ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

A+| A| A-

On the Microfinance Regulation Bill 2007

The Microfinance Regulation Bill 2007, which seeks to regulate trusts and societies that help or promote self-help groups, is completely unnecessary since it does not address the needs of the SHGs. Legislation that enables these groups to register as cooperatives and borrow from banks or helps them to form private limited companies under the Company (Amendment) Act 2002 to facilitate borrowing from commercial banks would be more helpful.

On the Microfinance Regu lation Bill 2007

The Microfinance Regulation Bill 2007, which seeks to regulate trusts and societies that help or promote self-help groups, is completely unnecessary since it does not address the needs of the SHGs. Legislation that enables these groups to register as cooperatives and borrow from banks or helps them to form private limited companies under the Company (Amendment) Act 2002 to facilitate borrowing from commercial banks would be more helpful.


icrofinance groups or self-help groups (SHGs) began to be set up in India around three decades ago. These were essentially mutualities of poor people, built up through their own routine savings. After a sufficient amount had been collected and deposited in a commercial bank, in the name of one or two members, the fund was used by the group to advance small loans to some of its members to meet urgent domestic needs. The rates of interest charged were often two paise a rupee a month or about 25 per cent a year. The members felt that this was much less than what they had to pay the moneylenders. In certain cases, public trusts or registered societies had promoted such SHGs, and in cases wherein members needed bigger loans than the amount of savings in the bank permitted, allowed the group to use a part of the society’s or trust’s savings in the bank as security against the borrowing of a larger amount. But, the trusts and societies did not work as savings or loan associations. They were just dogooders. In fact, these SHGs are properly speaking cooperatives organised to discharge one or more activities of the members more economically, thereby costing each one of them less and giving each one a higher return per unit of service rendered. In a credit cooperative, there is no deposit from non-members and no loans to non-members (a necessary requirement of a cooperative). If more money than what the deposits permit is needed to meet advances to members, it is borrowed from organisations willing to lend (like banks).

But the SHGs in India did not seek registration as cooperative societies because in that case they could not have functioned on their own but only according to the dictates of the registrar of cooperative societies of the state. Also, according to the state government and the Reserve Bank of India (RBI), there can be only one cooperative credit society in a village. So, SHGs would not have been permitted to register as credit cooperatives. This, however, created one basic difficulty: since theirs was not a legal entity, they could not put money in the bank in the name of the SHG, but in the name of one or two members. There have been instances of an individual promoter depositing the group’s money in his own name in the bank and ultimately disappearing with it. Some years ago the ministry of rural development had advised the SHGs to register with the charity commissioner for Rs 50 (and, of course, the other unavoidable expenses). But, this was later discontinued.

A Proper Cooperative Law Needed

The cooperative society law of the state should be amended on the lines of the model law proposed by the Brahma Prakash Committee of the Planning Commission, or on the lines of the new law passed by the Andhra Pradesh legislative assembly in 1995. But more than a year after the Vaidyanathan Committee recommended the amendment of state cooperative laws on these lines, only one state has done so. Moreover, the RBI during the last couple of years has permitted commercial banks to register the SHGs as depositors in their institution’s name, with any two of the three authorised members allowed to withdraw money. This has not greatly facilitated their borrowing from the banks directly because in many instances such groups find direct dealing with commercial banks rather difficult.

Economic and Political Weekly September 15, 2007

Against this background, it is surprising that the union government has tabled a bill in the Lok Sabha to register and regulate the trusts and registered societies promoting or helping such SHGs, calling them microfinancial organisations, without touching the SHGs themselves. Even after this bill is passed, the SHGs will remain as non-legal entities. It is only such trusts and societies, which have been in the business of helping the SHGs with loans, that will be brought under the umbrella of this act, if it is passed. The societies and trusts will get donations from the National Bank for Agriculture and Rural Development (NABARD) to meet the need for minimum funds of Rs five lakh as well as refinance from NABARD. For many years now trusts, like the Aga Khan Trust, have been helping not only SHGs but also some rural cooperative credit societies, which are not part of a three-tier structure, to gain access to larger funds from commercial banks than what their own savings with the bank permit, by allowing the trust’s own deposits in the bank to be used as security. Most of such trusts have their own funds and only help the SHGs in their business. It is difficult to understand why the government of India wishes to create trusts and societies, with largely state funds, to ultimately work as moneylenders to help the SHGs and poor individuals.

