Column: Why not MFI banks?

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Madan Sabnavis : Mar 02 2012, 02:15 IST

Are there alternative ways of addressing the MFI issue, considering that the new proposed guidelines for priority sector lending earmark 9% of credit for this segment? Everyone wants this segment to benefit, though we are not sure of the structures that have to be created or modified. The fact that banks do not do non-collateralised lending means that it is outside their purview or else they would have been there given their expansive branch network. The existing structure of MFI lending appears to be flawed in terms of the cost of credit for the MFIs that have pushed up the lending rates, which makes non-repayment attractive.

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

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