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Perhaps small is more beautiful than big! Targets continue to be ad hoc Merger mania haunts banks Financial inclusion vs unclaimed deposits Capital base of regional rural banks raised Banking in Telangana Ferrying digital banking to Lakshadweep A development bank for BRICS Governance in Reverse Gear? Greet Lakshmi the banking robot Stage set for Indian ‘avatar’ of foreign banks Mega merger is on A new development bank rising in the east… What is the priority – mergers or NPA reduction? Why priority status? Insatiable appetite for credit Too big to fail and too small to sail Holy or unholy? Another route for achieving financial inclusion Lacklustre credit expansion A bank for women, by women Cradle of banks to a smart city... Bottomlines shrink, bad loans rise... Reaching out: is it slowing down? How ‘secure’ are the secured loans? Growing gainfully Indian customers are tech savvy Why any time money? Good, bad and ugly United India Insurance - Rs 110 crore losses have been claimed till now due to floods in Tamil Nadu Fund healthcare clinics in villages... Cut in repo rate – lower than expected Small finance payment banks... Just 660 days! Target over-ambitious... New capitals of Migrant banks Well-lived... All that glitters is not gold... The paradox: clamour for the Goliath and David Growing volume of stressed assets… From lazy banking to easy banking It’s a war on black money, support it. Hesitancy in announcing year-end results New bank licences, at last... Nothing much can happen…. The collaboration suite of cyber criminals Smart banking in smart cities Small is ‘more’ beautiful Cautious and considerate Needed a Banking Atlas Bank deposits account for 46.3 per cent of household savings Two banks: their jubilees and performances Emerging crisis Thirty more cities seek to become SMART Banking overhauling or reorganisation? Small finance banks offer high interest rates Anytime banking to anywhere banking Drastic decline in asset quality Big bank merger, bigger expectations LVB- A supermarket of financial services How okay are new banks? Monetary policy continues to adopt dis-inflationary path Grows Bigger Aadhaar, niraadhaar and banking Managing NPAs... Banking on Risk Drop in SLR- sparing lendable resources One down in private sector Reaching the Unreached… Who is the real beneficiary? Rationalised Ernakulam excels... Payment banks have arrived
 
Holy or unholy?
In their quest to reach out to the unreached, banks have been striving hard to adopt various programmes, innovative or merely procedural.

After the initiative taken by NABARD, banks have approved the Self Help Group (SHG) Linkage programme for lending to the small borrowers. SHGs were able to bring together the formal banking structure and the rural poor for mutual benefit. Micro Finance Institutions (MFI), ostentatiously projected as the lenders as ‘micro credit,’ were facing competition from this linkage programmes. 

Of late, some banks are trying to forge alliances with MFIs by acquiring a couple of them. A large number of small borrowers may get the benefit of having access to micro credit from the big banks also. Hopefully, this could lead to a holy alliance of MFIs with banks, enlarging their accessibility.

However, one crucial issue that should be considered is the rate of interest charged by the MFIs. The track record of some successful MFIs is built on very high-interest rates charged by them. MFIs have been charging not less than 25 per cent per annum, according to some available data. And this rate of interest has the blessings of the Reserve Bank of India. MFIs are permitted to arrive at their lending rate by calculating a spread of 10 per cent margin.  Alternatively, they can charge at 2.75 times the average base rate of the five largest commercial banks, If the MFIs borrow funds at 15 per cent, adding their margin of 10 per cent, they can lend to the micro customers at 25 per cent. Thus the MFIs are legally allowed to charge this rate of interest, which is not different from that charged by moneylenders.

The dichotomy of interest rates

In classic Indian literature, the village moneylender is caricatured as a rapacious exploiter. Considering the insatiable demand for agricultural credit, the MFI perceive a lucrative business proposition in micro credit. The financial pundits, who were supporting the interest regimentation during the pre-financial sector reform period, now tacitly plead for the interest rates to be decided by market forces. The risk perception of MFIs’ rural lending is very high; their cost of funds and 

management fees are also high. Therefore, it is argued they should be allowed to charge a market-determined interest rate.

The consolation that the interest rate charged by MFI is slightly lower than that charged by moneylender is not a sufficient justification for charging rates much higher than that charged by banks. The rude manner in which some of them have stepped up their recovery efforts has created undue hardships to the debt-ridden poor borrowers.  It is reported that more than 60 per cent of the borrowers are now from urban areas. 

Need for introspection

The MFIs should voluntarily adopt a social audit to assess whether the interest rates charged by them are justified. While viability and reasonable profits are prerequisites for financial institutions, encashing on the misery of the helpless borrowers has to be avoided. If their operational cost is high, they need not venture into lending to the poor sections of the society. Five-star hotels cannot afford to charge less than Rs.100 for a cup of tea, because of their enormous operational cost. Rural India does not require five-star tea.  It would be satisfied to get tea from the road side tea stall at Rs.5, so long as it is available.

There have been many ‘angel investors,’ willing to fund the MFIs and receive in return very wealthy rewards for their investments. To repay these borrowings, the MFIs are compelled to squeeze their needy borrowers. This sort of unholy alliance should be avoided when the commercial banks enter into the business of micro finance.

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