The simpler approach will be for the states to pass proper cooperative laws on the lines of the Brahma Prakash Committee’s recommendation or amend the existing cooperative act on those lines, so that the SHGs can register themselves as cooperatives. They will thus be entitled to loans from commercial banks as well as refinance from NABARD. Such groups can also form their own cooperative society which can handle their borrowings as well as deposits with any commercial bank.

An alternative approach is also possible. The Companies (Amendment) Act, 2002, (Act No 1 of 2003) provides for registration of a private limited company of at least 10 members, which will serve essentially its members and which, as the Act stipulates, will be run on cooperative lines (without the mention of the word cooperation). The members can be either individuals or groups or both. The objects of such a company specified in the Act are such that, if properly interpreted, a number of SHGs can form such a company and carry out the function of lending money to its members, accepting their savings as thrifts, thereby also “promoting techniques of mutuality and mutual assistance” (an object of the company specified in the Act), and obtaining loans from outside institutions for the purpose. There are a few ambiguities in the interpretation of the provisions of this Act, leading to doubts about the possibility of discharging this function, as we shall note later. This can be clarified and the path opened for the self-help groups to have their own private limited companies to facilitate their functioning. The present bill appears to be unnecessary, unless the real objective is to promote new money lending institutions in the form of societies and trusts, at state cost.

A Bureaucratic Bill

Since the bill has been placed before the Lok Sabha, it is instructive to see what is provided and what might be implied. On reading the bill, one is clearly informed that the entire registration, regulation and control of the microfinancial organisations are with NABARD. It will not only certify the existing microcredit organisations but will also help create some with grants, and refinance all such for providing finance not only to SHGs but also to poor individuals for their consumption and capital needs, and also work as the regulator body. These microfinance organisations can also operate through “facilitators” authorised by commercial banks – presumably entities like input traders and village moneylenders

– to extend loans to self-help groups and poor individuals. These institutions shall be in the nature of middlemen-financial institutions, without being either a bank or a cooperative. These financial institutions will be neither cooperatives, under control of members, nor banks, under RBI’s control. In fact, the rural credit institutional situation today is such that if a suitable revision of the state cooperative laws takes place (even without the reorganisation of the commercial banking structure in the rural areas, which in my view is necessary), NABARD might become an unnecessary institution. One wonders if it is to forestall such an eventuality, that NABARD is being endowed with such wide responsibilities to create, finance and refinance as well as regulate, with the help of state funds, such middlemenfinancial institutions so that it can live on as another bureaucratic institution to control small private enterprise financial institutions in the far-flung corners of India. A regulator regulates the functions of the institutions; but in this case NABARD is the creator, financier, the superior determiner of administration as well as the regulator of these microfinancial organisations. In fact, recently the chairman of NABARD announced that the organisation is going to create on its own a microfinance institution with a capital of Rs 100 crore, which it will not only run but will also regulate.

Provisions of the Bill

In Section 2(f) microfinance organisation is defined as follows: “Microfinance organisation” means an organisation, other than a group established for the purpose of carrying on the business of extending microfinance services and includes the following:

  • (i) a society registered under the Societies Registration Act 1860 or any other state enactment governing such societies;
  • (ii) a trust created under the Indian Trusts Act 1882 or public trust registered under any state enactment governing trust for public, religious or charitable purposes;
  • (iii) a cooperative society or mutual benefit society or mutually aided society registered under any state enactment relating to such societies or any multi-state cooperative society registered under the Multi State Cooperative Societies Act 2002, but not including: (A) a cooperative bank as defined in clause (cci) of section 5 of the Banking Regulation Act 1949; or (B) a cooperative society engaged in agri cultural operations or industrial activity or purchase or sale of any goods and services.

    It is difficult to understand why a society registered under the Society Registration Act or a trust under the Indian or State Trusts Act, which is not designed as a financing institution, should be recognised as a microfinance organisation. Note that the bill says, “an organisation, other than a group established for the purpose of carrying on the business of extending microfinance services”, (italics mine). I find the above definition rather ambiguous, making it unclear if the SHGs are considered as microfinance organisations or not. It is only after reading the attached statement about the objects of the bill and the explanations about its provisions that I inferred that SHGs do not qualify as microfinance organisations. This implies that such societies and trusts can be

