1.RBI microfinance proposals that are anti-poor

The proposed guidelines will favour private credit institutions at the cost of public sector banks

In June 2021, the Reserve Bank of India (RBI) published a “Consultative Document on Regulation of Microfinance”. While the declared objective of this review is to promote the financial inclusion of the poor and competition among lenders, the likely impact of the recommendations is unfavourable to the poor. If implemented, they will result in an expansion of microfinance lending by private financial institutions, in the provision of credit at high rates of interest to the poor, and in huge profits for private lenders.

The recommendations

The consultative document recommends that the current ceiling on rate of interest charged by non-banking finance company-microfinance institutions (NBFC-MFIs) or regulated private microfinance companies needs to be done away with, as it is biased against one lender (NBFC-MFIs) among the many (commercial banks, small finance banks, and NBFCs). It proposes that the rate of interest be determined by the governing board of each agency, and assumes that “competitive forces” will bring down interest rates. Not only has the RBI abandoned any initiative to expand low-cost credit through public sector commercial banks to the rural poor, the bulk of whom are rural women (as most loans are given to members of women’s groups), but, in addition, it also proposes to de-regulate the rate of interest charged by private microfinance agencies.

According to current guidelines, the ‘maximum rate of interest rate charged by an NBFC-MFI shall be the lower of the following: the cost of funds plus a margin of 10% for larger MFIs (a loan portfolio of over ₹100 crore) and 12% for others; or the average base rate of the five largest commercial banks multiplied by 2.75’. In June 2021, the average base rate announced by the RBI was 7.98%. A quick look at the website of some Small Finance Banks (SFBs) and NBFC-MFIs showed that the “official” rate of interest on microfinance was between 22% and 26% — roughly three times the base rate.

Crucial for rural households

Microfinance is becoming increasingly important in the loan portfolio of poorer rural households. In a study of two villages from southern Tamil Nadu, done by the Foundation for Agrarian Studies, we found that a little more than half of the total borrowing by households resident in these two villages was of unsecured or collateral-free loans from private financial agencies (SFBs, NBFCs, NBFC-MFIs and some private banks).

There was a clear differentiation by caste and socio-economic class in terms of source and purpose of borrowing. First, unsecured microfinance loans from private financial agencies were of disproportionate significance to the poorest households — to poor peasants and wage workers, to persons from the Scheduled Castes and Most Backward Classes. Second, these microfinance loans were rarely for productive activity and almost never for any group-based enterprise, but mainly for house improvement and meeting basic consumption needs.

Our data showed that poor borrowers took microfinance loans, at reported rates of interest of 22% to 26% a year, to meet day-to-day expenses and costs of house repair. How does this compare with credit from public sector banks and cooperatives? Crop loans from Primary Agricultural Credit Societies (PACS) in Tamil Nadu had a nil or zero interest charge if repaid in eight months. Kisan credit card loans from banks were charged 4% per annum (9% with an interest subvention of 5%) if paid in 12 months (or a penalty rate of 11%). Other types of loans from scheduled commercial banks carried an interest rate of 9%-12% a year. As even the RBI now recognises, the rate of interest charged by private agencies on microfinance is the maximum permissible, a rate of interest that is a far cry from any notion of cheap credit.

A loan breakup, violations

The actual cost of microfinance loans is even higher for several reasons. First, on account of the method of repayment: a loan of, say, ₹30,000 from an NBFC-MFI has to be repaid in 24 equal monthly instalments of ₹1,640. Every month, a principal of ₹1,250 and an interest of ₹390 is repaid. In the first month, the simple interest on this loan is 15.6% per annum but by the end of the first year, the interest rate is 31%. This is because every month the principal is reduced (by ₹1,250) but the interest charge is the same. In short, an “official” flat rate of interest used to calculate equal monthly instalments actually implies a rising effective rate of interest over time.

In addition, a processing fee of 1% is added and the insurance premium is deducted from the principal. As the principal is insured in case of death or default of the borrower or spouse, there can be no argument that a high interest rate is in response to a high risk of default.

