M icrofinance , a category of financial services aimed at serving people from low-income households who lack access to conventional banking credit and services, was originally designed by international finance capital institutions such as the World Bank as an alternative to providing direct concessional credit to the poor—which would empower them—especially in the wake of establishment of the neoliberal economy.
The Reserve Bank of India (RBI) and the National Bank for Agriculture and Rural Development (NABARD) ushered in the concept of microfinance in the early 1990s. However, compared with the disastrous Latin American experience, in India the formal fusion of microfinance with the structure of mainstream institutional finance was somewhat different and beneficial to the poor to a certain extent. This was chiefly a result of the efforts of the RBI and NABARD and the vast array and reach of public sector banks, regional rural banks (RRBs), and cooperative banks. Among the poor, rural women in particular have been significant beneficiaries of microfinance. They have organised themselves into self-help groups (SHGs). The SHG movement has played a crucial role in empowering them through credit extended by banks.
In States such as West Bengal, Kerala, and Tamil Nadu, this movement was organised under the aegis of cooperative banks. Known as ‘cooperatives within cooperatives’ in West Bengal and ‘Kudumbashree’ in Kerala, this movement certainly made a mark in the field of microfinance, marking a departure from the traditional model as seen in Latin America or Bangladesh. However, all these gains will be reversed if a recent RBI proposal to remove the interest cap for private lenders and to delink microfinance from income-generating ventures comes into force.
In India, NABARD was the pioneer of the microfinance movement. In 1992, after discussions with the RBI, it initiated the SHG-Bank Linkage Programme (SHG-BLP) to promote SHGs with a view to linking rural women with banks through savings and credit so that they could meet their families’ needs and enhance their livelihood through income-generating activities. This savings-led, women-centric, doorstep, self-managed SHG programme has emerged as the largest microfinance movement in the world. Also read: The bank of last resort's reserves
India now has more than one crore SHGs that had Rs.26,152 crore in savings deposits with banks and enjoyed credit facilities of more than Rs.1 lakh crore, as on March 31, 2020.
NABARD role
NABARD has been directly involved in a number of path-breaking initiatives in the growth of SHGs. One of them is deepening of the SHG-Bank Linkage Programme, under which it has sanctioned a provisional cumulative assistance of Rs.415.37 crore to various agencies for promoting nearly nine lakh SHGs, as on 31 March, 2020. It has supported formation and linkage of SHGs, digitisation of SHGs, training and capacity building of stakeholders, livelihood promotion, documentation, awareness and innovation.
NABARD initiated the Livelihood and Enterprise Development Programme (LEDP) as a pilot project in 2015 to create sustainable livelihoods among SHG members and to help them obtain benefits from skill upgradation. The programme includes training for capacity building for livelihood, re-skilling, refresher training, backward-forward linkages, handholding, and escort support for credit linkage. Cumulatively, 89,127 SHG members have been supported through 783 LEDPs as on March 31, 2020.
NABARD also developed the Micro Enterprise Development Programme (MEDP) to impart skills to SHG members. The programme aims to help SHGs graduate into micro enterprises for participation in meaningful economic activities for sustainable livelihood. Cumulatively, around five lakh SHGs have received training through 17,700 MEDPs as on March 31, 2020.
Entry of private players
However, in the 2000s, private sector financial entities began aggressively invading this sector, where they sensed an opportunity to capture the rural financial landscape; this was in tune with state policy changes in agriculture and allied sectors that envisioned an increasingly greater involvement of the corporate sector.
Private sector micro-lenders such as microfinance institutions (MFIs), non-banking finance companies (NBFCs) and small finance banks are steadily taking over the microfinance sector. These entities operate with usurious interest rate structures that have little to do with the basic objective of creating durable income-generating assets for the poor for their overall economic empowerment. Also read: The threat of FDI in India's banking system
According to the RBI, as on September 30, 2020, there were a total of 197 lenders in the MFI sector in India, with an outstanding loan amount of Rs.2,27,942 crore. Out of these, there were only 15 banks, including public sector banks, and they accounted for a total lending amount of Rs.93,432 crore, or about 41 per cent of the total outstanding loan amount. The remaining amount of Rs.1,34,510 crore, or 59 per cent of the total, was shared by 182 private sector entities: NBFC-MFIs (86), small finance banks (8), NBFCs (55), and non-profit MFIs (33).
In such a milieu, the RBI’s “Consultative Document on Regulation of Microfinance”, released on June 14, 2021, which calls for the abolition of the interest rate cap for NBFC-MFIs and delinking microfinance with income-generating ventures, will prove to be disastrous for poor borrowers. The central bank’s plan for the abolition of any effective regulation of this sector, including removal of the cap on interest rates, hinges on its specious logic that there is no cap on other entities, including banks, on the interest to be charged from the ultimate borrowers.
This marks a watershed moment of serious departure from the successful Indian model of microfinance that has enabled a somewhat modest empowerment of the poor, especially women. The RBI document itself admits that the micro-credit sector began as an unregulated sector in the early 1990s (which continued until December 2, 2011, when the RBI announced regulations for NBFC-MFIs).
Taking advantage of the informality in the sector, the uncontrolled growth of various private sector MFIs with exploitative policies started to devastate the lives and livelihoods of the poor in several States, especially Andhra Pradesh, Odisha, Tamil Nadu, West Bengal, and Karnataka. Overindebtedness grew through practices such as zombie lending, unconnected with any meaningful livelihood development programme for the poor. (Zombie lending refers to lending fresh loans to distressed borrowers on the verge of default.)
