While the Malegam Committee (MC) recommendations gave the much-needed jolt to the micro finance sector, they have incorrectly stereotyped micro finance institutions (MFIs) and the roles they can play ensuring financial inclusion. The highly conservative and backward looking recommendations fail to understand the complexity around poor households, their livelihoods, cash flows and lifecycle needs. My gut is that the MG report recommendations are designed for MFIs to be a delivery channel for government financial programs & priority sector lending to reach a limited pre-identified segment. Nothing less, nothing more.
The microfinance sector definitely required waking-up. It was surprising to see a sector known for innovation & risk taking become highly conservative in approach. It only offered standardized products piggybacking on groundwork of others. Even more strange is that this happened despite high levels of competition where one would expect MFI leaders to look at new markets, innovative products and competitive pricing to differentiate themselves. The pressure to enhance scale, generate quick surpluses meant reducing key investment costs. This changed the entire culture of the MFI industry.
However the MC recommendations seem to have been made on selectively analyzed data and thus provide partial diagnosis. For e.g there maybe two major reasons (amongst many others) why borrowers may have engaged in multiple lending. One as identified by the report, led to over-indebtedness of ‘greedy’ customers encouraged by over-zealous agents/field offices. However, another possibility for multiple borrowings could be for the actual need for larger ticket size of finance. For e.g The MC report highlights that ~22% of SHG loans are taken for housing related expenditure. From our field work over 8 months in different cities of India, some customers we met in Hyderabad had borrowed Rs15,000 from 4 sources to build a floor, others in Bangalore had multiple borrowings for education, similar for enterprise machinery purchase. While I understand that 25% of the loan portfolio can be put to other than livelihood uses- households must still meet highly restrictive eligibility criteria set forth.
While over indebtedness can be tackled by much better due-diligence practices and end-use monitoring etc.- by imposing a cap on the loan amount to Rs 25,000- recommendations will do more harm than good. This will ‘exclude’ households in the other category who have a genuine need and ability to pay for a non-consumption financial need? Instead of designing a varied tenured & interest rate options for loans such as education or housing- this instead will incentivize a customer to meet her need by engaging in multi-lending (through creative proxies mechanisms of course!) For this segment, I see the MG recommendations leading to further over indebtedness by forcing customers with monthly payment burden in same limited time period of 2 years that is currently recommended. Not because of un-affordability, but purely a debt-trapped product design.
My other point of contention with the MC reco is that it has crafted recommendations looking backward and only with a small select target population in mind (rural BPL category). What about the financial needs of urban population- a segment growing at 3% a year? Formal banks despite branch banking penetration have not been able to reach this population and are afraid to do so despite government interest rate subsidy programs. Urban household needs for finance are quite different and for different financial offerings. Btw, which household (not person!) in the urban areas earns less than Rs 5,000?
Sadly, the MC recommendations have been overly prescriptive. This is not what is good for an agenda of financial inclusion. What we need is a transparent, facilitative regulatory framework with checks and balance in place. That is still not in sight.
- Rakhi
Co-founder, micro Home Solutions