Does the borrower understand this mechanism? In line with RBI regulations, we found that all borrowers had a repayment card with the monthly repayment schedules. On their regular visit, the loan collector would tick off the instalment paid. This does not mean that borrowers understood the charges.

Further, contrary to the RBI guideline of “no recovery at the borrower’s residence”, collection was at the doorstep. Note that a shift to digital transactions refers only to the sanction of a loan, as repayment is entirely in cash. Many borrowers said the debt collector used bad language in a loud voice, shaming them in front of their neighbours.

If the borrower is unable to pay the instalment, other members of the group have to contribute, with the group leader taking responsibility. In our survey, there was no organic connection of microfinance to any group activity or enterprise. As an agent of a NBFC-MFI told us, “we have used the groups formed earlier for other activities solely to show that we lend to a group”.

The shift now

While microfinance lending has been in place since the 1990s, what is different about the recent phase of growth of financial services is that the privately-owned for-profit financial agencies are “regulated entities”. In fact, they have been promoted by the RBI. Lending by small finance banks (SFBs) to NBFC-MFIs has been recently included in priority sector advances. And, post-COVID-19, the cost of funds supplied to NBFC-MFIs was lowered, but with no additional restrictions on the interest rate or other parameters affecting the final borrower.

In the 1990s, microcredit was given by scheduled commercial banks either directly or via non-governmental organisations to women’s self-help groups, but given the lack of regulation and scope for high returns, several for-profit financial agencies such as NBFCs and MFIs emerged. By the mid-2000s, there were widespread accounts of the malpractices of MFIs (such as SKS and Bandhan), and a crisis in some States such as Andhra Pradesh, arising out of a rapid and unregulated expansion of private for-profit micro-lending.

The microfinance crisis of Andhra Pradesh led the RBI to review the matter, and based on the recommendations of the Malegam Committee, a new regulatory framework for NBFC-MFIs was introduced in December 2011. A few years later, the RBI permitted a new type of private lender, SFBs, with the objective of taking banking activities to the “unserved and underserved” sections of the population.

Today, as the RBI’s consultative document notes, 31% of microfinance is provided by NBFC-MFIs, and another 19% by SFBs and 9% by NBFCs. These private financial institutions have grown exponentially over the last few years, garnering high profits, and at this pace, the current share of public sector banks in microfinance (the SHG-bank linked microcredit), of 41%, is likely to fall sharply.

The proposals in the RBI’s consultative document will lead to a further privatisation of rural credit, reducing the share of direct and cheap credit from banks and leaving poor borrowers at the mercy of private financial agencies. This is beyond comprehension at a time of widespread post-pandemic distress among the working poor. The All India Democratic Women’s Association, in its response to this document, has raised concerns about the implications for women borrowers and demanded that the rate of interest on microfinance not exceed 12% per annum. To meet the credit needs of poorer households, we need a policy reversal: strengthening of public sector commercial banks and firm regulation of private entities.

2.‘Must look at weaknesses and strengths of 13A’

In meeting with Shringla, Gotabaya expresses desire to revive spirit of relations of the 1960s and 1970s

There is an “urgent need” to understand the “weaknesses and strengths” of the 13th Amendment to the Sri Lankan Constitution and “act accordingly”, President Gotabaya Rajapaksa on Tuesday told Foreign Secretary Harsh Vardhan Shringla, while expressing a desire to revive the spirit of the relations of the 1960s and 1970s.

Mr. Shringla called on the President on Tuesday morning, before wrapping up his official visit. In addition to underscoring the need to expedite bilateral projects, the Foreign Secretary, in his meeting with President Rajapaksa on the final day of his visit, reiterated India’s position “on complete implementation of the provisions under the 13th Amendment to the Constitution, including devolution of powers and the holding of provincial council elections at the earliest”, the Indian mission said in a statement, referring to the nearly 34-year-old legislation that remains contentious in Sri Lanka.

Regional security

Both countries agreed on the need for “short-term and long-term steps” to take relations to “a higher level”, the President’s office said adding that President Rajapaksa is expecting India’s support in advancing the 1971 proposal made by then Prime Minister Sirimavo Bandaranaike to declare the Indian Ocean a peace zone.

