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Microfinance: latest developments

1. SHG Bank Linkage programme which was introduced in 1992 has grown substantially 97 million poor households have accessed to financial services with credit exceeding Rs. 312 Billion (March 2001) 2. Suicide of farmers followed by Andhra Pradesh Government audience brought micro finance by MFI to a stand still position. So Y H Malegam committee was appointed to examine the issues. Their significant recommendations are: i. Creation of a separate category of NBFCs operating in the microfinance sector to be designated as NBFC-MFIs; ii. Imposition of a margin cap and interest rate cap on individual loans; iii. Requirement of transparency in interest charges; iv. Lending by not more than two MFIs to individual borrowers; v. Creation of one or more credit information bureaus; vi. Establishment of a proper system of grievance redressal procedure by MFIs; vii. Creation of one or more social capital funds; viii. Continuation of categorization of bank loans to MFIs, complying with the regulation laid down for NBFC-MFIs, under the priority sector, etc. 3. RBI has issued guide lines permitting categorization as priority sector advance to certain eligible MFI who lend small amount to borrow in low income group without collaterals. Margin caps and interest rate caps have been stipulated to ensure protection of borrowers. Guideline has been issued for NBFC-MIF. Government has proposed Microfinance institution

(Development and Regulation bill 2011) which envisaged RBI as the sole regulator of microfinance sector.

ISSUES 1. Regulatory Frame Work Governance is maximizing shareholder wealth legally, ethically and on a sustainable basis. It represents value frame work, ethical frame work, moral frame work and legal frame work. Self-regulation has not been worked out or implemented thoroughly. People working in MFI aimed at profiteering or profit maximization. The value frame work is not as per expectations. It is like subprime crisis, giving credit beyond borrowed capacity to pay and compensation. Creating value for share holders but not to protect other stake holders. Minimum standard of governance, customer protection and finance health of MFIs need to be set up. 2. Social and Financial Objectives Social and financial objectives need to be balanced. The question is if MFI reduces the rate of growth and shift more towards social objectives, how will they get finance? 3. Human approach, MFIs should not be over-lending should be more ethical and human in their recovery methods. 4. Transparency Transparency about the interest changed and the total cost to customer should be ensured. 5. Credit Rating Credit Information Company should be established to guard against adverse selection and over in debtedness. 6. Cost efficient delivery model MFI should build cost-efficient delivery model, they should not pass on their operational inefficiency in the form of high rate of interest. 7. Linkage MFI should be rated. Other linkages like input supply, technical support, training, and market linkage need to be established.

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