What A News ?

Lending Rates in Microfinance
I was reading a news item in Economic Times about a Kolkata based MFI " Bandhan". It has slashed the lending rate to 19.1% from 24% that too on reducing rate. This is the news which will create a lot of discussions among the MFIs and also among the people like us who have interest in rural development.
Although the newspaper said that "it could spark off a rate war among the MFIs", but I don't see happening so. There are many reasons for that.
However, there are many positives about it, and we must see them first -

• The MFI has come out openly about the their lending rate.
• This may force others to declare abot their lending rates.
• This has also made clear that what is the rate the open market expects to be charged by MFIs.
• If lending rate is not comparable to what Bandhan has quoted (for which I am sure, most of the MFIs are not even closer to) the MFI will try to reach closer.
• Justifications by other MFIs likes, - lower rate is not possible because of smaller amounts to be given to larger number of people, reaching to borrowers is tough and costly, follow up and collection costs lot of resources, there is palpable risk associated with it, MFIs can't be expected to be very efficient because of objectives, type of clients they serve, and the type of service they are in, can not be accepted in the light of what Bandhan has declared.

Concerted efforts, dedication, and professionalism can make "development" cheaper. The team led by Chandrasekhar Ghosh, MD, Bandhan has proven that. This is true that financial institutions like banks are lending money to these MFIs on >12% , so reducing the operational cost to that level is commendable. Many MFIs and financial institutions like, SIDBI has already praised the move.
Why will many MFIs not fall in line ?

• There is no such strong demand from from clientele (consumers) side. Although, it is quite understandable.
• Most of the organisations are working at smaller units and one's actual lending rate is not known to other.
• Even if higher lending rates are known, so what ...?
• There is no system / authority in place to take cognizance of such practices ?
• MFIs own network or self -management body (although there is a network headed by Vijay Mahajan) is ineffective.
• Most of the MFIs (particularly those who have entered late in the "market") are being run as commercial organisation and not as a development organisation. It is important to mention that development organisation too can make profit (only to extent it is required to sustain or grow).

You must have come across the outcome of recent meeting of Network of MFIs where many decisions were taken about the - whom to lend, how much to lend, why to lend, how much to charge, what would be recovery mechanism, maximum how many MFIs can feed one borrower... etc. But what is happening is known to every one.
However, I must appreciate the efforts of 'Bandhan', it will certainly have some impact....positive.
Summer is catching up. Hopefully, this will bring good monsoon for us and then it will be cooler..Same may happen with lending rates of MFIs.

Keep enjoying..
Niraj