Self-help doubts

In Hyderabad, the office of the Mutually Aided Cooperative Thrift & Credit Society, which helps members of self-help groups.-G. KRISHNASWAMY

Opposition grows to the microfinance Bill on the grounds that it, among other things, excludes the big players in microfinance.

THE heightened allocations to the social sector and the rhetoric of women's empowerment notwithstanding, a Bill meant to guarantee financial services to women and other disadvantaged sections has run into rough weather. The Ministries of Women and Child Development and Rural Development are not in agreement with certain provisions of the Micro-Financial Sector (Development and Regulation) Bill, 2007, which they believe has been drafted in haste.

The main objective of the Bill is to provide for the promotion, development and orderly growth of the microfinance sector in rural and urban areas so as to offer an enabling environment to ensure that the people, especially women and certain disadvantaged sections, have universal access to integrated financial services of banks.

Another objective is to regulate the functioning of microfinance organisations. In its previous avatar it was known as the National Bank for Agriculture and Rural Development (Amendment) Bill, 2006. The Bill was first drafted in 2000 with the objective of giving a legalised structure to microcredit and microfinance organisations.

According to a note prepared by the Department of Economic Affairs (Banking Division) in the Finance Ministry, the Bill was formulated after consultations with the Reserve Bank of India (RBI), the National Bank for Agriculture and Rural Development (NABARD), and the Indian Banks' Association (IBA).

The logic was that "many microcredit-providing institutions such as MFIs [microfinance institutions] and SHGs [self-help groups] have been repeatedly stressing the need for regulation of this sector in view of its rapid growth and fear of less-than-credible institutions dealing with the poor and illiterate people." But the main problem with the Bill is that it excludes the big players in microfinance.

The Bill demonstrates perhaps that the talk of "inter-sectoral" convergence is just rhetoric. It also brings out the lack of inter-Ministerial discussion and deliberation.

For instance, the Rashtriya Mahila Kosh (RMK), set up in 1993 under the Ministry of Women and Child Development to provide credit to poor rural women, has been left out from the to-be-constituted microfinance development council (MDC), whose objective is to advise NABARD on matters relating to microfinance.

The council will have two women nominees, who may not necessarily represent the Ministry of Women and Child Development. This, said a senior woman bureaucrat, was ironical as 90 per cent of microcredit borrowers were women. Women and Child Development Minister Renuka Choudhary said the Bill was inimical to the interests of poor women. Excluding the RMK was a big surprise, considering that it has benefited 5,68,000 women so far. The Bill has also run into trouble from women's organisations and those closely involved with SHGs.

The All India Democratic Women's Association (AIDWA) believes that while the microfinance Bill ought to be rejected outright, there is also a need to look at the working of SHGs over the past two decades. According to AIDWA, unlike women's and people's science groups, the Government of India and other high-profile NGOs viewed SHGs as banking institutions whose savings needed to be mopped up in order to ease the burden of public investment.

Among the problems facing SHGs, it said, was the exclusion of a great number of poor people from the formation of SHG federations because of definitional problems and the lack of representation of women in the decision-making processes. Said Sudha Sundararaman, general secretary, AIDWA: "Instead of replacing formal credit institutions, the SHGs are designed to function as groups to ensure efficient transactions and repayments on a limited credit-based agenda. This works against the inclusion of issues such as domestic violence, sexual and reproductive rights and political participation. Such issues are then addressed by women `in spite of' rather than as a legitimate agenda of the SHGs."

The main objections to the Bill are that it excludes from its purview non-banking financial companies (NBFCs) and companies registered as not-for-profit under Section 25 of the Companies Act; these two categories of companies deal with 90 per cent of microfinance. The Bill, instead, seeks to regulate societies, cooperative societies and trusts registered under State laws, also called microfinance organisations (MFOs), which handle only 10 per cent of such services in the country.

These smaller organisations could also get into trouble, given the conditionalities such as profitablity, 15 per cent capital adequacy ratio (that is, the capital base of the organisation should comprise at least 15 per cent of its outstanding loans), three years' experience and NABARD certification.

Nevertheless, the Cabinet and the Group of Ministers has cleared the Bill and it is likely to be tabled in the current session of Parliament.

The concern among non-governmental organisations (NGOs) involved with SHGs is that MFIs, profit-oriented as they are, may introduce practices that might corrupt the SHG model itself. They also feel that the conditionalities are harsh considering that even commercial banks were required to have a capital adequacy ratio of only 8 per cent.

Thomas Franco Rajendra Dev of the Mahalir Association for Literacy Awareness and Rights (MALAR), a federation of SHGs in Kanyakumari district, said repayment rates were, by and large, very good and that was one reason why MFIs wanted to enter the picture in a big way and that too without many regulations.

He said MFIs in Andhra Pradesh used coercive methods to make women repay their loans and added that he knew of many instances of such harassment. He said that in the last seven or eight years, a lot of SHGs and microcredit institutions had been formed with the sole purpose of obtaining and disbursing loans. Only in some States, especially Kerala, where linkages had been made between literacy, political empowerment and economic empowerment within SHGs, the poorest among the women had benefited and emerged as a force.

