Like it or not, MFIs are the best rural alternative
Although the share of rural credit provided by informal financiers may have come down sharply over the years?69.7% in 1951 to 29.6% in 2002 and possibly even further now?two-fifths of rural households still depend on such sources. More importantly, small and marginal farmers are at the mercy of the moneylender because they aren?t able to access even the cooperatives or regional rural banks let alone commercial banks. A recent report put out by RBI reveals that there has been an increase in moneylenders? share of credit to farmers and not surprisingly much of the borrowing has been contracted at usurious rates of interest. So it is the larger farmers that have benefited hugely from the mandatory flows to the priority sector?outstandings to agriculture stood just short of R6 lakh crore at the end of March 2013.
While the microfinance sector had made strong inroads into the hinterland?outstanding credit, at one point was as much as R25,000-30,000 crore?the sector was hit by a series of problems in 2010, especially in Andhra Pradesh, where the state government ushered in draconian legislation. To make matters worse, the Malegam Committee suggested a cap on both margins and on loans. With RBI imposing a cap on spreads of 10-12%, depending on how big the business is, and a cap on interest rates of 26%, it has become harder for MFIs to make money. Unfortunately, the Micro Finance Institutions (Development and Regulation) Bill 2012, which entrusts the central bank with powers to issue directions to all MFIs, hasn?t been passed in Parliament yet. Once RBI is confident it is armed with adequate powers to regulate the MFIs, it will have to ease some of the financial conditions for MFIs. Curbing MFIs may look like good politics, but at a time when banks aren?t servicing rural markets, the only alternative to moneylenders are the MFIs.