Reserve Bank of India (RBI) published a “Consultative Document on Regulation of Microfinance”
- In June 2021, the Reserve Bank of India (RBI) published a “Consultative Document on Regulation of Microfinance”
- While the declared objective of this review is to promote the financial inclusion of the poor and competition among lenders, the likely impact of the recommendations is unfavourable to the poor.
- If implemented, they will result in an expansion of microfinance lending by private financial institutions, in the provision of credit at high rates of interest to the poor, and in huge profits for private lenders.
- The consultative document recommends that the current ceiling on rate of interest charged by nonbanking finance company-microfinance institutions (NBFC-MFIs) or regulated private microfinance companies’ needs to be done away with.
- It proposes that the rate of interest be determined by the governing board of each agency, and assumes that “competitive forces” will bring down interest rates
What is microfinance?
- Microfinance is a banking service provided to unemployed or low-income individuals or groups who otherwise would have no other access to financial services.
- Microfinance allows people to take on reasonable small business loans safely, and in a manner that is consistent with ethical lending practices
- Microfinance is becoming increasingly important in the loan portfolio of poorer rural households.
- Unsecured microfinance loans from private financial agencies were of disproportionate significance to the poorest households — to poor peasants and wage workers, to persons from the Scheduled Castes and Most Backward Classes.
- These microfinance loans were rarely for productive activity and almost never for any group-based enterprise, but mainly for house improvement and meeting basic consumption needs.
- In the 1990s, microcredit was given by scheduled commercial banks either directly or via nongovernmental organisations to women’s self-help groups, but given the lack of regulation and scope for high returns, several for-profit financial agencies such as NBFCs and MFIs emerged.
- By the mid-2000s, there were widespread accounts of the malpractices of MFIs and a crisis in some States such as Andhra Pradesh, arising out of a rapid and unregulated expansion of private for-profit micro-lending.
- The microfinance crisis of Andhra Pradesh led the RBI to review the matter, and based on the recommendations of the Male gam Committee, a new regulatory framework for NBFC-MFIs was introduced in December 2011.
- A few years later, the RBI permitted a new type of private lender, SFBs, with the objective of taking banking activities to the “unserved and underserved” sections of the population.
- Today, as the RBI’s consultative document notes, 31% of microfinance is provided by NBFC-MFIs, and another 19% by SFBs and 9% by NBFCs.
- These private financial institutions have grown exponentially over the last few years, garnering high profits, and at this pace, the current share of public sector banks in microfinance (the SHG-bank linked microcredit), of 41%, is likely to fall sharply.
- The proposals in the RBI’s consultative document will lead to a further privatisation of rural credit, reducing the share of direct and cheap credit from banks and leaving poor borrowers at the mercy of private financial agencies.
- The southwest monsoon has officially ended in India with 87.4 cm of rainfall between June and September, or just 0.7% short of the historical average of 88 cm. In many ways this was an exceptional year.
- By August end, India was staring at an all India monsoon rainfall deficit of nearly 9%.
- This was primarily due to monsoon rain in August, usually the second rainiest month, being short by 24%.
- Early in the monsoon, the India Meteorological Department (IMD) had forecast “normal” rains with “a tendency towards the positive side” and the August failure had it backtrack a little.
- It forecast correctly in hindsight strong rains in September but maintained that the overall monsoon rainfall while still “normal” would be towards the lower end.
- However, September rainfall 35% more than the monthly normal was so munificent that it completely closed the deficit and was well beyond the IMD’s expectations
- Three years of good rains have boosted storage in India’s key reservoirs. The monsoon, however, proved erratic for agriculture.
- The two key months for kharif crop sowing, July and August, were the ones when the monsoon failed and the excess September rains meant there are real fears of crop damage due to excessive moisture.
- The Government is expecting record crop output with kharif crops expected to yield 150.5 million tonnes until June 2022, which is slightly higher than the 149.56 million tonnes harvested last year.
- There are record surpluses expected for rice, pulses and oilseeds.
- While this could advantage exports it might also mean demands by farmers for more remunerative prices.
Police and ethics
- Two points emerge from these and other episodes, some of which are reported and many of which are buried stealthily.
- Police organisations in several parts of the world are not trusted for civilised and lawful behaviour.
- This is despite the many mechanisms that are in place that do not permit clandestine police actions against crime suspects
- The judiciary has tried to set right this distortion in the criminal justice system, but success has been marginal.
- The Chief Justice of India recently gave expression to his misgivings on police conduct.
- But deterrent punishments are not the answer; only a new culture of ethics can bring about visible transformation.
- Bringing about such a change will take decades and requires enlightened police as well as political leadership.
- Merely upgrading police technology, such as compulsory body cameras on patrol policemen and video recording of police station proceedings, without a corresponding change in mind-set will not be enough.
China and tech war
- China’s obsessive efforts to ensure that no private entity gains enough data to ever be in a position to even remotely challenge Chinese Communist Party-led state dominance, and that no competing country gains access to the citizen database through any unforeseen means, drive much of this overhaul.
- We should not overlook the fact that these efforts are limited only to the consumer tech sector.
- State support to manufacturing and ‘hard’ tech industries, which are perceived to be of higher value, including 5G/6G, semiconductor chips, artificial intelligence, biotechnologies, batteries, aviation and space tech, has only increased.
- We are witnessing a conscious redirection of efforts to areas that would maximise China’s geopolitical and geo-economic gains.
- It would not be surprising to see more state owned enterprises like ZTE and state-supported heavyweights like Huawei focus on strategic high technology and attempt to be pioneers in the global market.
Case of India
- These developments could be beneficial for India.
- The rate of digitisation accelerated during the pandemic in India. Start-ups here raised a record $10.46 billion in the first half of this year alone. India’s tally of unicorns has crossed 60.
- This trajectory and India’s projected growth will make the country the first destination of the funds fleeing Chinese stocks during these crackdowns.
- However, mirroring the U.S. start-up ecosystem, India’s emphasis too is on consumer tech, from which China is tactically distancing itself.
- Not to be forgotten, the U.S. also has a far reaching system for research and development of strategic technology.
- The recently concluded India USA talks as well as the Quad summit emphasised technological cooperation.
- The U.S. undoubtedly remains China’s lone rival in the high tech space, and the extent of this partnership will be important for India. U.S. interests will more likely be inclined towards the possibilities of market entry and penetration of its firms.
- India should also remain open to partnerships with friendly nations, keeping the enhancement of its internal capacity as the objective.
- An example would be the ongoing talks with Taiwan to bring in a semiconductor chip manufacturing plant to India.
- If successful, this could drive next-generation industries, including 5G devices and electric vehicles
Sri Lanka 13th Amendment
- There is an “urgent need” to understand the “weaknesses and strengths” of the 13th Amendment to the Sri Lankan Constitution and “act accordingly”
- The 13th Amendment provides for devolution of power to the Tamil community.
- “on complete implementation of the provisions under the 13th Amendment to the Constitution, including devolution of powers and the holding of provincial council elections at the earliest”,