RBI vide its June 14, 2021 press release has issued a 30 page “Consultative Document on Regulation of Microfinance” (henceforth “Document”) seeking comments from public at large.

First part of the “general comments / feedback” was published in an earlier issue. This  Second part addresses a few specific “points for discussions” on which RBI has sought responses on page 16 of the Document.

Whether any other criterion can be adopted for identification of low-income households?

The purpose of identification of low income households is to identify the households in need of external credit. The low income is traditionally being linked to “annual household income”. In the document (para 2.3.1 on page 10) it is stipulated at Rs. 1,25, 000 for rural and Rs 2,00,000 for Urban and Semi-Urban areas. I have the following comments / observations:

(a) It is noted that the annual income stipulated above is not for an individual, but for the entire household. In that case, there is a case to revise these limits upwards. If there are two or three earning members in an urban family, each earning (say) Rs 10,000 per month, the limit set at Rs 2 lakhs may prove to be unreasonably low.

(b) I am not aware when these limits have been stipulated, but it is felt that as a principle there is a need to link such limits with some price or wage index.

(c) Few of the characteristics of an annual income of a representative poor household is its “unevenness” and “uncertainty”. A household may be earning an aggregate “X” amount in any given 12 months period, but his monthly incomes will vary widely, forming “trough” and “crest” patterns. The poor household will invariably look for an external credit to smoothen the pattern, even if their aggregate annual income is above the stipulated levels. If he is informed that he is not eligible for a loan from a formal micro lender institution, he is bound to approach an informal credit source, defeating one of the core objectives of developing the microfinance industry.

(d) One way to overcome this issue is to bring in the degree of variation in the annual income along with the annual income as an eligibility criterion

(e) It is necessary that the eligibility criterion for availing credit from formal credit institutions should encompass as many poor households as possible otherwise they will continue to be in the clutches of informal credit dispensers, which are extremely difficult to regulate.

Is the proposed definition of ‘household’ appropriate? If not, which alternative definition can be adopted for identifying a ‘household’?

(a) The discussions in the document have not touched on the “migrant labourers” in the households being discussed. Not only each of these families have at least one member staying away from the family, almost perennially, but the remittances received from him constitute a major source for the family’s monthly / annual income, which in turn has a bearing on the family’s repaying capacity.

(b) While assessing the pool of incomes contributed by different family members  the emphasis should be on blood relations, and less on “normally living together”. It is very common that an individual from the same village or community will be living together, for many years, with the family under assessment, but he will not be taking any responsibility of servicing the debt of the host family.

Can a uniform methodology for household income assessment be adopted?

The extant and proposed regulatory framework for microfinance does distinguish rural and urban households in setting the limit of annual income. However, it is felt that there is a scope for further sub-dividing these two categories in, say, “metro” and “non-metro” for urban and “irrigated” and “non-irrigated” for rural; for obvious reasons. Yes, there is a trade-off between keeping the regulatory guidelines simple and ensuring that such guidelines genuinely capture the ground realities. One will have to take a call.

Such distinctions need not be confined only to setting annual income levels for eligibility, but may be extended to other features of the microcredit products.

Whether the proposed measures adequately address the concerns around over-indebtedness of microfinance borrowers ?

(a) It is rightly said in the document that the amount of loan should be linked to the income of the borrower household. And further that the ratio of payment of interest and principal for all outstanding loans at any point of time shall be capped at 50% of the household income. (para on page 12). The intention is at least half of the income shall be available to meet other expenses of the family, purportedly to maintain the minimum standard of living including family’s nutrition levels

(b) One may agree with the proposed ratio of 50%. However, whether the household income left in the hands of the family after servicing the outstanding loan is adequate to meet their essential expenses / nutrition levels will depend on the household income itself. A family with a monthly income of Rs 20,000 will be left with Rs 10,000 for this purpose whereas the one with Rs 10,000 will have only Rs 5,000 in their hands, grossly inadequate to feed the family.

(c) The ratio is expected to take into account the debt servicing load of all the outstanding loans; let us assume only those loans from formal micro-lenders. The fleshing out of the useful information with the Credit Information Companies is going to take much longer time than desired by the regulators. The efficacy of this regulatory intervention lies in accurate information about all the outstanding loans with the credit-officer sanctioning the fresh loan. We can’t expect the borrower to share true information with the credit officer, as his sole purpose is to win over the fresh loan. Hence, the onus should lie on the credit officer sanctioning the fresh loan to use his “market intelligence” to capture the true level of indebtedness of the borrower being assessed. This, it is expected shall also partially address the issue of multiple-lending.

Does the proposed definition sufficiently capture the essence of microfinance loans? Are there any other measurable factors which should be considered?

(a) It has been rightly pointed out in the document that the limit of loan amounts defined as micro-finance, decided a few years back, needs revision.

(b) However, these discussions on defining the amount of loan to be labelled as “microfinance” need to be dovetailed with the discussion on distinction between Metro and non-metro in urban and irrigated and non-irrigated in rural areas. An attempt to devise a pan-India definition will be a little far-fetched.

(c) Simultaneously, the core issue of professional and genuine assessment of credit absorption capacity of the borrower should not be lost sight of. The truth is being driven to meet monthly or quarterly targets of sanctioning fresh micro-loans, it is said that many credit officers tend to dilute credit appraisal norms leading to messy but avoidable situations.

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