By Jaipal Singh , Executive Director , Center for Microfinance Rajasthan – cmfraj.org
The author of this article can be contacted by email at jaipal (at the rate) cmfraj (dot) org
Comments and feedback on Malegam Committee Report
The Malegam committee has done a very good job within the mandate given to it. Most of the recommendations are commendable and will have a far reaching impact on the sector. The challenge is to set up a good regulatory infrastructure in RBI to cover the vast number of MFI’s in the country.
As a person engaged in the Microfinance sector for the last 5 years, through community based microfinance ( SHG’s and SHG federations), I have seen the emergence of MFIs and its adverse impact on SHGs as well. But I also believe that socially responsible MFIs have a good potential to do good for poor.
My comments/ suggestions on the Malegam Committee are as follows :
Section 4.2: There is too much emphasis on ‘loan for income generating activities’. The poor have diverse needs and as they do not have access to banks, the credit is required for health expenses, purchasing of food grains, fodder for animals, children education, house repair and for redemption of costly loans from moneylenders. So either the definition of income generation be broadened or the word income generation activities may be deleted.
Section 5.9 b) i The limit of annual income of the borrower family at Rs. 50,000/- is very restrictive and if it is applied, many of the poor people will not be able to access MFI loans. So this limit should be increased to Rs. 1 Lakh.
Section 5.9 b) ii Restricting aggregate value of all outstanding loans of an individual borrower to Rs. 25,000/- will be extremely difficult because almost 76% of live loans are found from informal sources like moneylender, friends and relatives etc. which have no records and people also do not tell easily (especially if they know that they will not get loan if they share this information). The limit should be increased to Rs. 50,000/- .
Section 5.9 b) v The stipulation that minimum 75% of loans should be for income generation purpose should be removed or at least it should be reduced to 50%.
Section 5.10 : The microfinance loans of NBFCs not qualifying as NBFC-MFI to the upper limit of 10% of their assets should also be clearly mentioned as ‘qualifying assets’ as it is applicable to NBFC-MFI’s.
Section 7.11 : Though it is implied, but it should be mentioned clearly that the rate of interest permitted at 24% is ‘annual interest on reducing balance basis’. Many MFIs charge flat rate on the entire loan amount for the loan term period.
Section 8.7 : The committee allows max 1% of gross loan amount as ‘loan processing fee’ under section 8.7 a); will it be in addition to 24% interest permissible or this 1% is included as admin cost while calculating the details of interest costs under section 7.7. It should be clarified. Because if it is in addition to interest rate then the effective interest will be 25% and not 24%.
Allowing recovery of insurance premium separately is like keeping a window open for manipulations. The insurance being provided by MFI’s are actually the insurance of their loans so that if something happens to the client, they can get the money back from insurance premium. It works like hypothecation of assets in case of bank loans. The cost of insurance should also be included in the interest rates. The borrower should get one and single rate of interest.
MFI’s take about 10% of the value of loan as ‘security deposit’ from borrower and there is no interest paid on that. To avoid the legal complications, MFIs term this deposit as ‘first installment paid by borrower’. This practice should be curbed and MFI’s should pay the complete amount of loan to borrower and the repayment should start not earlier than 1 months after the loan has been disbursed.
Section 9.7 b) It should be clearly mentioned that a borrower should be a member of more than one JLG or member of more than one SHG or member of a SHG and a JLG. Though it will not serve a great purpose as currently mother-in-law is member of one group and daughter- in-law is member of another group and father-in-law is member of some other group or take loan through KCC etc.
Section 9.7 d) The moratorium period should also be defined at a minimum of one month
Section 11.12 It should be clearly mentioned that the monthly salary of MFI staff should not be based on the recovery. At the most the recovery of loan and making fresh loans can be one of the performance indicators for performance appraisal done annually. Or at the most 5% incentive can be given for recovery to staff. Otherwise the MFI staff will behave like recovery agents being hired by banks.
Section 18.10 The recommendation on increasing the bank lending to microfinance sector and clubbing both SHG-Bank linkage program and MFI will be dangerous. It has been seen that Banks tend to deal in big ticket loans (through MFIs) and they have reduced their exposure to small loans through SHGs and through individual loans. Rather banks should be asked to give equal priority to SHGs and their SHG loans should be at least equal to MFI loans.
Section 19.5 The recommendation to RBI to revisit the existing guidelines for lending to priority sector is extremely welcome step. In fact committee can recommend that at least 5% of banks credit (within the present stipulation of 40% in priority sector) should be on microfinance.
Section 21.4 The recommendation of creation of ‘Domestic Social Capital Funds’ is very timely and commendable. But the governance of MFIs and track record of MFI promoters should be thoroughly checked before making Tier II capital available to them. The annual salary (including all benefits) of the CEO of MFI should not be more than 15 times of the salary of lowest paid staff.
Section 22.7 b) The responsibility of industry association is not clear and so far such associations have not been effective. So this clause has no value and should be deleted to avoid confusion.
As chartered accountant, Mr. Malegam must have been clinical in its approach. But microfinance sector need a general physician also. If banks continue to shun away from the poor, MFI’s and moneylenders will keep on finding ways to skim fortunes from the bottom of the pyramid.
The committee should have looked at alternatives like SHG model to understand as why poor get attracted to MFI’s even though SHGs are owned and managed by them. It should also have probed in to the dealings between Banks/SIDBI and MFI’s. Why do banks prefer to give loasn to MFIs, knowing fully that MFIs will charge more than 3 times the interest rate that it will pay to banks ? Why banks do not even open account of SHG’s who provide loan to poor effectively at the same rate that it pays to bank ?
The committee has not adequately addressed the root cause of the problem (un-regulated spread of MFIs and their usurious rates). Poor are attracted to MFIs and even such high interest rates because the banks which are mandated to provide financial services to all have so far failed to serve poor. The report is almost silent on banks who in a way encouraged the MFI’s by providing credit to them and at the same time almost stopped credit to community based microfinance model. i.e. Self Help Groups
The overall exposure of banks to the poor directly and through SHGs and SHG federations might come down as banks find it more lucrative to lend to NBFC in big sizes (even if the NBFCs charge high interests from poor) than lending small amounts to SHGs.
Mr Jaipal Singh
Centre for microFinance (CmF),
30, Jai Jawan Colony II,
Tonk Road Jaipur, Rajasthan (India);
Tel. 141-2546037, 3248119