    Economic and Political Weekly September 15, 2007 recognised as a new set of microfinance organisations, besides the cooperatives, by NABARD. It is difficult to understand why. The difficulty becomes greater when one finds that registered cooperative societies not engaged in credit operations or cooperative banks are not entitled to be recognised as microfinance organisations. In what way is any registered society or trust more suited for this purpose than a farmers’ cooperative institution currently engaged in non-credit activities? Furthermore, why and how should a cooperative credit society, agricultural or non-agricultural, be brought under the direct control of NABARD, (which is what is implied by sub-clause C above), when it is functioning as a cooperative society for that very purpose under the state law? The cooperative credit societies are member-controlled organisations, designed to accept deposits only from the members and advance loans only to members. How can these advance loans to entities listed in section 2(b) of the bill, if any of them are not members of the society? In many villages, at least one member of every household is a member of the village cooperative credit society. It is not clear if the recognition of such an institution as a microfinance organisation would not mean dual control – by the registrar of cooperatives and directly by NABARD. And, such a cooperative may be helped with state grants to have own funds to the value of Rs 5 lakh! What sort of cooperatives are these going to be under the circumstance? The messy grouping of various organisations as microfinance organisations under the bill is illogical. The exclusion of the RBI as the regulator of all financial institutions that accept deposits and disburse loans, in case of the trusts and societies, is strange.

    Trust and Societies Acts

    The main organisations sought to be recognised as microfinance organisations are trusts and societies under the respective central or state acts. It appears that some of these trusts and/or registered societies have not only sponsored SHGs but have been functioning in effect as micro finance organisations. But there is uncertainty and ambiguity in the matter. The Trust and the Registered Societies Acts specify “charitable purpose” (besides, religious, scientific, and cultural) as an object of the institution. But, the expression “charitable purpose” is not clearly defined in the acts. Certain trust acts, like the Maharashtra or Gujarat Act define “charitable purpose” to include relief of poverty or distress, education, medical relief, and the advance of any other object of general public utility. The last clause has been sought to be clarified through specific inclusions or exclusions in the acts. Thus, the Gujarat Act specifies that general public utility does not include a purpose which relates exclusively to sports or exclusively to religious teaching or worship. The Maharashtra Act explicitly states that charitable purpose includes provision for facilities for recreation or other leisure time occupation (including assistance for such provision), if the facilities are provided in the interest of social welfare and public benefit, and in the advancement of any other object of general public utility. But, it does not relate to purposes relating exclusively to religious teaching or worship. The act makes it clear that the “interest of social welfare” shall be satisfied only if the facilities are provided with the object of improving the conditions of life for the persons for whom the facilities are primarily intended, and those persons have need of such facilities as aforesaid by reason of their youth, age, infirmity or disablement, poverty or social and economic circumstances, or if the facilities are to be available to the members of the public at large. Similarly, “relief of poverty and distress” applies in particular to the provision of facilities at village halls, community centres and women’s institutions, and to the provision and maintenance of grounds and buildings to be used for the purposes of recreation and leisure time occupation, and extends to the provision of facilities for those purposes by the organising of any such activity.

    I have referred to the scope of the expression “charitable purpose” in these two Acts at length, in order to draw attention to the fact that the expression is not self-explanatory and the law only makes explicit certain inclusions or exclusions relating to it, from time to time. By and large, therefore, the expression is subject to the interpretation by the charity commissioner or the concerned government department (where there is no charity commissioner) and ultimately by the court of law. I learn from certain Non-Governmental Organisations (NGOs) in the field that the charity commissioners or concerned government departments in different states have, by and large, not

    Economic and Political Weekly September 15, 2007

    allowed extension of loans to the poor

    – bearing or not bearing interest, acceptance of deposits or thrift from poor beneficiaries and seeking of loans from banks to provide loans to the poor and recover the loan amount with interest, as routine activity of a trust or a registered society, as a part of its activities under “charitable purpose”. In some cases the charity commissioner has allowed some of this activity by the trust or society on a one-time basis. To repeat this activity, a change statement and fresh permission is required, which of course is a very time consuming process. But, I was told by such NGOs, that it is possible that some trust or society, having once obtained such permission from the charity commissioner/ relevant authority, does not go back for a fresh permission, but carries on as if it has a permanent permission.

    Under such circumstance of ambiguity and uncertainty relating to trusts and regis tered societies, some NGOs in this field thought of registering themselves as companies under section 25 of the Companies Act. Such institutions cannot accept deposits. Some of them circumvent this by accepting deposits under other names, like security, etc, and carry on lending operations.

