Nov 3, 2010

Small borrowers must stop repaying the loans from MFIs. This is the only way to curb the social evil

Yesterday, when the Reserve Bank of India (RBI) announced the credit policy review in Mumbai, I was discussing the implications on a national TV. Within minutes of the announcement of the upward revision in repo and reverse repo rates -- sixth time this year -- I found that the media focus had shifted to the tightening of the home loans. It was then that I asked a question as to why the RBI had refrained from tightening the screws on the micro-finance segment.

For some strange coincidence, the UPA President Sonia Gandhi who was addressing the All India Congress Committee (Rajdeep Sardesai of CNN-IBN later in show extended the acronymn AICC to 'All India Crooks Corner') at the same time, also skipped talking about rampant corruption within the party. Is it merely a coincidence or a pointer to the evil that the Congress party as well as the RBI is finding it too hot to handle?

I thought my poser on the TV show had gone unnoticed. But I was pleasantly surprised when I found George Mathew of the Indian Express (Nov 3, 20101) asking the same question to the RBI governor D Subbarao. He asked: Microfinance companies are charging very high interest rates. Why is the RBI not doing anything to bring them down?

Subbarao replied: "The RBI regulates only one segment of the MFI sector, which is the non-banking finance companies involved in the microfinance sector. There’s no such separate categorisation of NBFC-MFIs. There are 37 NBFCs which are MFIs and regulated by us and none of them are deposit taking. Only about 13 out of 37 NBFCs are systematically important with business of over Rs 100 crore. The segment of the MFI sector that comes under RBI regulation is small but in terms of total lending, it might be significantly higher. Now there are questions about regulating interest rates and our stance is to move away from regulating interest rates. We can’t now turn towards this and start regulating interest rates. In any case, this is a question that Malegam committee will go through and we will take a view after the report is available." 

While this may be partly true, I think the RBI (like the Congress party) is trying to turn a blind eye to the gory ongoings in the MFI sector. How can the RBI governor first express helplessness, and then say that 'in any case, this is a question that Malegam committee will go through and we will take a view after the report is available." Does it mean that Malegam committee will give additional regulatory powers to RBI? The answer is No. The RBI is simply trying to avoid taking a harsh decision lest it reflects on the lending rates of the nationalised banks (which provides refinance to MFIs and others).

Only a few days back, the Sunday Indian Express (Oct 24, 2010) had in a full-page article entitled Andhra's Small-Debt Trap (Read the full report at: http://www.expressindia.com/latest-news/Andhras-smalldebt-trap/701577/) written by Sreenivas Janayala clearly brought out the malaise that afflicts the micro-finance sector. It quoted R Subramaniam, Principal Secretary, Rural Development, Andhra Pradesh, as saying: “But it is the fine print in the clauses and loan agreement that really create the debt trap. When borrowers fail to pay one EMI, the additional interest is calculated at double or triple the interest rate. The interest continues to remain the same until the principal amount is paid off. More often than not, the final interest rate works to nearly 50 per cent.

Now please tell me, isn't this shameful? Does it make the MFIs any different from the moneylenders that they depict as the villain of the story?

On Oct 16, the Andhra Pradesh government, for the first time in the history of India, promulgated an ordinance, restraining the MFIs from using coercive tactics to recover loans and weekly interest, and keep lending rates in check. This is only one part of the criminal activity that MFIs indulge in. In my understanding, as numerous reports/studies have shown, the main problem is the high interest rate that is being charged from the small borrowers. The AP government as well as the RBI is silent on this. The conspiracy of silence is taking a human toll.

The answer lies in what I had first suggested some days ago on this blog. I had asked small borrowers (including the SHGs) to stop paying back the loans. I am glad the former chief minister Chandrababu Naidu, who is on a three day visit to Ranga Reddy district, also asked "women who have taken loans not to repay till interest rates are reduced."

In a democracy, people must raise their voice. They must express their anger in a peaceful way so that the powers that be sit back and take notice. MFIs charge such exorbitant interests because the nation does not care nor is it aware. The MFIs will come under pressure only of we exert that pressure. As Rajan Alexander has in a letter to Ground Reality wrote: "And how do know they are vulnerable? Because Vijay Mahajan, the father of MFIs in India tells us so:

“We are facing collapse. Unless something changes on the ground, the industry as we know it is basically gone.”

Mahajan, we have news for you. The day when the likes of you are gone, that will be the turning point for the fight against poverty!"

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