The traditional view, and there is some justification to it, is that if microfinance institutions? (MFIs) activities are curbed, this will benefit moneylenders. Apart from the fact that very large proportions of customers in rural India don?t have bank accounts, data such as that from the Invest India Economic Foundation show that even bank customers go to moneylenders as bank lending policies aren?t as flexible as those of moneylenders. It is this group going to moneylenders that MFIs were targeting, so any sensible examination of MFI interest rates has to keep in mind those being charged by moneylenders. So far, MFIs have argued, and this may well be true, that what looks like high margins are in fact their cost of operations, costs of setting up offices in various villages, of setting up a network to collect repayments, and so on.
Apart from the Andhra Pradesh ordinance, the real problem for MFIs is going to come from the RBI committee on MFIs headed by YH Malegam. Today, MFIs are entitled to loans under the priority sector lending window?so banks that need to lend 40% of their total to the priority sector are keen to lend to MFIs. If, in the current climate, MFIs are seen as being exploitative, RBI could threaten to remove them from this window. Banks will still lend to profitable MFIs, but since this will no longer be part of priority sector lending, they will no longer be as keen as they were before, and certainly the smaller MFIs will find it difficult to access bank loans. More important, with the extension of the banking correspondent concept, and the use of mobile phones as ATMs, rural India?s access to banks has increased manifold; and through banking correspondents, banks are in a better position to meet the borrowing needs of rural customers. The introduction of the base rate, as opposed to the PLR, which acted as an informal ceiling on bank loan rates, has also freed banks to charge higher rates in rural areas, to make up for their higher probability of default. Bank lending to individuals in rural areas won?t happen in a hurry, but the possibility of this is a lot brighter than in the past. MFIs are under threat as never before. They need to come up with a collective plan of action.