One thought here is that we can think of creating new banks that are dedicated to micro-lending. This addresses the issue of cost of funds for the MFIs, as once they are allowed to garner deposits, their cost of operations comes down and they are better positioned to lend at lower rates, which could improve repayment schedules. Today, they are not allowed to collect deposits, which pushes up the cost of funds as they borrow from reluctant banks that charge anywhere between 14-20%, given the risk. By allowing specialised MFI banks, we can leverage their expertise in terms of dealing with non-bankable public.
The structure for such banks can be that either an existing MFI becomes an MFI bank, or new MFI banks come into being. They should be allowed to operate only in the rural areas, and lending can be to only the lowest income class that is not covered by banks. The maximum amount of money that can be lent to an individual (R25,000) can be fixed along with tenure (1 year) and repayments (weekly, fortnightly, monthly). A rural credit bureau should be set up simultaneously as it will help to spread the word about the creditworthiness of borrowers. As the UID scheme works out, it becomes easy to integrate the same. These MFI banks would need to bring in a minimum amount of capital; and to start with R200 crore that, with a capital adequacy norm of 12%, will enable lending of around R1,600 crore.
On the liability side, these banks should be allowed to raise deposits from the public and offer rates that could probably be lower than what a bank gives with fewer restrictions such as minimum account size and withdrawals. By allowing access to deposits, we can cap the lending rate in a manner that makes it less usurious and at the same time profitable. There should be the CRR and SLR norms too so that the integrity of the system is maintained. Lending, however, could be only micro-credit. The SLR will ensure that banks actually earn some revenue from these investments, and as they mature could be allowed to trade in GSecs. Therefore, with pre-emption of, say, 30%, the balance can be used for lending purposes. It will resemble crudely the concept of a narrow bank that focuses on micro-lending and investments.
Capital infusion will be important and there are two options. The first is to have new players who satisfy a financial and expertise criteria or we could have an existing MFI becoming an MFI bank. This can be either by the MFI going public or choosing to be bought by a bank owned by corporate entity. The latter option is of interest here. Banks generally do micro-credit lending indirectly and could use such subsidiaries to run these operations. With their financial strength, these models become scalable. Banks who acquire and run such outfits could further be incentivised by allowing them to include such lending which is indirect as priority sector lending, much like the way that it is being done through the NBFC route.
The entry of corporates is another option for an existing player. Companies such as ITC, Godrej, Mahindra & Mahindra, Amul, HLL, etc, have done a lot in the rural space in terms of integrating their operations at the grassroots. Owning an MFI bank would fit in with their business models as it strengthens their own base in these geographies. In terms of the borrowers, they get a complete solution once they start borrowing from an MFI bank, which simultaneously leads to access to other facilities like deposits and creates a new culture that can later be linked with other financial products such as insurance.
To make these models cost-effective, one will have to leverage technology, and while a brick-and-mortar structure is essential to inspire confidence to the populace, operations should be linked by technology so that costs are reduced. The use of local staff with strong local knowledge will be helpful for screening loan applications.
There is evidently need for us to do something more definite in the micro-credit space. The existing models worked well before running into barriers and the creation of new banks may just be the solution. Currently, securitisation of their loans appears to be taking off, which means that we are integrating this concept with commercial banking. The last mile becomes that much closer once we establish these specialised banks with strong regulatory control.
The author is chief economist, CARE Ratings. These are his personal views