The Karnataka government, under the stewardship of Chief Minister Siddaramaiah, has turned the spotlight on Micro Finance Institutions (MFIs) in the state—including the holding of a high-level meeting on Saturday to discuss the promulgation of an Ordinance to regulate the activities of MFIs—as some instances of borrowers having taken their own lives under alleged ‘payback harassment’ from the loan recovery agents of these institutions have surfaced in several districts.
The chief minister chaired an emergency meeting on Saturday with deputy DK Shivakumar, Revenue Minister Krishna Byre Gowda, Home Minister G Parameshwara and Law and Parliamentary Affairs Minister HK Patil, besides senior government and top police officials. Representatives of the Microfinance Companies’ Association and regional officers of the Reserve Bank of India (RBI) and NABARD officials were also present.
Siddaramaiah said the state government would amend the existing laws related to money lending business and introduce new legislation to protect the interest of the genuine borrowers. He said that, during loan recovery, MFIs should follow RBI guidelines. The RBI should also monitor violations of the guidelines, he added. “After 5 pm, no one should go out to recover loans,” he said. “We’ve opposed outsourcing recovery work. What happens is, it’s outsourced and rowdies are roped in. This shouldn’t happen.”
Parameshwara had said on Friday that the state government plannedto give more teeth to the already stringent laws in the shape of the ‘Karnataka Microfinance Institutions (Regulation of Money-Lending) Bill’ to rein in microfinance companies and protect borrowers. He told journalists that shortcomings in the existing laws had come to the government’s notice, according to The Economic Times quoting a PTI report. He emphasized that, while there were provisions in the law to recover money, there were also regulations to protect borrowers.
Law and Parliamentary Affairs Minister HK Patil told reporters after a Cabinet meeting on Friday that the Reserve Bank of India (RBI) and other central finance agencies had proved inept at controlling the microfinance companies. When asked whether finance companies could really not be controlled under the existing laws, Patil said those laws were not strong enough and that the police had only limited powers to handle such cases. The loopholes must be plugged, he added.
The Hindu has cited several sources in the MFI sector who claimed that pressure to repay MFI loans were not the sole reason for reports of borrowers ending their lives that were trickling in from in Shivamogga, Belagavi, Ramanagara, Tumakuru, Kalaburagi and other districts.
Members of self-help groups (SHGs)— informal groups of 10–20 members, mainly women, who pool in their savings and become eligible for credit from formal banking institutions under the SHG-Bank Linkage Programme (SHG-BLP) with NABARD playing a key role in developing and supporting SHGs—or joint liability groups (JLGs), according to the MFI sources cited, are said to have taken loans from multiple sources, including moneylenders, at exorbitant interest rates.
There were also other multi-faceted issues, such as family problems and local ‘agents’ forming groups to collect ‘commission’ for securing loans from lakhs of SHGs/JLBs who borrow from MFIs to provide loans in the range of ₹30,000-₹50,000 or more to borrowers’ for their personal needs, or fulfil their aspirations to start petty businesses with weekly, biweekly, or monthly repayment schedules were the other factors for the widely publicized financial distress, Manjunath MS, assistant vice-president, Micro Finance Institutions Network (MFIN), which was formed in 2009 allowing NBFC-MFIs to become members, told The Hindu.
While the total number of SHGs linked to banks through savings bank accounts in India is 144 lakh with 77 lakh of those (or, roughly 53%) receiving loans, in Karnataka, the MFIs broadened their portfolio of clients from 4.2 million to 9.9 million from 2013 to 2022, chalking up a growth of 132%.
Many of these borrowers are said to have opted for loans from MFIs rather than from nationalized banks, mainly because of the easy documentation process. The total gross loan portfolio of MFIs in Karnataka rose from ₹16,946 crore (March 2019) to ₹42,265 crore in 2023-’24, according to data collected from the MFIs, adds The Hindu.
What Is Microfinance?
Microfinance is an effective tool for financial inclusion—which is the process of ensuring access to financial services and timely, adequate and affordable credit to such vulnerable groups as the weaker sections and low-income groups. Microfinance is a decisive game-changer in poverty alleviation, women’s empowerment and fostering entrepreneurship in developing economies.
Notably, Professor Muhammad Yunus, who has been serving as Chief Adviser of the interim government of Bangladesh since August 8, 2024, achieved international recognition for his ground-breaking work in microfinance and was awarded the Nobel Peace Prize in 2006 alongside Grameen Bank.
One of the financial services—besides savings, insurance, remittances and others that microfinance offers to underserved populations is to enable marginalized and low-income groups, especially women, to achieve social equity and empowerment through disbursal of small-value loans to households, small businesses and entrepreneurs who have no access to formal banking services.
