Percentage shifts

The Andhra Pradesh assembly has passed the Andhra Pradesh Micro Finance Institutions Regulation of Money Lending Bill, to replace the ordinance the state government had issued in October,following reports of coercive recovery methods used by microfinance institutions MFIs and debtor suicides. The government claiming to protect womens self-help groups and low-income borrowers against MFIs high interest rates and recovery agents has vented its ire on a sector in deep crisis. Although the bill does not cap interest rates the biggest threat to microfinance there are several reasons why the replication of Andhras heavy-handedness in other states could spell the destruction of microfinance in India.Andhra has imposed several restrictions on MFIs,such as registering them all with local authorities in each district. More dangerous is encouraging borrowers to default on loans. This hysteria misses the important role MFIs play in a country like India providing financial services to sub-prime borrowers commercial banks do not entertain. Without MFIs,they would be left at the mercy of old-style moneylenders charging around a 100 per cent where MFI interest rates vary mostly between 30-40 per cent,and when some large MFIs have already announced an interest cap of 24 per cent. Whats also overlooked is that MFI loans are small sums. And yet,precisely because the sums are so small,these involve high transaction costs. Nor do these loans have collaterals. However,what do these small sums do? These allow the very poor to be self-employed,helping them start or expand businesses,these also provide insurance against adversity,such as flood/ drought and disease.Although interest rates havent been capped in this bill,theres no guarantee the matter wont rise again in Andhra or elsewhere. Any attempt at severely restricting MFIs would hurt the poorest. Thats not to deny the need for safeguards against coercive collection methods or faulty judgments of creditworthiness. The best answer is better oversight of existing agencies. Perhaps the Centre should consider a consumer redress mechanism to discourage the anecdotal and speculative discourse as in Andhra,as well as a credit bureau where MFIs report their loan portfolios. If MFIs trip or disappear,the poorest will be thrown back to the wolves.