REPORT ON COSTS AND MARGINS OF MICRO FINANCE INSTITUTIONS
At the Conference of Regional Heads of the Rural Planning & Credit Department (RPCD), Reserve Bank of India held at the Central Office on November 24, 2005, the College of Agricultural Banking (CAB) was advised to conduct a study on "Costs and Margins of Micro Finance Institutions (MFIs)".
2. Micro Finance Institutions (MFIs) have emerged as important players in the rural credit delivery system. They are at present in significant numbers in the states of Andhra Pradesh, Tamil Nadu, Karnataka and Uttar Pradesh. MFIs can take many forms, but can be broadly grouped into the following categories: -
i) Non-Banking Finance Companies (deposit-taking and non-deposit-taking)
ii) Not-for-Profit Companies registered under Section 25 of the Companies Act, 1956
iii) NGOs registered as Societies or Trusts
iv) Cooperative Societies under the State Cooperative Societies Acts / Mutually Aided Cooperative Societies Act (Andhra Pradesh)
3. As per the current interest rate policy of the Reserve Bank, the interest rate applicable to loans given by banks to micro-credit institutions or by the micro-credit institutions to Self Help Groups/member beneficiaries would be left to their discretion. The interest rate ceiling applicable to direct small loans given by banks to individual borrowers, however, continues. As regards MFIs, there is also no specific restriction on 'other charges' levied by them on their borrowers. However, complaints have been raised from time to time on the 'high' interest rate and other charges levied by the MFIs. The contention of the MFIs has been that since they provide small quantum of loan to a large number of people, the cost of delivery and servicing are significantly high and need to be loaded on the borrower, if the lending is to be sustainable. In the process, the ultimate burden to the borrower is higher than what he would have paid if he had accessed credit directly from the banking system. At the same time, the argument is that banks do not have the infrastructure and systems to service such clientele requiring small loans with near daily contact. Further, MFIs provide service at the borrower's doorstep, which saves the borrower travel costs and lost wages. The higher interest rate and charges levied by MFIs need to be viewed in this perspective as well as in the context of very high interest rates charged by the informal lenders on whom still a large segment of rural poor depends in the absence of effective linkage with the formal credit delivery system.
4. The issue, therefore, is to understand the cost involved in such a delivery system with specialized functions, small volumes and appropriate infrastructure, manpower, mobility, cash movement, information system, back office support systems, etc. and to compare these with the charges being levied by these institutions to their clients.
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Report on Costs and Margins of Micro Fin... , By: R.N.Dash & E.V.Murra...