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Misplaced Critique of Microfinance Regulation Bill

The criticism of the draft Microfiance Bill (September 15, 2007) reveals an ignorance of facts and offers groundless criticism of the public sector institutions involved.

DISCUSSIONEconomic & Political Weekly January 19, 200877Misplaced Critique of Microfinance Regulation BillP SatishThe article ‘On the Microfinance Regulation Bill 2007’ by Nilakan-tha Rath (September 15) is a per-fect example of as to how even eminent and respected academicians can misrepre-sent facts. The first two parts of the article indicate as to how the author is unaware of the facts, as far as the microfinance and self-help group (SHG) movement in the country is concerned. Contrary to what the article says, SHGs for microfinance in India were not set up three decades ago, but beginnings were in the late 1980s due to the initiatives taken by the National Bank for Agricul-ture and Rural Development (NABARD). The first formal effort was the pilot project launched byNABARD in 1991 [RBI 1991, NABARD 1992]. The history of the SHG movement in India and its growth and mainstreaming is quite well documented and does not need any elaboration here [Dasgupta 2001; Shetty 2001; Satish 2001; Fisher and Sriram 2002; Meyer 2003 and Ghate 2006]. Further,SHGs have not evolved on their own and just with the efforts of certain “do-gooders”, but huge efforts of capacity building and commu-nity mobilisation were undertaken by the self-help promotion institutions (SHPIs) – NGOs, banks, development agencies of the government – with the active financial and technical support of NABARD. Pres-ently, NABARD works with nearly 4,900 partner NGOs and other agencies for the promotion and nurturing of SHGs.Factually IncorrectIt is factually incorrect to say that SHGs could not put money in the name of the group. As early as 1991 on the initiative of MYRADA, some of the south India-based banks like Corporation Bank, Canara Bank and Indian Bank, allowed unregis-tered SHGs to open savings bank accounts in their groups’ names which was later for-mally accepted by the RBI, when it issued the circular allowing unregistered groups to open savings bank accounts [RBI 1993]. Much of the regularisation and simplifi-cation of the operations of SHGs in their linkages with banks for savings and credit was the outcome of the report of the work-ing group on SHG-bank linkage, which was followed up byRBI’s comprehensive circular dated April 2, 1996 on all the nitty-gritty related to SHG-bank linkage programmes [RBI 1996]. Apparently the author seems to be ig-norant about these documents. Notwith-standing the lack of any amendment to the existing cooperative acts in states and without any formal registration un-der any law,SHGs in India have been ac-cessing credit and depositing their sav-ings in banks since 1991. As on March 31, 2007, 29.24 lakhSHGs in 587 districts of the country have been credit-linked to 44,500 branches of 50 commercial banks, 352 cooperative banks and 96 regional rural bankings (RRBs). The cumulative credit which has flown to these groups is Rs 18,040.74 crore and the cumulative refinance drawn from NABARD is to the ex-tent of Rs 5,446.49 crore [NABARD 2007].At various points in the article the au-thor complains against “donations” to “so-cieties and trusts” from NABARD as if a cap-ital crime is being committed. Technically NABARD does not extend “donations”, etc to any entity. However since the late 1980s NABARD had been supporting financially and non-financially a wide cross section of organisations for capacity building in the field of formation, nurturing and deve-lopingSHGs. The capital support and equi-ty support to microfinance organisations and NBFC-MFIs is also not in form of a “donation” but in the form of soft loans or coupon bearing preference shares.The position of NABARD throughout, has been that in the microfinance sector, there has been an evolution of different types of institutional variants. Some of them are registered under the existing statutes and acts and are accordingly regulated. SHGs being unregistered informal groups which are collecting only members’ savings, need not be subject to any regulation, and they are already subject to lender’s discipline when their working and operations are The views expressed are those of the author and not of the institution in which he is employed. P Satish ( criticism of the draft Microfiance Bill (September 15, 2007) reveals an ignorance of facts and offers groundless criticism of the public sector institutions involved.
DISCUSSIONEconomic & Political Weekly January 19, 200879regulation, and also management are under its purview. Scheduled commercial bank-ing structure has a far bigger share in the Indian financial market and compared to that, the microfinance sector is minuscule. When such an all-encompassing role can be allowed in case of a more sophisticated and larger commercial banking set-up, why such a hue and cry is being raised in case of a similar role in the smaller and simpler microfinance sector is anybody’s guess. Even in case of the rural cooperative banking and RRB sectors,NABARD carries out the developmental, financing, advisory and supervisory functions in additionto being a licensing and regulatory authority (on RBI’s behalf).NABARD had beencarry-ing out these functions for the last 25years without experiencing any conflict of inter-est between the various roles. This being so, why is the issue of conflict of interest being bandied about in case of a much smaller mi-crofinance sector which hadbeennurtured from its infancy byNABARD?The author sheds crocodile tears that NABARD might become an unnecessary institution without this legislation. He need not have this fear, as even without the microfinance billNABARD will be alive and kicking for decades to come. Microfinance is just a small part of its