flexibility in dealing with land issues in a manner that does not hurt the interests of farmers and also provides incentive for the next generation to continue in farming, holds the key to reform agenda in agriculture.
This new approach should be able to provide an alternative to the not-so-successful earlier initiatives of joint cooperative farming societies, contract farming and producer companies formed around a few agricultural products.
The Scheme I propose, seeks to promote the participation of all the farmers and persons with other occupations on the basis of a pari pasu charge on their assets and proportional returns to the participants. The Society, in other words, the General Body, would have the usufructory right on the land of all the members for implementing the new initiative. In other words, x,y,z farmers owning a,b,c tenures of land individually would pool together their lands for their own long term benefit and improved economic status. The land holding would be converted into a scrip at a value decided by the community in the General Body. There would be issues relating to valuation of lands: road-side lands, wet lands, lands having minor irrigation structures, undulated lands, lands with terrain differences, soil textures, and so on. All the lands in a pool or in a society therefore would have differences in valuation on varying parameters getting applied. A computer model could solve this issue. The value of land could be decided based on consensus as is being implemented in the case of Project Affected Persons under some projects. The Voting Rights will be proportionate to the share holding unlike in the cooperatives where each person would hold only one vote. Non-land owners who are admitted into the Society would have a single vote.
The Share Certificates represent the title to the property held by the individual member and are transferable only to another member of the Society with the approval of the General Body or its authorized Board. What happens in the process is that the land does not get divided without at the same time disturbing the hereditary rights to the property owned on one side and the production patterns on the other. Limited resources like water, soil health, etc would be protected for optimal utilization. Other ancillary activities like animal husbandry, horticulture, fisheries etc would mitigate the risks arising from crop losses.
The General Body consists of all the farmers and non-farmers and it is they who collectively own and manage all assets and a representative General Body ( each constituency in the general body either on the basis of ward or certain reserved categories and women etc could have one representative for a general body) would also elect the Board of Directors and designate the powers that the Board of Directors and the Executive Committee would have to run the Society.

This Society would thus be governed by a professional Board of Directors including those elected by the shareholders. The Board will be assisted by an Advisory Body and specialized Sub Committees consisting of experts from agriculture, allied activities and agro industries. This Society established at the village level itself with full autonomy would be governed by the vision, mission and objectives set out by the State level Advisory Council consisting of functional experts in Animal Husbandry, Fisheries, sericulture, Horticulture, Retailing, Rural Industries etc.

Every member of the Society should get the return no less than the best of the last five years’ return at the beginning and would get multiples of it at the end of every year proportionately distributed in accordance with their shareholding value. The Society should be run under PPP mode. The nitty-gritty of many of these aspects should find a place in a special Law that can be formulated.

Roles and responsibilities of various agencies:
• State Government should constitute a special Regulatory Authority to value and register the scrips.
• In the event of the death of the actual owner evidenced by the Death Certificate, the legal heirs would get the shares as per the Will if any of the deceased; And in its absence, the Society would retain the shares by transferring them in its own name and it should also be registered with the specified Authority. This would in effect enable all mutations recorded without having to subdivide the land.
• The Society should be registered with Articles and Memorandum of Association wherein the boundaries of functioning authorities and activities are clearly defined. If an existing PACS would like to perform these functions, it should be enabled through a transition clause in the proposed Law.
• The seed capital equivalent to the land value contributed by the farmers during the first 5 years should be mobilized at the rate of ten percent of the value from the landowners. Those who lack liquidity at the start should be helped out from the National Farm Equity Fund to be specially set up with a corpus of Rs.5000crores initially as a budgetary support.
• Banks should sanction loans to the society on a debt equity ratio of 4:1 with a moratorium of two years on a soft rate of interest.
• National Agricultural Insurance Corporation should insure Agricultural Loans.
• General Insurance Corporation should insure the other assets in conjunction with the Life and Health Insurance of all the shareholders and the premium would be part of the project cost.
• Initial project costs that include administrative and establishment expenses would be met out of the loan funds.
• Existing liabilities to institutional lenders and other statutory agencies should be pooled into a separate liquid asset and blocked for a period of three years, interest frozen as on the date of transfer. This pooled asset in financing bank’s books would be a funded asset repayable after the moratorium period in seven installments.
• The State as one time measure may write off the private moneylenders’ loans or de-recognize the usurious loans as part of the new Law.
• Lessee – whether oral or written – would have the scrip endorsed in favour of the lessee by the owner with attestation from the Society Management.
• NABARD field level executives should render technical help in projectisation and formulation of the village development plan.
• NABARD should be asked to administer the National Farm Equity Fund.
• NABARD should set up a district level and state level monitoring committee to oversee the project implementation.
• Specified Authority should be provided a list of chartered accountant firms to the Society at the village level for taking up half-yearly and annual audits. Each Village Society should display its accounts in the Notice Board duly signed by the CA and Management representative.
• In case natural calamities occur, and the village itself is washed out, the State Government after realizing from the Insurance Companies the insured amounts, should re-carve the village and distribute the land in accordance with the share register so that the rehabilitated village would carry on the economic activity undisturbed.
• In the case of continuing natural calamities like the cyclones, drought and periodical floods, insurance claims should be quickly settled in favour of the Society and the financing Bank; the deficit should be financed by the State Government and the Bank from out of the Natural Calamity Fund to be separately set up by the GoI with participation from the State Government in equal proportion and this fund would also be administered by the NABARD as the agent of GoI.

