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 Regulatory Affairs
Killing microfinance will help moneylenders
The EconomicTimes, India Sunday, October 24, 2010

Swaminathan S Anklesaria Aiyar
Last week, the Andhra Pradesh government issued an ordinance that temporarily shuts down and permanently maims Microfinance Institutions in the state. The Government claims that coercive loan recovery by MFIs have caused thirty suicides. While we need a regulatory regime to curb excesses, but there is no need for politicians to empower people through opening up access to microfinance, writes Swaminathan Anklesaria Aiyar in The Economic Times.

It’s actually a boon to moneylenders. For two decades, microfinance institutions (MFIs) have spread fast in Andhra Pradesh, reaching millions of poor women and filling the space once dominated by moneylenders.

But last week, the state government issued an ordinance that temporarily shuts down and permanently maims MFIs in the state. This also threatens to maim MFIs across India, since equity investors and bankers will be reluctant to finance a sector with such political risks.

The AP government says it is protecting borrowers from coercive loan recovery by MFIs that reportedly has caused 30 suicides. Its not-so-hidden agenda is to give the government’s own microfinance scheme — through self help groups (SHGs), a lending monopoly, eliminating MFI rivals. The preamble of the ordinance clearly says that MFIs are a threat to SHGs and must be quashed.


We need a regulatory regime that checks malpractices while encouraging the positive aspects of microfinance. But local politicians don’t want to empower people through independent access to finance: they prefer patronage networks that can be used as vote banks. Government-driven SHGs can serve that purpose, but not MFIs.


Many MFI agents have been arrested. Arrests were feared of the most distinguished MFI stalwarts like Vikram Akula of SKS and Vijay Mahajan of Basix, who have for years won national and international awards for their pioneering social work. The high court has fortunately stopped this.


The ordinance halts all MFI operations until they register with district authorities, which MFIs fear will take weeks. The ordinance also forbids any MFI to lend to a member of an SHG without first getting a no-objection certificate.


But that will be an appalling loss for India. A globally acclaimed industry that employs thousands and benefits millions is at risk. New Delhi should intervene to amend the most noxious clauses of the AP ordinance. Most MFIs started as NGOs, as did Nobel Prize winner Mohammed Yunus. But NGOs had limited reach, being dependent on donor finance. So, many switched to a forprofit model, which enabled them to raise money for expansion from equity investors and banks. Such MFIs expanded hugely, reaching not just thousands but millions.

This article was published in the The EconomicTimes on Sunday, October 24, 2010. Please read the original article here.
Author : Mr Aiyar is consulting editor of Economic Times and writes the Swaminomics column in Times of India
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