Incidentally, estimates of the number of SHGs in the country range from seven million to more than a crore. The demand for micro-credit is estimated to be close to Rs.1 lakh crore. Until December 2006, 24.82 lakh SHGs had been credit-linked with a cumulative bank loan of Rs.13,720.82 crore. As on January 25, 2007, about 24.33 lakh SHGs, with a bank loan of Rs.10,895 crore, had been formed under the Swarnajayanti Gram Swarojgar Yojana of the Ministry of Rural Development. Last year alone, Rs.65,000 crore was disbursed as microcredit.

But there are doubts whether it can help rural poverty. Franco Rajendra Dev said it was an illusion that microfinance alone would eradicate poverty; it had to be accompanied by other measures, including land reforms, which was the experience of both Kerala and West Bengal. The Integrated Rural Development Programme, which began in 1979, he said, failed to reduce poverty, as it was unconnected with the other causes of poverty.

He said that within MALAR, which was based on the People's Science Movement model, nearly 10 per cent of the women had improved their quality of life; handloom weavers had become owners of looms, pottery workers had turned owners and women had opened grocery shops and got into lease cultivation.

While this was a positive outcome, the main problem was the small net profit in these ventures and the challenges of the market. There was a lot to learn from the Kudumbashree model in Kerala, where the poorest of the poor among women were identified under the Asraya scheme and marketing outlets were provided for their SHG products. In West Bengal, too, 16 government departments were involved in SHGs in one way or other. There was a separate Ministry for SHGs as well. The marketing of the products was allowed through the public distribution system (PDS).

Critics of the Bill accused the major players of charging high rates of interest and resorting to other irregularities, including inhuman methods of recovery, which, in States such as Andhra Pradesh, even drove women to commit suicide. The majority of the borrowers were women, organised into SHGs or otherwise. Last year, the Collectors of East Godavari and Krishna districts submitted a report each to the RMK about women committing suicide because of harassment by the MFIs. Most of the suicides were reported from Guntur, East Godavari and Krishna districts.

In Krishna district, of the 19 unnatural deaths of women in 2005-06, 10 were confirmed to have committed suicide. In general, the district administration's observations were that MFIs imposed a non-transparent, flat rate of interest instead of a simple interest on the diminishing principal amount; the periodicity of repayment was weekly instead of monthly, the insurance policy of MFIs was such that premiums were collected without giving any policy; and they used methods of recovery that were demeaning to women, including making them stand in the hot sun, locking up their homes and even advising them to commit suicide.

In raids on the local offices of some of the MFIs operating in the district, signed cheques, blank, signed plain sheets of paper, and home-site pattas and land title-deeds were seized.

One of the proposals in the Bill is to allow MFOs that have a capital base of Rs.5 lakh to mobilise thrift. Such a move, critics argued, would restrict the expansion of the capital that was being created by SHGs. They said group savings were normally used in an emergency, but if MFOs were allowed to mop up the thrift, the purpose of SHGs would be defeated and women would find themselves again at the mercy of moneylenders.

Sources in the RMK said the word "thrift" was a clever way of defining "public deposit" as the RBI had not prescribed any "safety norms" for banks that accepted public deposits. This could allow unscrupulous MFOs, as also moneylenders who could register as MFOs, a backdoor entry and accept not only savings from people but also lend at very high rates of interest. Another worry was that caste and communal organisations could enter the fray, especially if the Bill allowed them to collect deposits through thrift.

The Bill does not provide any cap on the rate of interest, especially when there were known instances of MFIs charging flat rates of 15 to 30 per cent and using unethical means of recovery. On the other hand, there was a cap of Rs.50,000 on borrowing. There were objections to NABARD functioning as the regulatory body because it was insufficiently manned in the districts and there could be a conflict of interest as it was a promoter of SHGs and NGOs. "A promoter cannot be a regulator," said Franco.

Yet another criticism has been that State governments were not consulted during the formulation of the Bill despite the fact that many of the MFOs were registered under State laws.

The controversy over the Bill also comes in the context of a widespread SHG movement comprising mainly of poor women in the villages. The experience of the SHGs has been a mixed one, depending on the level of political awareness and rate of literacy and social and political organisation in the States. The possible enactment of the microfinance Bill has caused consternation among groups working with SHGs.

A two-day national consultation organised by Nirantar, an organisation that deals with gender and education issues, debated the implications of the Bill as well as the role of the SHGs.

More than 40 organisations from 19 States participated. The conference discussed a study prepared by Nirantar, titled "Examining empowerment, poverty alleviation, education within self-help groups" and a broad consensus emerged on the positive and the negative outcomes of the experiences of women in SHGs.

The study was done among 2,750 SHGs, the majority of them formed under government programmes, in 16 States. The survey revealed that the benefits had not percolated equitably to all women and most of them had not received any capacity-building inputs for the past two years. The experience differed from State to State and on the level of political consciousness as well.

At the consultation itself, the consensus was that the microfinance Bill would do more harm than good to rural women. It sought a wider consultation with all the stakeholder before the Bill is passed.