    Private limited companies under the Companies (Amendment) Act, 2002, (Act No 1 of 2003), section 581 (A to Z) is another device that can be used for the purpose. This Act requires at least 10 individuals or groups (incorporated or unincorporated) or a combination of the two types to form such a private limited company with specified share capital. The liability of the shareholders in such a company is limited to their paid up and unpaid share capital. The company is to carry on its business mainly (if not exclusively) with its members. (Section 581B (2): Every Producer Company shall deal primarily with the produce of its active members for carrying out any of its objects specified in this section.) In the Act a “producer company means a body corporate having objects or activities specified in section 581B and registered as Producer Company under this Act”. There are 11 objects specified for such a company in section 581B (1). The object of a producer company shall relate to all or any of these. Two of the first 10 objects listed in the Act are: “(d) providing education on the mutual assistance principles to its members and others”; and “(h) promoting techniques of mutuality and mutual assistance”. The 11th objective states: “(k) financing of procurement, processing, marketing or other activities specified in clauses (a) to (j) which include extending of credit facilities or any other financial services to its members”. Reading these above quoted three objectives together should make it clear that a company registered under this Act’s provision can accept deposits from its members, provide loans to them, at specified interest rates, and also borrow funds from banks to meet a part of this activity to be discharged in the interest of its members. The voting rights of its members are similar to a cooperative when there are individual and group members, that is, one vote for every member, irrespective of share capital or patronage (which means participation in the main business of the company by the member). So is the distribution of the profit or final price received net of costs. The dividend on share capital is nominal, to be determined by the board of directors or specified in the by-law. The bulk of the profit is to be distributed in proportion to patronage. All these make it clear that such a company shall function exactly like a cooperative credit society. But there appear to be some difficulties. From the point of view of such a company functioning as a microfinance organisation for its members, the difficulty appears to lie in the reported decision of some registrars of companies at the state level to prohibit such a company from accepting monetary deposits from its members. To my understanding, this is not right.

    Difficult Procedure

    Another difficulty with the use of this Act by the SHGs or their members is even more disturbing. It is necessary to note here the type or class of persons for whom this new section has been inserted into the Companies Act. They include those engaged in agriculture, horticulture, floriculture, fishing, viticulture, forestry, collection of forest produce and marketing, bee-keeping, and other services which promote the interest of farmers or consumers. It would be clear from this that such persons are most likely to be ordinary, often illiterate persons and of course not very moneyed people. For such people, the procedure followed is extraordinarily difficult and beyond their capacity. Firstly, not only the Act but the model by-law framed for such a company is in English. The annual report to be submitted to the registrar of companies is to be in English. The registrar’s office does not bother to provide a regional language version of these documents for the understanding of the intending members. The reports and other documents have to be electronically filed – not an easy or inexpensive task for such companies. At least one director has to have a digital signature, which costs Rs 3,000 to obtain. Other directors also need electronic director identification which too is hard to obtain for semi-literate directors. There are many other problems and delays in filing documents electronically. There has to be a full-time manager right from the beginning and he has to be a non-member, an outsider. Until the company begins operating at full steam at its proper scale, this is a very difficult and expensive requirement.

    One gets the impression that the companies sought to be helped by this section inserted at the end of 2002 are, for procedural matters, being treated as the general run of corporate entities, not to mention Multinational Corporations (MNCs). The result: the procedures prescribed make this Act a cruel joke. It is necessary for the ministry to clarify the ambiguities, or amend the Act to accommodate such institutions, if found necessary, provide all forms, by-laws and other documents in the regional languages, and not insist on the expensive electronic and digital requirements, if the party cannot afford them. The ministry should make it possible for these companies to function as microfinance institutions (that is, like the primary cooperative society) for its members.

    From the above discussion, it appears that the new bill is trying to empower trusts and registered societies to overcome the difficulties in their way of functioning as microfinance organisations. It is not quite clear that this is going to overcome all legal-technical difficulties in the way of the trust or registered society from functioning as microfinance organisation. Conflict of interpretation might arise if the provisions of this bill supercede anything in the central or state acts relating to trusts and registered societies. One cannot under stand how the RBI can be kept away from regulating such financial institutions that accept deposits and lend money to anyone, which are in essence the functions of a bank. Nor does it make sense to introduce a new financial institution when a proper cooperative act at the state level and/or a clarified section 581

    Economic and Political Weekly September 15, 2007

    of the Companies Act at the central level can meet the needs of the situation, without cluttering up the institutional and regulatory scene. Section 2(f) states: “‘microfinance services’ means