According to the Drishti learning portal for UPSC Civil Services Examination (CSE) aspirants, the microfinance sector in India has experienced significant growth, with 168 MFIs operating across 29 states, 4 Union Territories and 563 districts, and serving more than 3 crore clients with an outstanding loan portfolio of ₹46,842 crore.
Microfinance contributes about 130 lakh jobs and 2% of India’s Gross Value Added (GVA)—a metric that measures the value of goods and services produced in an economy—according to a National Council of Applied Economic Research (NCAER) study. It has the prospective of covering the entire chunk of 6.3 crore unincorporated and non-agricultural enterprises.
Categories of MFI Lenders
§ Non-Government Organizations (NGO-MFIs): Registered under the Societies Registration Act of 1860, or the Indian Trust Act of 1880, these NGOs extend micro-credit
§ Cooperative Societies: Registered under the relevant laws, such cooperative societies as the Primary Agricultural Credit Societies (PACS) offer microfinance services
§ Section 8 (Formerly Section 25) of the Companies Act, 1956): This refers to the legal provision that allows for the formation of companies with primarily charitable objectives, where profits are used to further the company’s social goals rather than being distributed to members as dividends. These non-profit entities offer micro-credit under the Companies Act, 2013
§ Non-Banking Finance Companies (NBFC-MFIs): NBFC-MFIs raise funds from bulk loans from banks, or from their own resources to cater to JLGs. This category, which was introduced by the RBI in 2011, accounts for 80% of the microfinance market
But the Concerns Persist
Aditya Bhan of the Observer Research Foundation (ORF) notes that, despite its phenomenal growth, the Indian microfinance sector still faces some of the following issues:
o Interest Rate: Interest rates levied by MFIs often exceed those charged by commercial banks, having the potential to burden especially poorer debtors
o Indebtedness: Several borrowers source credit from multiple sources, causing over-indebtedness
o Operational Cost: Small loan portfolios and expensive credit risk management architectures can elevate the cost of operations, rendering it difficult for MFIs to attain financial viability
o Financial Literacy: Low financial and digital literacy can cause misuse of funds and challenges in repayment
o Credit Cost: MFIs frequently struggle to avail of inexpensive funding, which curtails their ability to extend affordable credit.
The COVID-19 pandemic, notes the ORF, exacerbated some of these challenges, causing higher defaults and financial strain among borrowers. Alleviating these issues requires a multi-pronged strategy involving an improved regulatory architecture, financial literacy initiatives and innovative financial offerings customized to the requirements of the impoverished classes.
Regulatory Framework
The RBI recently defined microfinance as ‘collateral-free loans given to households with annual incomes of up to ₹3 lakh. The average loan amount per borrower in Karnataka is ₹44,036 against the all-India average of ₹42,838, according to MFIN, an RBI-recognized regulatory body. The RBI has regularly been issuing guidelines to bring erring MFIs under control.
The RBI regulates MFIs in India through the Non-Banking Financial Company-Micro Finance Institutions (NBFC-MFIs) framework, issued on July 1, 2014. These guidelines cover such aspects as registration eligibility, client protection, prevention of borrower over-indebtedness, privacy and pricing of credit. MFIs mostly comply with these regulations, helping boost stakeholders’ confidence in the sector.
Research Scholar Archana B1 of Periyar University and Principal, Siri Shrine PU College, Bengaluru and Dr B Mathivanan, Professor and HoD, PG and Research Department of Commerce, MGR College, Hosur, of the Karnataka-based Educational Administration: Theory and Practice in their research article on microfinance, have several recommendations to make. Some of these are:
§ Still Stricter Regulations: Unscrupulous ways of lending followed by some MFIs call for greater scrutiny and need for still stricter regulation
§ Optimum Field Supervision: Field visits are an optimum way of monitoring the conditions on the ground. This measure entails a strict check on how the ground staff of different MFIs perform, what practices they follow for recovery and taking timely corrective action, if needed
§ Interest Rates Transparency: Different MFIs employ different patterns of interest rates and additional charges, such as interest-free deposits. This creates confusion about pricing in the poor borrowers, rendering the borrower incompetent in terms of bargaining power. Uniform interest rates by all MFI players in the market are recommended
§ Cost-Cutting with Technology: NBFCs are adopting widespread cost-cutting measures. Not only do automation tools lead to a low cost-per-unit of money lent (9%-10%) but also make loan origination processes more transparent and efficient for the borrower
(The author of this article is an award-winning Science Writer and a Defence, Aerospace & Political Analyst based in Bengaluru. He is also Director of ADD Engineering Components, India, Pvt. Ltd, a subsidiary of ADD Engineering GmbH, Germany. You can reach him at: girishlinganna@gmail.com)
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