August 01, 2021

AIDWA memo on RBI document on microfinance

ALL India Democratic Women’s Association, on July 28, released a memorandum on the consultative document on regulation of microfinance, pointing out that women, who make majority of microfinance seekers, are unable to get loans at low interest rates, and collateral free loans.

AIDWA said it has been repeatedly raising women’s concern that they are not able to access low interest and collateral free loans from public sector banks. According to AIDWA, this islargely because of the lack of public sector banking infrastructure, along with rejection of accounts and difficulties in getting credit. AIDWA has been campaigning for the strengthening of the  SHG-Bank Linkage Programme, especially through public sector banks, since the early 2000s.

In a statement, AIDWA, which represents the interests of the poorest and most marginalised sections of women, said it has been working on issues related to the microfinance sector for over two decades.

As per the Bharat Microfinance Report 2020, the share of women borrowers in the microfinance sector as a proportion of total borrowers is more than 96 percent and has hovered around 98 percent in the last couple of years. The preponderance of women borrowers is linked to several schemes of the government like National Rural Livelihood  Mission, SGSY and others. These credit link schemes were leveraged through NABARD so that women could finance their income generation and other activities through Self Help Groups (SHGs).

Linking SHGs to public sector banks for low-interest credit, was initiated with the goal of emancipating them from the clutches of new informal moneylenders and other high  interest loans. This move was therefore seen by women’s organisations as a positive step,  towards providing small loans at low interest rates, with potential for united action against  all types of oppression and harassment. However, the microfinance institutions are adding to the deterioration of their  economic misery.

The demand for strengthening and expansion of the public sector led SHG bank link has, however, found little policy support. From the early 2000 onwards, successive governments have focused on the privatisation of public sector banks and liberalisation of financial  markets. After the notorious microfinance crisis in Andhra Pradesh in 2010, the Reserve Bank of India (RBI) introduced margin and interest caps on NBFC-MFIs in 2011.

The rate of interest on individual loans was capped at 26 per cent per annum, and the annual margin for these  institutions was capped at 10 percent of large-sized NBFC-MFIs (with a loan portfolio  exceeding Rs. 100 crore) and 12 per cent for others.

The RBI relaxed the interest rate cap in  2014 by linking it to the cost of funds of NBFC-MFIs or the base rate of commercial banks. To  be precise, RBI allowed the NBFC-MFIs to fix their lending rates either as per their own cost  of funds plus margin or as per the average base rate of the five largest commercial banks  multiplied by 2.75, whichever was lower of these two variables. However, this limited regulation was only applicable to NBFC-MFI. Such control was not applicable to MFI’s or small finance banks (or former giant MFIs who were allowed to become banks like Bandhana  Financial Services, Bharat Financial Inclusion Ltd, Ujjivan etc., in 2014).

A further weakening of the SHG Bank Linkage Programme has taken place through the inclusion of NBFC-MFIs and SFBs in priority Sector Lending. As a result, the interest rates for women are much higher (to the tune of  24 percent) than they would have been if the women were getting low interest loans from  public sector banks. Consequently, women have become targets of unfair practices being  followed by the NBFCs and MFIs, especially with respect to managing collaterals, having to  take multiple debts for repayment, harassment for recoveries, high processing and other  associated costs etc. The recovery methods of the MFIs are highly objectionable despite the RBI  directiveduring the pandemic. Women have been humiliated and even driven to suicide. Recovery agents standing outside the houses of the women and shouting obscenities like, “sell your bodies to pay up”, etc. have been reported by women.

Given this context, the consultative document on the regulation of microfinance must address the above mentioned issues if women are to be benefitted by it. It also notes with concern, that while it has been in the middle of a grave pandemic, the Document ignores the  prevailing social reality and devastating impact of the pandemic on the lives of women and  their families.
AIDWA demanded that the proposals made in this Paper should be withdrawn, and fresh in-depth consultations should  be held to evolve a comprehensive framework for the regulation of microfinance,  whose proposals address the needs of women workers and peasants. Such a framework should make explicit financial and infrastructural provisions for expanding the SHG-Bank Linkage Programme, and increasing the outreach of public sector banks. The banks should expand the small loans at low interest rates to women entrepreneurs and vendors in order to reduce their dependence on  NBFC/MFIs.
New proposals should also ensure that women get low interest loans at a reasonable rate of interest, whose ceiling is determined by the RBI; such a provision should apply to all entities: MFIs, NBFC-MFI, SFBs, Thrift societies etc.