1. Sale/transfer of shares is restricted only to the Society in the absence of family members of the shareholder wanting to buy up such shares or access them as legatees.
2. At the end of every three years the shares get revalued in terms of the annual dividend passed on at the general body. The share register would thus be up dated in valuation terms once in every five years.
Other Aspects:
Each member should be provided credit support for consumption and social needs as decided by the Board of Directors on such terms and conditions as considered appropriate and in the best interests of members.
The hinterland of the village should be enveloped by adequate and appropriate storage and marketing facilities.
Integrated development of land-based and non-land-based activities providing value addition to the farm produce right at the doorstep of the farmer through this new initiative with appropriate law to support would usher in an era of prosperity for not only the farmers but for the entire village itself.
All the Societies should be computerised from the very start and appropriate management information system should be designed by NABARD with the help of outside experts.
There must be a firm resolve that the Governments would not indulge in loan write-off but would only facilitate financial unburdening through the specially set up funds. The whole scheme would thus help protecting property rights without impeding economic development and legal disputes would also be minimized. All disputes should be settled through local arbitration mechanism.

*. The author is an economist and Regional Director, Professional Risk Managers’ International Association, Hyderabad chapter. He is also Member, Expert Committee on Cooperative Banking, Government of AP. The views are personal. This paper is for presentation at the Symposium on Land Rights & Development, Organised by Liberty Institute, New Delhi, in association with Forum for Good Governance Hyderabad on the 26th December 2010

Sunday, December 12, 2010

మైక్రో ఫైనాన్సు ఇన్ మాక్రో Problems

Micro Finance in Macro Problems.
B. Yerram Raju*

Suddenly, the issue of Microfinance has occupied the centre stage of intense public discourse during the last few weeks. The State Government also acted proactively to bring about “Andhra Pradesh Microfinance Institutions (Regulation of Money Lending) Ordinance, 2010 on 15th October 2010. For a change, the media have taken up a deserving issue concerning the hapless rural women falling into debt trap of the Micro Finance Institutions (MFIs), which have mushroomed in the country in the garb of helping poor women to overcome misery and poverty. Some questions that beg for an answer at the moment are: Are the MFIs that bad as made out? Why did the suicides occur only in Andhra Pradesh and not anywhere else? Where are the roots to the entry of MFIs and are the corrections possible? Are equity and discipline incompatible in lending to the poor?


The SHG movement was started in early 1990s by Govt. of India with involvement of NABARD to provide empowerment to rural women. It took nearly five long years for the NABARD to create interest in the public sector banks, the RRBs and the Cooperative Banks to get interested in this linkage programme. 42.24 lakh SHGs were credit linked to the extent of Rs.22,670crores as on 31st March 2009 in the entire country by Nationalised Banks, RRBs and Cooperative Banks. Andhra Pradesh had a share of 23.6 percent in number of groups and 26.5 percent in credit under SBL. Society for Elimination of Rural Poverty (SERP) a State Government initiative with World Bank funding has been actively associated with SBL in Andhra Pradesh aiding the social, financial and political empowerment of Rural Women to a large extent as corroborated by various studies. Similar SHG-Bank Linkage programmes are also being implemented in other states like Tamil Nadu, Kerala and Karnataka. Under this SBLP, the savings-linked credit has been provided to SHGs around 8% to 10% interest rate with monthly repayment obligations. The recovery percentage is stated to be around 95%. The entire SBL financing has been carried out through thousands of bank branches located in the hinterland of the country. The Bank staff is actively involved in this programme.


