Are there alternative ways of addressing the MFI issue, considering that the new proposed guidelines for priority sector lending earmark 9% of credit for this segment? Everyone wants this segment to benefit, though we are not sure of the structures that have to be created or modified. The fact that banks do not do non-collateralised lending means that it is outside their purview or else they would have been there given their expansive branch network. The existing structure of MFI lending appears to be flawed in terms of the cost of credit for the MFIs that have pushed up the lending rates, which makes non-repayment attractive.
One thought here is that we can think of creating new banks that are dedicated to micro-lending. This addresses the issue of cost of funds for the MFIs, as once they are allowed to garner deposits, their cost of operations comes down and they are better positioned to lend at lower rates, which could improve repayment schedules. Today, they are not allowed to collect deposits, which pushes up the cost of funds as they borrow from reluctant banks that charge anywhere between 14-20%, given the risk. By allowing specialised MFI banks, we can leverage their expertise in terms of dealing with non-bankable public.
The structure for such banks can be that either an existing MFI becomes an MFI bank, or new MFI banks come into being. They should be allowed to operate only in the rural areas, and lending can be to only the lowest income class that is not covered by banks. The maximum amount of money that can be lent to an individual (R25,000) can be fixed along with tenure (1 year) and repayments (weekly, fortnightly, monthly). A rural credit bureau should be set up simultaneously as it will help to spread the word about the creditworthiness of borrowers. As the UID scheme works out, it becomes easy to integrate the same. These MFI banks would need to bring in a minimum amount of capital; and to start with R200 crore that, with a capital adequacy norm of 12%, will enable lending of around R1,600 crore.
On the liability side, these banks should be allowed to raise deposits from the public and offer rates that could probably be lower than what a bank gives with fewer restrictions such as minimum account size and withdrawals. By allowing access to deposits, we can cap the lending rate