  • (i) providing financial assistance to an individual or an eligible client being under any of the sub-clauses (i) to (vi) of clause (b) either directly or through a group mechanism for (A) an amount, not exceeding rupees fifty thousand in aggregate per individual, for small and tiny enterprise, agriculture, allied activities (including for consumption purposes of such individual), or (B) an amount not exceeding rupees one lakh fifty thousand in aggregate per individual for housing purposes; or (C) such other amounts, for any of the purposes mentioned in items
  • (A) and (B) above or other purposes, as may be prescribed.” In view of the condition in C above, it is difficult to understand the necessity of A and B. Section 2 (f) (ii) states: (microfinancial services means) “financial services to an eligible client or individual borrower under any of the sub-clauses (i) to (vi) of clause (b) through the business facilitator or business correspondent mechanism authorised by the scheduled banks or any such other agency as may be permitted by the Reserve Bank of India”. Now, it appears from this that a scheduled commercial or cooperative bank can “authorise” a “business facilitator or a business correspondent mechanism” to provide financial services.
  • Business Facilitators

    The “business correspondent” (BC) in the RBI scheme, in addition to the functions of the business facilitators (BFs), shall do the following: disbursal of small value credit, recovery of principal/collection of interest, collection of small deposits, sale of micro insurance and mutual fund products, receipt and delivery of small value remittances. The entities which can be authorised as BC are NGOs/microfinance institutions (MFIs) set up under societies/trust acts, societies registered under Mutually Aided Co-operative Societies Act or Co-operative Societies Act of States, Non-Banking Financial Companies (NBFCs) registered under section 25 of the Companies Act and post offices. In their case too a reasonable commission will be paid by the bank to the BC, but the BC cannot charge any fee to the client. As in case of BFs, all omissions and commissions by the BC shall be the responsibility of the bank.

    Most commercial banks, particularly the public sector banks, have not been very enthusiastic about these provisions, particularly the business correspondent device. There is a stipulation of about 11.5 to 13 per cent as interest (the PLR of the bank) to clients out of which the commission is to be paid to the BCs. Since the interest on deposits varies from 4 to 9 per cent, there is very little margin to be shared on a reasonable basis with the BCs. The BC model had been initiated by some private sector banks, like the ICICI Bank, before the RBI Committee formulated its scheme. In this, the ICICI Bank advanced bulk credit to the BC and charged between 9 and 11.5 per cent interest (till October 2006) and the BCs were free to recover a service charge of between 9 and 20 per cent in addition, making the total annual interest to the client about 30 per cent or more. The RBI scheme appeared unattractive to the BCs.

    In the light of this account of the BFs, and particularly of the BCs recommended by the RBI, two points stand out in regard to the provisions of the bill under discussion. Firstly, the microfinance organisations to be certified by NABARD are to be mainly trusts or registered societies and they can function through BCs authorised by a commercial bank, which in turn will also be trusts or registered societies. The cluttering up of microfinance institutions is clear from this. Secondly, the banks are not enthusiastic about the RBI’s business correspondent scheme since there is little margin in it to be shared with the BC. In point of fact, the rural branches of commercial banks are not very enthusiastic about the collection of small deposits from rural areas and the operation through these entities, since very little savings today come their way. Some branches of the State Bank of India said that hardly 2.5 per cent of their total deposits are from such rural clients and it is not worth the bother for them [Tankha 2006]. In the light of this it is difficult to understand why the finance ministry, presumably advised by the RBI and NABARD, has brought forward such a bill. Section 2 (l): Thrift has been defined as follows: “‘thrift’ means any monies collected (other than in the form of current account or demand deposit) by a microfinance organisation from a group or by a group from its members through the group mechanism, not exceeding such amounts and subject to such other terms and conditions as may be prescribed”. In the first place, the meaning of current or demand deposit is not clear insofar as societies and trusts are concerned. They are not banks. Secondly, while SHGs are essentially thrift societies, the trusts and registered societies are not thrift institutions. The only thing they can do, as per the

    Economic and Political Weekly September 15, 2007

    bill, is accept from the self-help groups their thrift deposits as deposits and extend loan to them, if such groups seek them. It is not clear if the trusts and societies can accept deposits from individuals. If they can, then how does one draw the distinction between thrift and deposits in the case of deposits by such individuals? The amount that people keep, habitually or even occasionally, with their SHGs or their cooperative credit society is their thrift or savings. There are no nonmembers in such organisations and no depositors except the members. Then, what is this distinction relating to thrift? Is it to accommodate the trusts and registered societies who will be entitled to render microfinance service, without membership like in case of self-help groups and who, it appears, can accept deposits from anyone, without being banks? This is utterly messy, to say the least. Sections 8 and 9: NABARD appears as the sole organisation whose certificate is necessary to start a new microfinance organisation, be it a trust or a registered society or even a primary agricultural cooperative credit society. Only the existing trusts and registered societies can continue to function as they are doing at present if they choose not to be so certified. Presumably, the primary agricultural cooperative credit society can continue to function as at present since it is registered with the registrar of cooperatives.

