On 14th March 2022, RBI issued revised instructions for microfinance loans to the poor by Non-Banking Financial Companies (NBFCs) called Micro Finance Institutions (MFIs).

Their website published a draft on 14 June 2021. The draft has been criticised by several women’s organisations and a number of articles appeared in the newspapers and magazines criticising the proposed removal of ceiling on the interest rate and giving freedom to the boards of these institutions to decide the interest rate. Ignoring the inputs, RBI has revised its earlier guidelines. The RBI now seldom seems to listen to people’s voices. One of the guidelines says that the rate should not be usurious. But we have seen that many MFIs are already charging 26%, which is usurious. MFIs get a loan from the banks at around 9% interest. Giving them the freedom to charge more interest is unethical and leaves the poor at the mercy of Shylocks.

As per its guidelines, a microfinance loan is defined as a collateral-free loan provided to a household with an annual household income of up to 3,00,000. In this instance, a household is a husband, wife, and their unmarried children.

Regardless of the end-use or mode of processing/disbursement (physical or digital), all collateral-free loans provided to low-income households, i.e., households with annual incomes up to 3,00,000, shall be considered microfinance loans. The Regulated Entities (REs) shall have a board-approved policy to provide the flexibility of repayment periodicity on microfinance loans as per borrowers’ requirements.

Each RE shall put in place a board-approved policy regarding the pricing of microfinance loans which shall, inter alia, cover the following:

  1. A well-documented interest rate model/ approach for arriving at the all-inclusive interest rate;
  2. Delineation of the components of the interest rate such as cost of funds, risk premium, margin, etc. in terms of the quantum of each factor based on objective parameters;
  3. The range of spread of each component for a given category of borrowers; and
  4. A ceiling on the interest rate and all other charges applicable to microfinance loans.

Interest rates and other charges/ fees on microfinance loans should not be usurious. These shall undergo supervisory scrutiny by the Reserve Bank.

Does the RBI have the ability to control these Non-banking Finance Companies numbering more than 10000 now? RBI has only one office in state capitals. RBI cannot monitor these NBFCs. There are already too many complaints! In Andhra Pradesh, the state assembly passed a bill to regulate MFIs in 2011 after a report of 54 suicides. (See, Death by default, Down to Earth, Nov 30, 2010 Issue) The Assam assembly had passed a bill regarding the same in 2020. Now the RBI instructions supersede these acts passed by state Governments. Where is federalism in these actions? Did RBI consult the states? In fact, RBI instructions also state the following-

 RE or its agent shall not engage in any harsh methods towards recovery. Without limiting the general application of the preceding, the following practices shall deem as grim:

  1. Use of threatening or abusive language
  2. Persistently calling the borrower or calling the borrower before 9:00 a.m. and after 6:00 p.m.
  3. Harassing relatives, friends, or co-workers of the borrower
  4. Publishing the name of borrowers
  5. Use of violence or threatening or other similar means to harm the borrower or borrower’s family/ assets/ reputation
  6. Misleading the borrower about the extent of the debt or the consequences of non-repayment

The question is, does the RBI have a police force to check this? All the above practices are taking place every day across the country, and the poor have no way out. All India Democratic Women’s Association (AIDWA) has conducted studies and even gone to court, but without any relief. Currently, there is the Usurious Loans Act 1918, which does not help the poor. The poor can only get a maximum of just Rs 1,25,000 as a loan. Should we not control the interest rates? When the Tatas can get, Rs.10000 crore at a 4.5% rate, why not the poor?

What is to be done?

India has some excellent models in place. The Self Employed Women’s Association (SEWA), which started as a trade union of the unorganized in 1972, is a pioneer in this area. It runs the SEWA Bank and has an exceptional lending model. Mysore Rehabilitation Development Agency (MYRADA) had already put women into groups and guided them to lend among themselves, later creating successful Credit Groups. Mahalir Association for Literacy Awareness and Rights(MALAR) in Kanniyakumari, Tamil Nadu, is now a 27 years old self-reliant model which can be replicable everywhere. Kerala has Kudumbashree, which is a neighbourhood-based lending model. Andhra Pradesh had the VELUGU project. West Bengal once had a Cabinet Minister for SHGs!

At present, there are two important Models in Micro-Finance.

One is the Self Help Group (SHG)-  Bank Linkage Model in which Public sector Banks, Regional Rural Banks and Co-operative Banks provide loans to SHGs directly without any collateral and the interest rate is around 8% PA. The Self Help Group Model was promoted by the National Bank for Agriculture and Rural Development (NABARD) based on studies on Bangladesh Grameen Bank started by Prof. Muhammad Yunus in 1974, and studies of the International Labour Organisation. If flourished well with the support of NABARD and the RBI guidelines which said SHG loans are loans to weaker sections and covered under priority sector advances. The SHG model evolved based on the credit co-operatives in India, Latin America and Bangladesh, which looked at women as creditworthy and appreciated the idea of mutual help.

Another Model is the Micro Finance Institution Model where the MFIs get loans from the banks and lend to SHGs, SHG Federations, Non-Govt Organisations (NGO), Joint Liability Groups etc. They even give individual loans for which the interest rates go up to 26% though they get bank loans at 8-9%. This is the World Bank model. Unfortunately, the World Bank sees it as a profitable business. The shift from service to the poor to profitable business encouraged Non-Governmental Organisations to convert into profitable business organisations called MFIS. Now the corporates have entered the field. And the RBI is also pushing a co-lending model allowing banks to collaborate with these NBFCs in which their stake is only 20%. The whole thing is murky, unethical, anti-constitution and promotes inequality. In 2007, the government brought a bill in Parliament called the MFI Bill, which faced opposition because of several detrimental clauses. Again, the same bill came to Parliament in 2012 and was referred to the Standing Committee. Currently, the same policies are being promoted by the RBI without any Parliament approval. This is simply atrocious!

What we need is to strengthen the NABARD guided SHG-Bank linkage model, expand it, and provide more direct credit. The bloodthirsty, profit-seeking Micro Finance Institutions that use harassment for recovery need to be banned immediately. We need to study the models of SEWA, Kudumbashree, MALAR etc and ask banks to support them.

Thomas Franco is the former General Secretary of All India Bank Officers’ Confederation.

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