responsibilities and addition or dilution of its role in such an area will not make much difference to an institution likeNA-BARD. Even without this billNABARD will continue to play a pre-eminent role in the Indian microfinance sector. Further, agricultural credit always re-quiressecond-tier refinancingarrangements [FAO 1998] and even in countries where share of agriculture inGDP and workforce is less than 3per cent, like USA and Japan, apex institutions for farm credit are active and thriving [Satish 2007]. When one com-pares this with the responsibilities which NABARD had inherited from ARDC andACD of RBI in 1982, it has now taken on a far wider and deeper role and multifarious responsibilities on the canvas of agricul-ture, agricultural finance and rural devel-opment sectors in the country. It wouldbe out of place to list out here the achievements and activities ofNABARD in the last quarter century, suffice to say that its role in agricul-turalfinanceand rural development sector in the country is well acknowledged by all national and international players concerned with the sector. It is intriguing as to how academics like Rath who have not questioned the system-atic emasculation of rural finance systems in our country byRBI and government [Satish 2007] suddenly wake up to write against a proposed piece of legislation which is far peripheral to the more vital is-sues relating to rural credit. And the main aim of this writing does not seem to be a concern for the microfinance sector as such, but to use the draft bill as an instru-ment to pour vitriol onNABARD.In their preface to the Communist Manifesto, Marx and Engels wrote, “a spectre is haunting Europe – the spectre of communism. All the powers of old Europe have entered into a holy alliance to exorcise this spectre: pope and czar, metternich and guizot, French radicals and German police spies”[MarxandEngels1971].Similarlypara-phrasing it, one can say, “A spectre is haunt-ing the microfinance sector in India – the spectre ofNABARD. All the vested interests in the sector have entered into a holy alli-ance to exorcise this spectre.” There is no dearth of popes, czars, metternichs and guizots in the Indian MFI sector. It would be appropriate to quote a Telugu saying that any curse by a family elder is also a blessing. Having been its founder-director for nearly half a decade, Nilakantha Rath is like a family elder forNABARD. His critical remarks must be taken as blessings for further growth and development of the institution in the service of Indian agriculture and rural India.ReferencesDasgupta, Rajaram (2001): ‘An Informal Journey through Self-help Groups’,Indian Journal of Agricultural Economics, Vol 56, No 3, July- September.FAO (1998): ‘Agricultural Finance Revisited: Why?’, Food and Agriculture Organisation of UN, Rome.Fisher, Thomas and M S Sriram (eds) (2002): Beyond Micro-Credit: Putting Development Back into Microfinance, Vistaar Publications, New Delhi.Ghate, Prabhu (2006): ‘Microfinance in India: A State of the Sector Report, 2006’, Microfinance India, New Delhi.GoI (2005): ‘Budget 2005-06: Speech of Minister of Finance’, Ministry of Finance, Government of India, New Delhi.Marx, Karl and Frederick Engels (1971): Manifesto of the Communist Party, translation and reprint of the original 1848 German version, Progress Pub-lishers, Moscow.Meyer, Richard L (2003): ‘Microfinance, Poverty Al-leviation and Improving Food Security: Implica-tions for India’ in Rattan Lal, David Hansen, Nor-man Uphoff and Steven Slack (eds),Food Security and Environmental Quality in Developing World, CRC Press, Boca Raton, FL.NABARD (1992): ‘Guidelines for the Pilot Project for Linking Banks with Self-help Groups’, Develop-ment Policy Department, February 26, National Bank for Agriculture and Rural Development, Bombay. – (1999): ‘Report of the Task Force on Supportive Policy Framework for Microfinance’ (chairman, Y C Nanda), National Bank for Agriculture and Rural Development, Mumbai. – (2007):‘Annual Report: 2006-07’, National Bank for Agriculture and Rural Development, Mumbai.RBI (1991): ‘Improving Access of Rural Poor to Bank-ing-Role of Intervening Agencies – Self-help Group’, Rural Planning and Credit Department, July 24, Reserve Bank of India, Bombay. – (1993): ‘Opening of Savings Bank Accounts in the Name of Self-help Groups’, Rural Planning and Credit Department, January 4, Reserve Bank of India, Bombay. – (1996): ‘Linking of Self-help Groups with Banks: Working Group on NGOs and SHGs – Recom-mendations and Follow Up’, Rural Planning and Credit Department, April 2, Reserve Bank of India, Bombay. – (2004): ‘Advisory Committee on Flow of Credit to Agriculture and Related Activities from the Bank-ing System’(chairmanV S Vyas), Reserve Bank of India, Mumbai.Satish, P (2001): ‘Institutional Alternatives for the Pro-motion of Microfinance Self-help Groups in India’, Journal of Microfinance, Vol 3, No 2, pp 49-74.– (2007): ‘Agricultural Credit in the Post-Reform Era: A Target of Systematic Policy Coarcta-tion’,Economic & Political Weekly, Vol XLII (26), June 30.Shetty, S L (2001): ‘Rapporteur’s Report on Working and Impact of Self-help Groups and Other Forms of Microfinancing’,Indian Journal of Agricultural Economics, Vol 56, No 3, July-September.For the Attention of Subscribers and Subscription Agencies Outside IndiaIt has come to our notice that a large number of subscriptions to the EPW from outside the country together with the subscription payments sent to supposed subscription agents in India have not been forwarded to us.We wish to point out to subscribers and subscription agencies outside India that all foreign subscrip-tions, together with the appropriate remittances, must be forwarded to us and not to unauthorised third parties in India.We take no responsibility whatsoever in respect of subscriptions not registered with us. MANAGER

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