Q&A : Responsible Lending – A New Industry Benchmark?

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From left: William Tucker, P.N. Vasudevan, Royston Braganza, John Conroy

Microfinance Focus, October 15, 2010 (Colombo) : William Tucker moderated and actively engaged the panel and audience in one of the most lively and insightful Q&A.

Comment from audience: Royston, I agree with everything you said, except for one small point, which will change the direction of our discussion completely. About whether commercial capital is desirable. What happened in India was the advent of commercial capital (referring to recent multiple borrowing problems and developments arising from Indian MFIs aggressive marketing, exponential growth and stock market involvement). I think the focus should be much more on government and regulator’s involvement in creating a new type of MFI that works more like small banks. Yes you have to chase numbers and give evaluations but I think there will be serious consequences from this high growth that has recently taken over.

Comment/Question from audience: The point is why did we make this big jump to commercial capital when for a good eight years, it gets its capital from wholesale funds and bank linkages to MFIs. It is disappointing to see the disabilities of banks.  I know banks are driven by government mandates and we have several national banks. Where have the whole sale banks gone? Where are the other stakeholders in responsible lending? Where are the banks? Why no loan guarantees? Where is the missing link from banking side (suggesting an additional bank representative to be on the panel of this session besides representative for investor, MFI, regulator)?

Vasu: I cannot represent a bank to answer your question. If something is possible, it happens. No matter how you regulate, how much you stress on it, if there is money to be made, investors will go for it and if not, they can possibly leave. Banks were nationalized with the purpose to reach to the common men.  not because. The question is relevant, MFIs may disappear if banks take on the job (of responsible lending). Question is, Do we wait (for banks to do so)? Or meanwhile do we ensure some form of banking is happening to the poor? Till then, we have the banking correspondent model. That is why banks have not taken over the job of MFIs for the last 40 years . It has not happened.

Royston: There are various specific moves by the banking sector to the microfinance world. Grameen is offering credit enhancement guarantees. To get banks to drop their interest rates for the capital given to MFIs. Also, today it is the banks that are chasing the MFIs to fund them, and not the case of MFIs queuing outside the bank.

Question: I don’t fully understand. Is the problem in interest rate or regulation? In India, for 3-4 years, interest rates were very high but people were still borrowing. Now, interest rates have drop from 40% to 30%. Don’t you think the regulators should stop giving out NBFC to MFIs? Is there a problem with interest rates and ROE or is the problem with competition?

Royston: Perhaps there are economies of scale that have brought down the cost of funding (and hence interest rates). In India, the ROE is pretty consistent. However, I think we are sparsely serving the north and east districts compared to the South side of the country.

Vasu: The ROE is everywhere an issue, multiple lending is also an issue. They will use everything to curb it, whether it’s interest rates caps etc. And then the problem is transparency – not showing what MFIs do. I would favour to cap the number of players. You see, unlike MFIs, Banking sectors are highly regulated – you cannot just start a bank easily, you need documents, go through various procedures etc. Similarly, the number of MFIs set up should be capped so that those lucky to get a license will actually seriously focus on serving the target segments in the population rather than be cooped up with competition. We should have something like regulating banking license.

John: Some firms should fail and exit the market, leaving the more competitive ones in the industry. But this is not happening. What are the forces keeping the MFIs in the market? Is it foreign investments? Why isn’t the market solving it? Why aren’t money lenders failing and leaving the market?

William: Let us close. I see a revolution in the discussion. Years ago there will not be a discussion about ROE but it is a new and rich theme spreading around the world, and we are contributing to this spread. We have heard about scoundrels, loot and scoot, feather bedding etc. An interesting discussion. Thank you all for your contributions.

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