On 14th March 2022, RBI issued revised instructions for microfinance loans to the poor.
Their website published a draft on 14 June 2021. The draft has been criticized by several women’s organisations and a number of articles appeared in the newspapers and magazines criticizing the proposed removal of ceiling on the interest rate and giving freedom to the boards of these institutions to decide the interest rate. Ignoring the inputs, RBI has revised its earlier guidelines. The RBI now seldom seems to listen to people’s voices. One of the guidelines says that the rate should not be usurious. But we have seen that many MFIs are already charging 26%, which is usurious. MFIs get a loan from the banks at around 9% interest. Giving them the freedom to charge more interest is unethical and leaves the poor at the mercy of Shylocks.
As per its guidelines, a microfinance loan is defined as a collateral-free loan provided to a household with an annual household income of up to Rs. 3,00,000. In this instance, a household is a husband, wife, and their unmarried children.
The Regulated Entities (REs) shall have a board-approved policy to provide the flexibility of repayment periodicity on microfinance loans as per borrowers’ requirements.
Each RE shall put in place a board-approved policy regarding the pricing of microfinance loans which shall, inter alia, cover the following:
- A well-documented interest rate model/ approach for arriving at the all-inclusive interest rate;
- Delineation of the components of the interest rate such as cost of funds, risk premium, margin, etc. in terms of the quantum of each factor based on objective parameters;
- The range of spread of each component for a given category of borrowers; and
- A ceiling on the interest rate and all other charges applicable to microfinance loans.
Interest rates and other charges/ fees on microfinance loans should not be usurious.
These shall undergo supervisory scrutiny by the Reserve Bank.
Does the RBI have the ability to control these Non-banking Finance Companies numbering more than 10000 now? RBI has only one office in state capitals. RBI cannot monitor these NBFCs. There are already too many complaints! In Andhra Pradesh, the state assembly passed a bill to regulate MFIs in 2011 after a report of 54 suicides. (See, Death by default, Down to Earth, Nov 30, 2010 Issue) The Assam assembly had passed a bill regarding the same in 2020. Now the RBI instructions supersede these acts passed by state Governments. Where is federalism in these actions? Did RBI consult the states? In fact, RBI instructions also state the following-
RE or its agent shall not engage in any harsh methods towards recovery. Without limiting the general application of the preceding, the following practices shall deem as grim:
- Use of threatening or abusive language
- Persistently calling the borrower or calling the borrower before 9:00 a.m. and after 6:00 p.m.
- Harassing relatives, friends, or co-workers of the borrower
- Publishing the name of borrowers
- Use of violence or threatening or other similar means to harm the borrower or borrower’s family/ assets/ reputation
- Misleading the borrower about the extent of the debt or the consequences of non-repayment
The question is, does the RBI have any mechanism to check this? All the above retrograde practices are taking place every day across the country, and the poor have no way out. All India Democratic Women’s Association (AIDWA) has conducted studies and even gone to court, but without any relief. Currently, there is the Usurious Loans Act 1918, which does not help the poor. The poor can only get a maximum of just Rs 1,25,000 as a loan. Should we not control the interest rates? When the Tatas can get, Rs.10000 crore at a 4.5% rate, why not the poor?
What is to be done?
India has some excellent models in place. The Self Employed Women’s Association (SEWA), which started as a trade union of the unorganized in 1972, is a pioneer in this area. It runs the SEWA Bank and has an exceptional lending model. Mysore Rehabilitation Development Agency (MYRADA) had already put women into groups and guided them to lend among themselves, later creating successful Credit Groups. Mahalir Association for Literacy Awareness and Rights(MALAR) in Kanniyakumari, Tamil Nadu, is now a 27 years old self-reliant model which can be replicable everywhere. Kerala has Kudumbashree, which is a neighbourhood-based lending model. Andhra Pradesh had the VELUGU project. West Bengal once had a Cabinet Minister for SHGs!
What we need is to strengthen the NABARD guided SHG-Bank linkage model, expand it, and provide more direct credit. The bloodthirsty, profit-seeking Micro Finance Institutions that use harassment for recovery need to be banned immediately. We need to study the models of SEWA, Kudumbashree, MALAR etc. and ask banks to support them.