Opinion By the rich,for the poor

North Block wants a cap on MFI loan rates. RBI is thinking whether MFIs should continue to be beneficiaries of scheduled banks’ cheap priority sector lending. Moral conviction has been strengthened by SKS Microfinance,a big MFI,getting a warm reception in the equity market. Its IPO was a hit. If moneymen like a firm that lends to the poor then surely there’s something wrong with that firm’s business model — that’s the thinking.

Critiques of the finance ministry and the central bank are pointing out that this thinking is wrong because of three reasons. One,the so-called high interest rates are a reflection of finance reaching people who otherwise finance never thinks of. For the poor,getting a Rs 10,000 loan from someone who isn’t a thuggish moneylender or a thug who occasionally lends money and charges 100 per cent-plus interest is a very big thing. People like us should sometimes ask our drivers and domestics — rural migrants to cities — how they finance their big expenditures. Many of them borrow money at 100 per cent-plus. We should ask them whether they would like a loan at,say,28 per cent (North Block wants a MFI rate cap of 24 per cent) with a well-thought-out repayment schedule. Their answer will be humbling.

Two,loaning tiny amounts of money to lots of poor people is a high-cost business. You need frequent and close personal contact with your clients,who get doorstep financial services. Interest rates in MFI business models partly reflect that. Should MFIs lower interest rates so that they can never make money? Who will then lend to the poor? Public sector banks can’t — the tiny loans make no sense for banks. Concern for the poor shouldn’t lower competition for exploitative moneylenders,should it?

Three,and this is Economics 101,if MFI business decisions are not interfered with,there will be more MFIs as financial entrepreneurs see that there’s money to be made,and more MFIs mean more choices for customers,which means lower prices,that is lower interest rates. Why are cellphone call rates dirt cheap and why are cellphones available for as little as Rs 1,000 or below? Not because mobile service providers and handset manufacturers are barefoot entrepreneurs who march for every good cause. It’s because people who we classes call the masses represent a big market. MFIs can make financial services mass market products.

One should add to these the following question — how did North Block decide that a ceiling of 24 per cent on MFI lending rates is most optimally pro-poor? Bibek Debroy,a columnist in these pages,had once observed that such figures are arrived at in government offices by employing the ceiling method — ministers and officials look at the ceiling of their office rooms,think,and come up with a number.

The most fundamental discomfort one should have with the ministry/ RBI’s position on MFIs is something else: the imposition of metropolitan assumptions on the poor’s utility functions. All of us nice people know that the poor don’t have access to many basic services. We want that to change. Public services should be universal,effective and cheap. That perhaps will happen one day. But in the interim let’s recognise that the poor are forced to pay massive premiums,relative to their spending capacity,for goods and services — from cooking fuel to basic medical care to reasonable quality education — that we won’t dream of paying through our noses for.

Expenditure by the poor on privately provided services has been steadily increasing. If there are private sector solutions that address the problem of the poor paying massive premiums and if they do that through a viable business model shouldn’t official agencies encourage this? By thinking of light-touch,intelligent regulation. Lending rates of 30 per cent look medieval to us,who can crib about 15 per cent rates and take Rs 30 lakh house loans. But that MFI rate works out to small absolute repayment obligations on a small loan for a poor borrower who otherwise has a choice between zero loans or loans at 100 per cent rate of interest.

Similarly,for innovative private sector solutions for medical care or education,prices offered may offend us. But the government should think of the effective price the rural poor face when they,say,travel miles and miles to a city/ town government medical centre,and where they are often treated with that special contempt that India’s sarkari staff reserve for social groups the sarkar calls economically weaker. Or,of course,the poor go to quacks; some of them certified by the official Medical Council of India.

The official position that asks for seats for poor children in private schools is a small recognition of this reality. But it’s a quota-based solution,nowhere near enough. Education and health vouchers that guarantee need-specific spending power for the poor is the big way to think — the private sector will be interested in mass markets for education and health. These will be efficient use of subsidy,just as RBI allowing MFIs to borrow from banks at priority sector rates is.

Fixing prices and not delivering services don’t help the poor. Fix the service (encourage/ subsidise the private sector) and free the price. And ask the poor. They will agree.

saubhik.chakrabarti@expressindia.com