MICRO FINANCE: USURIOUS RATE

Look at this irony – the wealthiest and the richest industrialists/business men in the country have access to the cheapest credit, around 8% p.a. from Banks and Financial institutions. Where as the poor, the down trodden and the and other unfortunate sections of the society pays the highest interest, anywhere between 30%-40%p.a. when they borrow from the Micro Financial Institutions (MFI).


Micro finance – objectives

Despite the vast expansion of the formal credit system in the country, the dependence of the rural poor on moneylenders continues in many areas, especially for meeting emergent requirements. Such dependence in the case of marginal farmers, landless labourers, and petty traders and rural artisans belonging to socially and economically backward classes and tribes whose propensity to save is limited or too small to be mopped up by the banks.
Micro finance is the provision of financial services to low income clients, including consumers and the self employed that traditionally lack access to banking and related services. It is a movement whose object is to create a platform, for as many poor and near poor as possible, to have permanent access to an appropriate range of high quality financial services, including savings, insurance and fund transfers, at an affordable cost. Those who promote microfinance generally believe that such access will help poor people out of poverty. Microfinance is one of the tools that can reduce the suffering of people by financial services that enable the poor to use the existing knowledge and experiences.


In 1994, the RBI constituted a Working Group on NGOs and Self Help Groups (SHG). On the recommendations of the Group, the Reserve Bank advised that the banks’ financing of SHG should be reckoned as part of their lending to weaker sections and such lending should be reviewed by banks at regular intervals. As a follow up of these commendations, the RBI took a series of measures in April 1996 to give a thrust to micro-finance based lending. Currently, all loans by banks to MFIs are categorised as priority sector lending, that banks have to fulfill as part of their social obligation and regulatory requirement.


Usurious rate

The interest rate applicable to loans given by banks to micro-credit organisations or by the micro-credit organizations to Self Help Groups/member beneficiaries is left to their discretion. Since the advances to MFIs are classifieds as priority sector advances, the applicable interest rate is around 15%p.a. However, the MFIs are collecting interest between 24% to 36% p.a. from the hapless borrowers. The Micro Finance Institutions, instead of providing credit at affordable interest rate, exploiting the situation and looking for a return on investments in excess of 30% p.a. Micro finance should not be viewed as a business venture where one can expect very high return on investments. RBI should put a cap on the interest to be charged on the end users, as most of their income goes for servicing the debt with no savings. This kind of situation is no better than the one the poor borrowers had experienced with the traditional moneylenders. They also defeat the very purpose of establishing the Micro Finance Institutions.

The RBI should also exercise greater control over MFIs, bring more transparency in their operations and derecognize the MFIs, which are known for bad corporate governance.