Following RBI circular dated 18th February 2000 providing guidelines to financing of MFIs by commercial banks, there has been rapid increase of private MFIs in the country during this decade. Most of these MFIs are broadly in four categories.

1) NGO MFIs – Registered under Societies Registration Act 1860 and/or Indian Trust Act, 1880
2) COOPERATIVE MFIs – Registered under State Cooperatives Act or Mutually Aided Cooperatives Act (MACS) or Multi-State Cooperatives Act, 2002.
3) NON-BANKING FINANCIAL COMPANIES(NBFC) MFIs- Registered under Section 25 of Companies Act, 1956 (Not for Profit)
4) NBFC –MFIs – Registered under Companies Act, 1956 and Registered with SEBI where they went in for public issue and/or with RBI.

In order to encourage the MFI movement, the RBI desired that they go under self-regulation mode and the RBI expressed categorical “NO” to MFI regulation. On the top of it, the Central Bank categorized all corporate loans granted to MFIs as part of priority sector lending and the public sector banks found a bonanza in such categorization as they can claim credit under somebody else’s shoulder without having to incur the huge cost of reaching the poor and realizing such loans again at a huge cost. Suddenly they found a de-risking their otherwise high-risk portfolio. Bulk loaning to MFIs moved at 8-12 percent for online lending to the poverty groups.

Even most of the private sector banks that were unable to fulfill their Priority Sector obligations due to their lack of presence in Semi-Urban and Rural Centers or lack of initiative in financing SME or other Priority segments, have found an easier option of providing bulk loans to MFIs. This paved the way for large scale flow of depositors’ funds to MFIs for their onlending activities. There are 44 RBI recognized MFIs in the country according to Microfinance Institutions Network. Some well meaningful entities have put the training of the poor in viable economic homestead and village level activities ( BASIX for example) and created enthusiasm and confidence in institutional lenders for this activity. But greed has no boundaries and seeing large scale benefits with a little effort and much propaganda, others bee-lined and Banks qued up to lending to the opportunistic and showy MFIs. This led to mushrooming of MFIs accessing huge funds from Commercial Banks for their onlending activities. Most commercial banks lent them for 12 months with the result the MFIs had to recover in weekly repayments.

As on 31st March 2009, it is reported by NABARD that Banking Sector disbursed around Rs.3731 crores to MFIs, out of which Rs. 2700 crores were provided by 10 private sector banks and Rs. 561 crores by 10 public sector banks. In Private Sector Banks, ICICI Bank tops with Rs.825 crores, followed by HDFC Bank with Rs.786 crores and Axis Bank with Rs.636 crores. In Public Sector Banks, Indian Overseas Bank tops with Rs.244 crores followed by State Bank of India with Rs.144 crores and Bank of India with Rs. 70 crores. The latest figures of the bulk loans provided by Banks to MFIs may have crossed Rs. 6000 crores. SIDBI has the largest cake: It has established seven dedicated branches to dispense credit to MFIs in 2008-09 and has lent Rs.3398crores during the last ten years with outstanding credit of Rs.2137cr as at the end of 2008-09. SIDBI website indicates the ultimate number of beneficiaries from this package as 65lakhs. SKS Micro Finance has a substantial presence in this loan portfolio and it has placed its representative on the Board of SKS Micro Finance Ltd., which is in the eye of the storm. SHG-MFI –Bank Linkage has been provided to ultimate customers through MFIs and their agents/employees. Imagine what would happen to the Rs.22500cr lent through this window getting into the loop of NPAs of the Banks at the end of March 2011. Government of India would announce another loan waiver from the tax-payers’ money and recapitalize the losing public sector banks? The fiscal endurance to the monetary failure?