This resulted in a large number of suicides of micro-credit borrowers, especially poor women in Andhra Pradesh and a few other States, who unfortunately could not withstand the pressure of the back-breaking usurious interest rate structure. This necessitated the introduction of RBI regulations for the NBFC-MFIs that came into effect from December 2, 2011. This was against the backdrop of the global financial crisis of 2008 onwards that saw the reckless behaviour of international finance capital engulfing the global economy. It also contributed to shaping public opinion strongly in favour of the regulation of MFIs and other private sector financial entities. Also read: Banks on the run
For a few years after the regulations were implemented, there was muted behaviour by the NBFC-MFIs and other private sector microfinance lenders, especially after public outrage following the Andhra Pradesh micro-credit crisis. However, with the gradual weakening of progressive forces and voices in India and elsewhere, followed by the dramatic rise of neoliberal and proto-fascist forces globally, international finance capital decided a take a decisive step towards further deregulation in order to earn super profits through further pauperisation of the masses.
In the existing guidelines for NBFC-MFIs, for a microfinance loan to be classified as a ‘qualifying asset’ the borrower must have a household annual income not exceeding Rs.1,25,000 in rural areas and Rs.2,00,000 in urban and semi-urban areas.
The loan amount should not exceed Rs.75,000 in the first cycle and Rs.1,25,000 in subsequent cycles.
The total indebtedness of the borrower should not exceed Rs.1,25,000, excluding the loans towards meeting educational and medical expenses.
The tenure of the loan should not be less than 24 months for the loan amount in excess of Rs.30,000, with a provision for prepayment without penalty.
The loan must be extended without collateral. The aggregate amount of loan given for income generation must not be less than 50 per cent of the total loans given by the MFIs.
The loan must be repayable on weekly, fortnightly or monthly instalments at the choice of the borrower. No more than two NBFC-MFIs can lend to the same borrower.
The maximum interest rate charged by an NBFC-MFI shall be the lower of the following: the cost of funds plus a margin cap of 10 per cent for MFIs with a loan portfolio of Rs.100 crore or above and 12 per cent for others; or the average base rate of the five largest commercial banks by assets multiplied by 2.75.
In the existing regulations, there are safeguards for borrowers, such as the stipulation that NBFC-MFIs shall ensure that the average interest rate on loans sanctioned during a quarter does not exceed the average borrowing cost during the preceding quarter plus the margin within the prescribed cap. The regulations also stipulate that the processing fee shall not be more than 1 per cent of the gross loan amount. The lending entity may not charge penalty from the borrower for delayed payment, etc.
Proposed changes
However, in the new proposal, meant for all regulated entities in the microfinance sector, almost all the above safeguards of lending have been removed, although the collateral-free character of loans to households with existing annual income criteria are retained.
In the new proposal, there would be a “realistic household income assessment”, which is to be done by the financing agency. (Private agencies are likely to artificially inflate such assessments of household income to push more loans at high interest rates).
Each regulated entity shall have a board-approved policy for capping the payment of interest and repayment of principal for all outstanding loan obligations of the household as a percentage of the household income, subject to a limit of maximum 50 per cent.
The board of each NBFC-MFI shall adopt an interest rate model taking into account relevant factors such as cost of funds, margin and risk premium and determine the rate of interest to be charged for loans and advances. Also read: A Kerala model for the banking sector
The RBI also said that although interest rates are not regulated by it, “rates of interest beyond a certain level may be seen to be excessive and can neither be sustainable nor be conforming to normal financial practice. Boards of NBFC-MFIs, therefore, shall lay out appropriate internal principles and procedures in determining interest rates and processing and other charges.”
There will be just a display of minimum, maximum and average interest rates charged on MF loans.
There will be no upper limit of indebtedness of borrowers to prevent overindebtedness.
There will even be a provision for penal interest to be charged for late payment, unlike existing rules, where it is explicitly prohibited.
Following the COVID-19 crisis and near total policy paralysis in advanced capitalist countries in tackling the pandemic, there has been a renewed clamour to go back to a somewhat neo-Keynesian model of capitalist development. But that is not the case in India, where right-wing forces hold fort at the Centre and in several States and have failed to resolve the crisis.
In this sociopolitical setting, with vast sections of the Indian population deeply mired in poverty and destitution, finance now sees a new opportunity for exploitation of the masses. This is all the more deplorable as the wholesale price index scaled a new high of 12.94 per cent and the consumer price index-based retail inflation touched a six-month high of 6.3 per cent in May 2021, which even the RBI is worried about.
There are several other problems plaguing the entire gamut of economic activity in India, such as patchy rainfall in many parts of the country hitting kharif acreage, which now stands at 49 million hectares, down 11 per cent from 55 million hectares during the corresponding period last year, and widespread unemployment.
Strangely enough, even in such a backdrop the Central government is still mulling privatisation of banks and insurance companies and making moves to bring the cooperative banking sector under its control, even though cooperation falls under the State list in the Constitution.
The RBI’s proposal regarding NBFC-MFIs must be viewed in the context of the series of recent government measures and the change of laws relating to the financial sector, which have a common design and a decisive pattern. All the recent moves of the government have a common discernible thread, which is the intention to give free rein to finance.
Coupled with the grand plan to privatise public sector banks and insurance companies and the calculated decimation of cooperative institutions, this will further devastate the poor.
Rana Mitra is general secretary, NABARD Employees Association.
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