The proposed guidelines will favour private credit institutions at the cost of public sector banks
Context: 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.
- However, If implemented, it will result in private lending at high rates of interest to the poor.
The recommendations
- Doing away with interest cap: The current ceiling on rate of interest charged by non-banking finance company-microfinance institutions (NBFC-MFIs) needs to be done away with, as it is biased against one lender (NBFC-MFIs) among the many (commercial banks, small finance banks, and NBFCs).
- The ‘maximum rate of interest rate charged by an NBFC-MFI shall be the lower of the following:
- The cost of funds plus a margin of 10% for larger MFIs (a loan portfolio of over ₹100 crore) and 12% for others; or
- the average base rate of the five largest commercial banks multiplied by 2.75’. This would bring the “official” rate of interest on microfinance between 22% and 26% — roughly three times the base rate.
- Power to regulate – given to government boards: 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.
- Minimum initial capital requirement increased for licensing new banks be enhanced from ₹500 crore to ₹1,000 crore for universal banks, and be raised to ₹300 crore from ₹200 crore for SFBs.
A Worrisome trend in rural finance:
- Due to liberalization: Brach authorization policy where mandatory opening of rural braches was required is significantly reduced from 75% to 25%.
- Now: Not only has the RBI abandoned any initiative to expand low-cost credit through public sector commercial banks to the rural poor, but, in addition, it also proposes to de-regulate the rate of interest charged by private microfinance agencies.
- Further, The rate of interest that would now be charged would be more than 20% in all practical sense!
Importance of Micro-finance:
- Easy credit for small loans to customers, without any collateral.
- Financial Inclusion: Credit reaches to the lowest rung of the society.
- Serving the under-financed section: as most loans are given to members of women’s groups(SHGs). There is a clear differentiation by caste and socio-economic class in terms of source and purpose of borrowing.
- Prevents people from poverty: Since most of the loans are personal loans taken at the time of financial stress.
Problem:
- Mostly personal loans: 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. These are difficult to be paid given the reported rates of interest of 22% to 26%.
- High rate of interest compared to other means: For example, Kisan credit card loans from banks are charged at 4% per annum (9% with an interest subvention of 5%) if paid in 12 months (or a penalty rate of 11%). Other types of loans from scheduled commercial banks carried an interest rate of 9%-12% a year.
- Incremental cost: as the time increases, the high rate of interest mounts the cost. In addition, a processing fee of 1% is added and the insurance premium is deducted from the principal. Borrowers are often unaware of this scenario.
- Violations of recovery rules: Contrary to the RBI guideline of “no recovery at the borrower’s residence”, collection is often done at the doorstep. Note that a shift to digital transactions refers only to the sanction of a loan, as repayment is entirely in cash. Many private collector hired by the banks use bad language in a loud voice, shaming them in front of their neighbours.
- In case of SHGs: There is no organic connection of microfinance to any group activity or enterprise. This makes the collection for repayment a difficult task.
- Post COVID: post-COVID-19, the cost of funds supplied to NBFC-MFIs was lowered, but with no additional restrictions on the interest rate or other parameters affecting the final borrower.
- Widespread malpractices: Although microfinance is being promoted since 1991, by the mid-2000s, there have been widespread accounts of the malpractices of MFIs (such as SKS and Bandhan), and a crisis in some States such as Andhra Pradesh, arising out of a rapid and unregulated expansion of private for-profit micro-lending.
Current scenario: Today, as the RBI’s consultative document notes, 31% of microfinance is provided by NBFC-MFIs, and another 19% by Small finance banks(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.
Conclusion: 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. This is beyond comprehension at a time of widespread post-pandemic distress among the working poor. Many groups demand that the rate of interest on microfinance not exceed 12% per annum. To meet the credit needs of poorer households, we need a policy reversal: strengthening of public sector commercial banks and firm regulation of private entities.
2) Digitize healthcare slowly
GS3: Issues related to Health Sector
Context:
- The author talks about the Digital Health ID Project.
Editorial Insights:
What’s the matter?
- Recently the Indian PM has launched the Digital Health ID Project (DHID) which generated debate on issues related to the use of technology in the broken healthcare system.
Digital Health ID Project (DHID):
Objective:
- To improve the quality, access and affordability of health services by making the service delivery quicker, less expensive & more robust.
Advantages of DHID for India:
- The use of tech for record maintenance is not just inevitable but necessary.
- With DHID the burden of storing & carrying health records to the doctor is minimized.
- Moreover, the doctor has instant access to the patient’s case history enabling more accurate diagnosis & treatment.
- Further, DHID enables portability across geography & healthcare providers which helps in reducing re-testing every time a patient consult a new doctor.
- It will hugely impact the quality of care & enhances patient satisfaction & confidence.
- Digitization of medical records overcomes the problems related to space & retrieving databases.
- Well organized repositories enable easy access to records that can stimulate much-needed research on medical devices & drugs.
- It can have a transformative impact in promoting ecosystems that functions as paperless facilities.
- The direct electronic linkages between the patient registration process, doctor, laboratory & pharmacy enable the use of relevant information before the patient’s arrival, thereby reduce delays & enhances efficiencies.
Challenges/Concerns with respect to DHID:
- Although technology smoothens the process & enhances the patient experience, there is a cost attached to it.
- In the immediate short run, DHID will increase the admin cost by 20% due to the capital investment in hardware & software development & personnel.
- Studies showed that small & medium hospitals are reluctant to adopt EMRs, because of the upfront investments that are required.
- Ultimately, any scaling up of this reform would require extensive subsidies & techno-logistical support to govt & private hospitals.
- In India, the challenges for Digitization is much higher because :
- The majority of the facilities do not have the required physical infrastructure.
- Cards getting corrupted,
- Servers being down,
- Computers crashing/hanging
- Frequent power outages in India.
- For many years, the inability to synchronize biometric data with ID cards has resulted in large-scale exclusions of the poor from the welfare projects.
- Repeating the same mistakes in the health sector will cause immense hardships to the most marginalized sections of Indian society.
- Though teleconsulting has certainly helped patients access medical advice for managing minor ailments & getting drugs delivered home.
- But in handling chronic diseases that necessitate continuity of care, teleconsultations have been problematic & cannot be substituted for actual physical examination.
- The serious shortcoming of using teleconsultation is the high attrition rate of doctors.
- Technology can be of little use in absence of doctors & basic infra.
- The most important is the possibility of privacy being violated increases with the centralization of all information.
- There is also the high possibility of hacking & confidentiality breach.
Way-Forward:
- There is a need to conduct a pilot study to assess the use of technology for streaming patient flows & medical records & thereby increase efficiencies across different facilities.
- There is an urgent need to build robust firewalls & trust.
- Increasing the doctor: patient ratio by encouraging more & more doctors into public hospitals.
- Increasing & upgrading the infrastructures of the hospitals.
Concluding Remarks:
The only way to ensure that a good policy does not die along the way due to poor implementation is by going slow & steady by making DHID sustainable & acceptable with the aim to achieve this aspiration sooner.