SBL programme implemented by NABARD since 1994 with the involvement of public sector banks, cooperative and rural banks creditably has no record of suicides or even extortion in recovery process. Capacity building of groups and building group dynamics saw several innovations that resulted in some of the groups taking up agricultural marketing activity in the villages. (For example, in Nizamabad District the SHGs collected maize crop of 3lakh tons and sold at remunerative prices for the farmers and good margins for themselves. There are also built-in insurance mechanisms as well. Andhra Pradesh leads this movement.
There are private players like the Cooperative Development Foundation (CDF)and Centre for Collective Development (CCD) that built SHGs around the concept of small savings of the Women groups initially. The group saves in small sums and the individual members’ needs are met out of the savings: the savings receive interest at the rate decided by the group ( this is around 12%p.a) and the credit for any purpose that the members approve would be charged at 15% and they also build ‘Abhaya Nidhi’ an insurance fund for any untoward calamity to any member. CDF has built a women’s dairy while the CCD has built even Oil Mill with the financial support of NCDC. Most of these groups have a livelihood support programme behind them.

The bulk lending in the MFI robes, on the other hand, has taken the ugly turn witnessed during the last few weeks due to the following reasons:
1. The incentive of booking such credit under the priority sector
2. Banks that usually stipulate stringent conditions on the high-risk ‘poor’ refused to see a part of it even when lending to MFI because of their myopic approach to priority sector credit.
3. The Commercial banks were quick to respond to the glossy balance sheets; foreign flows and the bee-lining of venture capital funds because of the minimum of 8-12 percent yield on these assets and near 100 percent repayments.
4. The investors walked away with the high returns, which is nothing but the rich walking on poor man’s incomes. Poor man’s rupees walked into rich man’s dollars. This is not certainly what either the Government or the RBI intended when they spoke of financial inclusion.
5. Micro Insurance is not linked.
Corporate greed overtook the poor man’s need. Banks too were no less greedy as they could fulfill their priority sector targets without having to actually go near the poor. The result was the sub-prime nature of the MFI-lending process.

But look at what would happen with the steps now taken: the repayments to MFIs would stop. MFIs’ in turn would have to seek postponement of their corporate loans. Their AAA ratings would all vanish in one stroke and they end up as NPAs. All the commercial banks and SIDBI would build up their NPA portfolio during the next quarter. The RBI will have to perforce revise its risk weights to MFIs. Since the money locked up is huge the percentage of NPAs would also be high and this requires capital refurbishing in most of the commercial banks as per Basel norms.

For a change the media espoused a right cause when they started releasing the stories of suicides of some of the MFI-lent borrowers. While the AP Government sounded the alarm with the ordinance that was really not necessary as the existing laws would take adequate care of punishing the usurious lenders on one hand and violent extortionists on the other, the MFIs have been disrobed. The question that still haunts is whether the registration of MFIs would help the cause of the poor. I doubt.

Why Suicides in AP alone?

Whether it is farmers or micro credit borrowers, failure in repayment of loans is the root cause of suicides and these have been occurring mostly in Andhra Pradesh in spite of several measures taken by both the Central Government (separate package of loan waiver announced; interest subvention announced in the farm sector in 2007-08). This is because of the enlarged inadequacies of credit-related infrastructure for institutional lenders to move aggressively on one hand and social divide on the other. All the schemes announced by the Government have built-in rent seeking opportunities for the bureaucracy and politicians with only a portion of the schemes reaching the poor. Secondly, in the villages, there is a clear rich-poor divide on caste considerations. The sufferings on any account whatsoever are mostly unattended. The neighbours expect only the Government to take care of them. Andhra Pradesh is one of those few States declaring reduction of poverty to a mere 16% in the backdrop of state economy growing at a steady 6% and above at the beginning of this century. At the same time there is uneven distribution, rampant corruption and heavy politicization of any and all schemes that are meant to reach the poor. MFI could make a difference in this scenario as there were no strings attached to the loans and the loans were being available in bigger slices than the SLBs at their door step. Little did they realize that the no-strings loans had ropes around their necks running like a computer programme.


When MFIs are basically indulging in money-lending activities with turnover running into crores of rupees that too with public money as their source of funds, why they were not brought under regulation so far when they ? What are their credentials and how are they allowed to freely operate in the entire country? If they were registered with any local authority could it have helped? What would such registration mean?

Under what parameters, the Banks were doing bulk lending amounting to hundreds of crores to unregulated MFIs? Whether they were lending against any collateral security offered by MFIs or whether their lending to MFIs has any relation to relative net worth of MFIs? What are the precautions taken by Banks to ensure against misuse of funds by MFIs or protect the public money in case of default by MFIs? When the Banks knew pretty well that this is for re-lending, why did not impose conditions on its use and cost of operation? Every lender imposes such covenants in their loan agreements.