    The remaining provisions in the bill relate to the upper organisational structure governing the microfinance organisations, a special fund with NABARD to help these organisations with donations towards their “own” funds (more scope for political patronage?), refinance, training and research, the provisions relating to certification of microfinance organisations and cancellation of such certificates, fines in case of violation of rules by such bodies, etc. The clear picture that emerges is the overriding authority of NABARD in all such matters, – not a mere regulatory body, but ‘sarve-sarva’ (all in all).

    One part of this bill is intriguing. Section 32 states: “Provisions of the Act to override other laws: The provisions of this Act shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law”. But, three other articles later, article 36 states: “Application of other laws not barred: The provisions of this Act shall be in addition to, and not in derogation of any other law for the time being in force”. One is left wondering what anyone, including the courts of law is to make of this

    This bill is an entirely unnecessary device to help the poor who have been organising themselves into small or large rural SHGs. The help they need can best be given by having a suitable legislation for their registration as co-operatives, which will give them a legal identity which is what they need to park their funds with a bank and borrow from a bank. For such small SHGs, the cost of maintaining savings and the cost of extending loans to members will not be large, certainly much less than what microfinance organisations working in the field are found to incur. These self-help groups, whether registered as a co-operative or not, can also form a private limited company under article 581(A to Z) of the company (Amendment) Act, 2002, to facilitate their borrowing from commercial banks. No new institutional device appears necessary. Poor individuals who are not yet part of a SHG can quickly form one to facilitate their own borrowings and bank loans.

    Some Policy Issues

    The discussion above has been confined to the institutional structure for microfinance to the poor households in rural and urban areas. But I wish to add a point about the policy relating to lending money to SHGs. The SHGs are basically thrift institutions of the poor. Their individual member’s loan requirements are limited. The responsible SHGs are very careful in lending money to their own members. They help, advise and supervise their loan to their own members so well that banks, I think, would like to learn the essentials of supervised credit from them. This is because the deposit money is theirs and each one of them has a stake in it. At any time, loan fund in excess of what the group’s own savings permit, will be as effectively supervised provided the amount does not form an overwhelming part of the total advance by the group, such that the advances from their own funds become a small or negligible part of the total advances. In such a situation, sooner than later the members will become less careful about the disbursement and supervision of loans to their own members, since their stake in the funds advanced will cease to be significant. This is what has happened to the primary cooperative credit societies in the country. A policy of “helping” the SHGs with disproportionately large loanable funds will ultimately lead the SHGs to the same fate. Therefore, as a rule of thumb, no self-help group should be provided with external loanable funds which is more than 50 per cent of the total advances by the group to its members during the year. This alone will preserve their character and allow them to grow slowly yet steadily.

    Moreover, the interest rate at which such external funds should be provided should be some 5 to 6 per cent lower than the rate at which the group provides loans to its members, not an administratively predetermined rate. Both these measures will help the group to preserve and promote its mutuality and responsibility. I have seen SHGs of poor, including tribals, where the group has dissuaded its members from incurring high loans to meet family expenses, like wedding or death rituals. I have also seen self-help groups of poor women who so carefully schedule loans to their members for productive purposes that at no time is there a very large outstanding debt; and the groups allow their members to redesign or reschedule investment plans. We should not kill such sound institutions by our “help” with abundant cheap funds.

    It is futile to think that many, if not most, poor people in our villages can be transformed into able entrepreneurs with high levels of income, through the mechanism of microfinance organisations and cheap, plentiful loanable funds.

    The trusts and societies which have been helping such groups should be left free as they are at present, and should not be converted into agents of NABARD with “own” funds and refinance. I will not be surprised if most of such genuine trusts and societies in this field would be unwilling to become a part of the device under the proposed Act. It is only the fly-by-night type of institutions that will be promoted through the proposed device.




    Tankha, Ajay (2006): ‘Challenge and Potential for Indian Banks to Implement Business Facilitator and Business Correspondent Models: A Status Report’, sponsored by NABARD.

    Economic and Political Weekly September 15, 2007

    Dear Reader,

    To continue reading, become a subscriber.

    Explore our attractive subscription offers.

    Click here

    Back to Top