According to official sources in Colombo familiar with the Foreign Secretary’s discussions over the last few days, the Indian official had raised concern over maritime security in the region, particularly in the wake of Sri Lankan authorities recently apprehending massive hauls of narcotics that India suspects came from a “regional drug mafia”. “Any threat to Sri Lanka’s peace and security is a threat to the region and Sri Lanka must not become a conduit,” the Indian side is said to have conveyed.

The President’s remarks on elevating ties come after considerable strain in relations over Colombo’s unilateral move earlier this year, cancelling a trilateral Port terminal project agreement signed with India and Japan in 2019; and New Delhi’s persisting concern over the “slow pace” of India-backed development projects amid China’s increasing presence in Sri Lanka’s economic and developmental spheres.

However, last week, the Adani Group obtained 51% stake in a deal signed with Sri Lanka’s John Keells Holdings and the Sri Lanka Port Authority, to jointly develop the West Container Terminal at the Colombo Port, offered as a “compromise” to India.

According to official sources, both sides identified areas of greater collaboration in the energy sector. The development of the Trincomalee Oil Tank Farm at the eastern tip of the island nation was a key point of discussion, sources indicated, with Colombo expressing willingness to iron out differences. The statement from President Rajapaksa’s office said the Minister of Energy has been “entrusted with the task of resolving the situation” regarding the Trincomalee oil tanks in a manner that is “beneficial to both countries”.

“The subject Minister is likely to travel to New Delhi soon,” an official source said, requesting anonymity, citing the sensitivity of the ongoing negotiations. India has been linked to the project for over three decades now, but the proposal for India and Sri Lanka to jointly refurbish and commission the World War II-era oil storage facility has only hit roadblocks, with worker unions and nationalist groups periodically opposing any Indian involvement.

After the Rajapaksas’ win in the November 2019 presidential polls and the August 2020 general election, the spotlight has fallen on two key legislations in Sri Lanka’s Constitution.

Sri Lankan amendments in news

• One, the 19th Amendment was passed in 2015 to curb powers of the Executive President, while strengthening Parliament and independent commissions.
• The Rajapaksa government has already drafted and gazetted the 20th Amendment.
• The other legislation under sharp focus is the 13th Amendment passed in 1987, which mandates a measure of power devolution to the provincial councils established to govern the island’s nine provinces.

What is the 13^th Amendment?

• It is an outcome of the Indo-Lanka Accord of July 1987, signed by the then PM Rajiv Gandhi and President J.R. Jayawardene, in an attempt to resolve the ethnic conflict and civil war.
• The 13th Amendment, which led to the creation of Provincial Councils, assured a power-sharing arrangement to enable all nine provinces in the country, including Sinhala majority areas, to self-govern.
• Subjects such as education, health, agriculture, housing, land and police are devolved to the provincial administrations.
• But because of restrictions on financial powers and overriding powers given to the President, the provincial administrations have not made much headway.
• In particular, the provisions relating to police and land have never been implemented.

Why is it contentious?

• The 13th Amendment carries considerable baggage from the country’s civil war years. It was opposed vociferously by both Sinhala nationalist parties and the LTTE.
• The opposition within Sri Lanka saw the Accord and the consequent legislation as an imprint of Indian intervention.
• It was widely perceived as an imposition by a neighbour wielding hegemonic influence.
• The Tamil polity, especially its dominant nationalist strain, does not find the 13th Amendment sufficient in its ambit or substance. However, some find it as an important starting point, something to build upon.

Why is it significant?

• Till date, the Amendment represents the only constitutional provision on the settlement of the long-pending Tamil question.
• In addition to assuring a measure of devolution, it is considered part of the few significant gains since the 1980s, in the face of growing Sinhala-Buddhist majoritarianism.

Its criticism

• Critics argue that in a small country, the provinces could be effectively controlled by the Centre.
• The opposition camp also includes those fundamentally opposed to sharing any political power with the Tamil minority.
• All the same, all political camps that vehemently oppose the system have themselves contested in provincial council elections.
• The councils have over time also helped national parties strengthen their grassroots presence and organisational structures.