Whether MFIs were lending to first time borrowers or are they double financing the existing borrowers of other banks or other MFIs? Are they informing other Banks/MFIs in case of double financing? Are they ensuring end-use of funds? Are they financing any income-generating activities or consumption activities?

Whether staff of MFIs has any credit assessment skills? Whether MFIs or their staff is doing a risk assessment of the borrower? Whether MFIs are educating the borrowers about the conditions and stiff repayment obligations?

Where is the need for MFIs to target the SHG-Bank Linkage beneficiaries? Whether the staff of MFIs was given stiff targets of lending and recovery in order to boost their turnover? Were these staff adequately trained and sensitized about the rural dynamics? Were the staff paid salaries or given incentives on targets? How did the staff recruitment take place and what are the HR practices of MFIs? Why is their staff behaving with borrowers in inhuman manner?

A joint fact-finding study on microfinance conducted by Reserve Bank and a few major banks made the following observations as mentioned in the RBI Master Circular RBI/ 2010-11/52 RPCD. FID. BC.No. 05 /12.01.001/ 20010-11 July 1, 2010):
i. Some of the microfinance institutions (MFIs) financed by banks or acting as their intermediaries/partners appear to be focusing on relatively better banked areas, including areas covered by the SHG-Bank linkage programme. Competing MFIs were operating in the same area, and trying to reach out to the same set of poor, resulting in multiple lending and overburdening of rural households.
ii. Many MFIs supported by banks were not engaging themselves in capacity building and empowerment of the groups to the desired extent. The MFIs were disbursing loans to the newly formed groups within 10-15 days of their formation, in contrast to the practice obtaining in the SHG - Bank linkage programme which takes about 6-7 months for group formation / nurturing / handholding. As a result, cohesiveness and a sense of purpose were not being built up in the groups formed by these MFIs.
iii. Banks, as principal financiers of MFIs, do not appear to be engaging them with regard to their systems, practices and lending policies with a view to ensuring better transparency and adherence to best practices. In many cases, no review of MFI operations was undertaken after sanctioning the credit facility.
These findings were brought to the notice of the banks to enable them to take necessary corrective action where required. If lending to the poor is cost-intensive, and such lending is very necessary in the drive to financial inclusion agenda, the cost needs subvention from either the Financial Inclusion Fund or the Micro Finance Fund and the delivery mechanism for such subvention has to be worked out carefully.
This circular and the entire episode with consequences reflect that the RBI has to bring them into financial regulatory regime as they are also part of the overall financial stability mechanism. NABARD because of its one and half decades of active presence in the micro finance sector through SHG-Bank linkage programme, may have acquired the capabilities to regulate the system. But it cannot be a player and regulator and therefore, it may hive off this activity as an independent arm and then take over regulatory responsibility if the RBI were to continue to feel that it is not equipped adequately to handle this regulatory responsibility. Micro Finance Regulation and Development Bill 2007 has been well debated and its ineffectiveness has been articulated in full measure. The Bill drafted by NABARD with the assistance of SADHAN, deserves redrafting as it does not respect either financial regulation or legal fundamentals.
The MFIs’ taking credit for reaching those poor where the institutional credit mechanisms thus far failed to reach has some justification. But the route they chose became questionable. If, as they aver, the poor get the money at the door step and they were able to get a multiplier out of it and therefore the MFIs are reasonable in expecting a major slice of it, is patently absurd. The poor, if they start earning more than what their existing style of living demanded, should be enabled to save a good pie for the future and for better insurance and protection of the next generation. The MFIs that did not create livelihood opportunities, and barricaded sustainability have no license to squander public money in the name of equity. Growth with equity should also be matched with social justice and this is instantaneously absent in the present MFI approach.

*The author is an Economist and Member of the Expert Committee on Cooperative Banking, Government of Andhra Pradesh. The views expressed are personal.

Five myths about microfinance
TT Rammohan

The microfinance bubble has burst. The AP government ordinance, the AP opposition fs campaign asking borrowers not to repay and the sheer public hostility towards MFIs . all these have put the brakes on MFI activities for now. We need to rethink the role of MFIs in the rural economy . In order to do so, we must first grasp some of the myths on which the MFI sector has rested th US far.

