Jan 16, 2011

If farmers can be given loans at one per cent interest, why not small borrowers? MFIs can then be directed to close operations.

At a time when the Micro-finance Institutes (MFIs) are charging anything between 24 to 36 per cent (and sometimes more) as the annual rate of interest, Madhya Pradesh government's decision to provide farmers with loans at one per cent interest from the cooperative banks from the next financial year, comes as a big sigh of relief. And as Chief Minister Shivraj Singh Chauhan claimed MP is the first State to lower the interest rate to as low as one percent.

Karnataka is also planning to lower interest rate for farmers to one percent. PTI reports: "The government intends to examine the feasibility of extending farm loans under the cooperative sector at a lower interest rate of one percent," Governor H R Bhardwaj said in his address to the winter session of the State assembly. Karnataka is at present extending term loans to farmers, weavers and fishermen at three percent interest rate through cooperative credit societies.

Over the years, India has systematically reduced the interest rate for farmers. As former Finance Minister P Chidambaram had said sometimes back: "10 percent interest was charged for farm loan when the UPA government assumed office in its first term (in 2004)". When he was the Finance Minister it was reduced to 7 percent gradually. Subsequently, farmers could get 2 percent subsidy out of 7 percent interest on farm loan if they repay the loan without default, which means for all practical purposes the effective rate of interest came down to five per cent.

The catch here is that while the nationalised banks provide crop loans at 7 per cent (subsidised to 5 per cent if repayed in time), it is through the cooperative banks that the State governments have managed to extend loans at a much lower rate of interest. This is certainly laudable, and I hope in 2011 Finance Minister Pranab Mukherjee directs nationalised banks to further lower the rate of interest to 3 per cent (if not one per cent).

Although the Government had fixed a target to extend agricultural loan to the tune of Rs.3.75 lakh crore in 2010-11, much of this loan is actually going to agribusiness,warehousing and related activities. Farmers are still in the lurch, largely depending upon the money lenders.

This makes me wonder that if farmers can be provided with loans at such a low rate of interest why is that we need to encourage the new organised breed of money-lenders, and I am talking of the MFIs, be allowed to charge an exorbitantly high interest ranging between 24 to 36 per cent from the poorest of the poor in the same village? Why is that while the farmer gets crop loan from cooperative banks at one per cent, his wife if she happens to be a member of a self-help group or for that matter a farm worker who also works on the same farm, be obliged to take loan from an MFI?

Why can't the government extend credit to small borrowers also at the same rate of interest as the farmers? If the farmers can avail of the Kisan Credit Card, why can't the artisans, weavers, fishermen, and agricultural workers too get similar cards?

This brings me to what Muhammed Yunus writes in New York Times (Jan 14, 2011) "Sacrificing Microcredit for Megaprofits" (here is the link: www.nytimes.com/2011/01/15/opinion/15yunus.html?partner=rss&emc=rss): "The maximum interest rate should not exceed the cost of the fund — meaning the cost that is incurred by the bank to procure the money to lend — plus 15 percent of the fund. That 15 percent goes to cover operational costs and contribute to profit. In the case of Grameen Bank, the cost of fund is 10 percent. So, the maximum interest rate could be 25 percent. However, we charge 20 percent to the borrowers. The ideal “spread” between the cost of the fund and the lending rate should be close to 10 percent.

Yunus admits that he is also charging an interest of 20 per cent from the small borrowers. Agreeing that strict regulations should help in enforcing discipline, he says: "To enforce such a cap, every country where microloans are made needs a microcredit regulatory authority. Bangladesh, which has the most microcredit borrowers per square mile in the world, has had such an authority for several years, and it is devoted to ensuring transparency in lending and prevented excessive interest rates and collection practices. In the future, it may be able to accredit microfinance banks. India, with its burgeoning microcredit sector, is most in need of a similar agency."

I am afraid I do not buy the argument forwarded by Yunus. Although he blames the recent crisis that erupted in India and Latin America as the cause behind the mistrust in MFIs when he writes: "Troubles with microcredit began around 2005, when many lenders started looking for ways to make a profit on the loans by shifting from their status as nonprofit organizations to commercial enterprises. In 2007, Compartamos, a Mexican bank, became Latin America’s first microcredit bank to go public. And this past August, SKS Microfinance, the largest bank of its kind in India, raised $358 million in an initial public offering," I think he is very cleverly trying to deflect attention from the real cause.

Yunus writes: "In 1983, I founded Grameen Bank to provide small loans that people, especially poor women, could use to bring themselves out of poverty. At that time, I never imagined that one day microcredit would give rise to its own breed of loan sharks." Well, the problem actually began in 1983. Yunus did exactly what the loan sharks are doing now. The only difference being that while the loan sharks are charging 24 to 36 per cent and above (some even charging 100 per cent and still cite several case studies where poor have gained), Yunus was charging a little less.

If only people like Yunus (and those who swear in the name of the poor, and have in turn built Empires) forced the governments to provide cheaper credit to small borrowers like what is being made available to farmers I am sure a large population of the poor would have been above the poverty line by now. That is why I am convinced that MFIs are basically a crime against humanity. Tough legislation is not the answer to stem the rot. These MFIs need to be shut down, and several of those whom Yunus refers to as 'loan sharks' need to be put behind bars.

The poorest of the poor also need to be provided with cooperative loans, and Kisan Credit Cards like the farmers get. If such schemes can be implemented for farnmers who live in unreachable areas, I am sure the same provisions can be extended to other members of his family. What is needed is a political will to make this happen, and it will happen.

Till then , MFIs will continue to loot the poor.


Ramesh Dubey said...

आदरणीय देवेंद्र जी आपका यह सुझाव ठीक है कि किसानों, कृषि मजदूरों, मछुआरों, बुनकरों आदि को रियायती ब्‍याज दर पर कर्ज मिलना चाहिए । इसके साथ-साथ बैंकिंग प्रक्रिया का सरलीकरण किया जाए । बैंक सप्‍ताह में सभी दिन खुलें और उनके कार्य दिवस सुबह आठ से रात आठ बजें तक रहें, कागजी कार्यवाई कम से कम की जाए ताकि किसान आदि को अधिक भागदौड़ न करना पड़े । लेकिन केवल कर्ज बांटने से समस्‍या का समाधान नहीं होगा क्‍योंकि खेती-किसानी लंबे समय से उपेक्षित पड़ी है । कृषि व ग्रामीण क्षेत्रों में सरकारी निवेश बढ़ाया जाए और मुक्‍त व्‍यापार की नीतियों को इस प्रकार ढाला जाए कि किसानों के हित प्रभावित न हों । इन बहुआयामी उपायों से ही रियायती ऋण सुविधा गांवों में समृद्धि लाएगी अन्‍यथा वह भी वोट बटोरू हथकंडा बनकर रह जाएगी ।
रमेश दुबे

Dwarikanath said...

Dear Devinderji,
It's correct that the MFIs are looting, but isn't that they are taking the advantage of the Gap the state co-operative banks and central banks have left for years!!! I doubt the capability/dedication of the govts both in state and center whether they can provide loan to all farmers at nominal interest rates.

I pray GOD that they will be able to provide loan at 1% or even below that. In this case we should forget about MFIs as they will die their own death!!! then the greatest contribution by the MFIs to the society will be they compelled the Govt to introduce such low interest loans to our farmers!!! For me that will be a blessing in disguise and may be Dr Yunus will get his success in his failure!!!

Amandeep Singh said...

Dear Devinderji,
you are absolutely right. but i want to tell you that now banks are also providing Agriculture Loan against Gold at less than 1% p.m. you can apply on
Or Call at 60011600.

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