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Microfinance Regulation Bill: A Rejoinder

 Microfinance Regulation Bill: A Rejoinder Nilakantha Rath It is inappropriate to make trusts or registered societies or cooperative credit societies function as wholesalers in a regime of microfinance institutions. It is better to provide the self-help groups and their federations with statutory status under a liberal cooperative law. This would be the proper approach to extension of credit to such elements in the rural society.

DISCUSSION

Microfinance Regulation Bill: A Rejoinder

Nilakantha Rath

cooperative societies as “wholesalers” of credit to individuals and SHGs. That I think was my main point of criticism of the Bill.

I would react to his points in the following way:

It is inappropriate to make trusts or registered societies or cooperative credit societies function as wholesalers in a regime of microfinance institutions. It is better to provide the self-help groups and their federations with statutory status under a liberal cooperative law. This would be the proper approach to extension of credit to such elements in the rural society.

Nilakantha Rath (nrath66@yahoo.co.in) is with the Indian School of Political Economy, Pune.

I
came to learn about and read, only recently, the discussion note ‘Misplaced Critique of Microfinance Regulation Bill’ (January 19, 2008) by P Satish, a senior executive at the National Bank for Agriculture and Rural Development (NABARD). I find that he does not take up the basic issues raised in my article about the Micro finance Regulation Bill’s provisions.

The Critique

First, Satish severely attacks me on three points: (i) My ignorance about the initiation of self-help groups (SHGS) in India under the aegis of NABARD only about two decades ago, when I mention that SHGs started in India some three decades ago;

(ii) My ignorance that the SHGs were being recorded in their own names and serviced by some commercial banks even before the Reserve Bank of India (RBI) issued a circular to the commercial banks saying they can do so without difficulty (in two stages – in 1994 and finally in 1996); and (iii) NABARD’s proposed role in regard to the microfinance institutions in the Bill is no different from that of the RBI with respect to the commercial banks and other financial institutions, and I am attacking the provisions relating to NABARD’s role, while keeping quiet on the role of the RBI.

Second, the article also, incidentally, suggests that there is no necessity of providing a statutory status to the SHGs, since they do not accept deposits from non-members. He also points out that the Vyas Committee and such others have sug gested that microfinance institutions, like non-banking financial companies (NBFCs), should work as wholesalers of credit to SHGs.

He has nothing to say about the provisions in the Bill about the intended role of registered societies and trusts and

The Response

I may be in error in thinking that the SHGs started in India roughly some three decades ago. Surely, till the end of 1986, when I ceased to a member of the NABARD board, I had not read in any document placed before the board or heard any mention of SHGs in India or elsewhere. In that year, in private conversation, a senior officer of NABARD said that he was going to visit Bangladesh to see and understand the Gramin Bank system, which, of course has nothing to do with SHG, which, I under stand is a result of German suggestion. Much later, in the early 1990s, I saw many SHGs in Malappuram and in Alleppy town in Kerala. While the SHGs in Malappuram were of rather recent origin, the SHGs in Alleppy were much older. Subsequently, in course of conversation with different friends working in tribal as well as non-tribal areas, I was told that some self-help group type organisations had been promoted in some areas by nongovernmental organisations (NGOs) quite early in the 1980s. Therefore, to be on the safe side, I mentioned three decades. In any case, I do not see that this is a relevant point in my critique of the Microfinance Bill.

From my personal experience, I learnt that banks in India would not agree to open accounts in the name of associations which were not registered under one or the other law. Until recently, I did not know that there is no legal bar to unregistered associations of indi- viduals being recognised for such purpose, and some laws, including the Income Tax Act, permit this. Therefore, it appears that the RBI only reiterated what was there in law and brought it to the attention of the commercial banks. Surely, as long as the banks are willing to entertain the deposits of the SHG and extend credit to the SHG as a group, without such statutory status,

May 10, 2008

EPW
Economic & Political Weekly

DISCUSSION

there may be no problem. But, in such a situation, the liability of the individual members is not limited, unlike in case of most associations registered as cooperatives. And, that may create problems for both the bank and the members of the SHG. Hence the need for statutory status. Indeed, many SHGs have preferred to be registered as cooperative societies under the new liberal cooperative laws or even the older laws or as other associations.

That a regulator of a particular type of institution should also not be promoter or participant in the formation of such institutions is a well accepted principle. But, this is what NABARD is proposed to do in the Bill; indeed, the chairman of NABARD had already made an announcement to start many SHGs. As for “donations”, the provision is there in the Bill for NABARD to give outright grants to trusts/registered societies to bring their total capital to a specified minimum. As for the RBI’s role in regard to commercial banks, I was not writing about the RBI’S role in relation to microfinance institutions or any others, but about NABARD’s stipulated role with respect to microfinance institutions. That was not the occasion for me to examine RBI's role regarding commercial banks.

From the above, it should be clear that I did not “misrepresent” anything or try to mislead anyone as regards the contents and contentions of the Microfinance Bill. My main contention was and is that it is inappropriate to make the trusts or registered societies or cooperative credit societies function as wholesalers in a regime of microfinance institutions.

It is better to provide the SHGs and their federations statutory status under a liberal cooperative law. That would be the proper approach to extension of credit to such elements in the rural society. The author of the present critique of my paper has chosen to be silent on these basic issues and contentions in my paper.

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Economic & Political Weekly

EPW
May 10, 2008

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