MFIs are crucial to financial inclusion: The big impetus to financial inclusion came way back in 1969 following the nationalisation of banks. Secondly, financial inclusion is not just about giving small-ticket loans. It is also about taking deposits and providing basic banking services.

MFIs are hardly the pioneers in microfinance. The early initiative came from the self-help group (SHG) movement started by the government of India in 1992 under the auspices of Nabarad and with the involvement of banks. This is the biggest outreach programme of its kind in the world. It covers 86 million poor households and has extended credit of .Rs23, 000 crore. MFIs cover 30 million customers and have lent over .Rs30,000 crore.

Under the SHG scheme, credit is linked to savings (unlike MFI credit). There is focus on capacity-building among borrowers. The rate of interest is 8-10% with monthly repayment. The suggestion that MFIs are crucial to financial inclusion is only part of an attempt to give respectability to what is increasingly a profit-driven activity.

MFIs have reached out to those ignored by banks: The contention is that MFIs complement the efforts of banks by reaching out to those ignored by banks. This too is not true. AP has an average credit/deposit ratio of over 105% and a ratio of over 80% in half the districts. (The national average is 63%). AP does not lack credit. MFIs would have been made a real contribution had they fanned out to states where the credit/deposit ratios are low. Instead, they have focused on AP.

They have done so because AP houses nearly a quarter of the SHGs. MFIs chose the easy route of tapping into established SHGs for making loans. This was viable in the early stages but, over time, it has led to the problem of multiple lending and excessive debt burdens.

It is no different from private banks in India marketing consumer loans or US banks marketing subprime loans. œ MFIs are an important mechanism for alleviating rural poverty: Credit is only one of several instruments needed for fighting poverty.

Secondly, credit can help alleviate poverty if it goes into income-generation schemes. MFI credit, for the most part, is for consumption. Thirdly, returns to agriculture are so low that it is inconceivable that it can service interest rates of 24% and above that MFIs charge. Since agriculture is the key to rural poverty, it is ridiculous to suggest that MFI credit can help alleviate poverty.

MFIs have substituted moneylenders who used to charge even higher interest rates: The comparison with moneylenders is flawed. Moneylenders don ft go out and market their loans as MFIs do. Besides, moneylenders make loans strictly against collateral and this is a built-in check on lending.

Secondly, MFI interest rates in AP are said to be have been in the range of 24-60%. At the upper end, the rates are no different from those of moneylenders. Yes, MFIs did substitute moneylenders in a way because many moneylenders found it expedient to set up MFIs themselves . they could then have easy access to bank funds!

High operational costs means that smallticket loans cannot cost less than 24%: If this is true, how is lending to SHGs viable? The high lending rates of many MFIs translate into fat salaries for executives and abnormal returns. (Some have return on assets of 5%; a bank is lucky if it makes 1%).

Public sector banks (PSBs) have long had branches in the rural areas. Small loans will be one element in their portfolio which will include low-cost deposits and other products. With branch costs fully written off, it is hard to see why microfinance provided by PSBs needs to be priced at 24%. If indeed the operational costs turn out to be steep in some areas, then the bank correspondent and other models need to be developed.

PSBs have not put their best foot forward in respect of microfinance because they lack the incentives to do so. Most are listed now and have had to focus on earnings growth, which is easily provided by corporate and retail credit. The regulatory cap on interest on small loans was a dampener. (The cap is now gone). Lending to MFIs qualified as priority sector credit, so PSBs could not be troubled to build their own portfolios.

Many people think the recent problems with MFIs were the result of some excesses. With a little tweaking here and there, MFIs can be in the forefront of financial inclusion. They are wrong. The entire MFI model needs revisiting. At least PSBs are much better placed to pursue financial inclusion on their own. The AP ordinance and its fallout ensure that the go-go days for MFIs are over. And that is all to the good.
When the Banks lend for Corporates they are expected to form a Consortia if the same Company were to receive credit at the hands of more than one Bank. Peculiarly, in the case of MFIs, no Bank preferred to lend via a consortium route with the result the same list of primary borrowers may have gone round different lending banks to qualify for the priority sector classification. Why the RBI is a mute spectator to this is typical failure of regulator. Hopefully, the Malegaon Committee would take this into consideration.