The Malegam committee report will be submitted to the regulator (Reserve Bank of India) on the 20th of January. Hopefully they will have sensible regulatory recommendations and that will reduce the uncertainty thereby encouraging banks to start lending again.
I am keeping my fingers crossed.
The Malegam committee report was submitted to the Regulator today - http://www.rbi.org.in/scripts/PublicationReportDetails.aspx?UrlPage...
- Please see the annexure at the bottom for specific recommendations
My first cut impressions on this:
- Reasonably comprehensive in covering aspects of microcredit that needed attention.
- They have specified some caps on the interest rate (24%) and the margin MFIs can make over the cost of funds. While MFIs that have large scale can make good profits if they desire, this will reduce possibilities of profiteering.
- It is detailed and very workman like middle of the road approach.
- They have recommended several measures to prevent multiple lending etc. that can put poor families under debt stress.
What is missing:
- It does not recommend a central regulatory body for all MFIs. The large for-profit NBFC MFIs will continue to be regulated by the Reserve Bank of India (RBI). Smaller mostly non-profit MFIs are left out of the regulation. It is proposed that they be regulated by another body called NABARD. This is status quo. After this crisis Banks may become even more risk averse and now there is a possibility that they are likely to become less supportive of smaller MFIs outside the ambit of RBI's regulation.
- The recommendations could have been more visionary. e.g.I quote the report:
'In a utopian society, all microfinance credit would be extended only by not-for-profit making entities. However, the ground realities dictate otherwise. Both the SBLP model and the MFI mode, therefore, need to co-exist as do co-operatives, trusts and societies. The SBLP and MFI models must be viewed not as competitive but as complementary models both sharing a common cause.".
There are some MFIs like SKDRDP in India which is a non profit and that has done truly outstanding work (http://www.skdrdpindia.org/ , http://www.amazon.com/Development-Divinity-Dharma-Institutions-Micr...).
Similarly there are great examples of member owned organizations such as Grameen Bank or Sewa Bank. And as Prof. Yunus wrote recently the ownership of a microfinance institution matters in how well they go about achieving their mission. ( http://www.thedailystar.net/newDesign/news-details.php?nid=169263). There is no reason why we should not attempt to create more of such organizations.
- The report correctly identifies that mere extension of credit alone will not help. I quote the report 'The lesson, therefore, to note, is that mere extension of micro-credit unaccompanied by other social measures will not be an adequate anti-poverty tool.'. While one of the problems is correctly identified, caps on margin will by their nature reduce the provision of social measures. While many of the smaller MFIs mostly non-profits offer services beyond credit, they are likely to be continued to be challenged in raising funds from banks.
Thus I think that there could have been more measures to ensure that single bottom line pro-poor organizations get the necessary support.
Overall there are a lot of positives in the recommendations. These recommendations if well implemented will at the least create a stable environment.
Now we need to work with the bank on getting lending restarted.
The final shape of the regulations are likely to emerge by the end of March as per the regulator - http://www.business-standard.com/india/news/decisionmfi-regulation-...
Will have more updates soon.