We appreciate the Malegam Committee’s recommendations to increase the supervisory capacity of the RBI , to make MFI regulation consistent at the national level, to promote good corporate governance, to increase bank lending to MFI’s, and to make available alternative sources of equity.
We are less enthusiastic that the Malegam Committee chose to focus their efforts narrowly on the product design of the JLG loan instead of understanding the way microfinance functions and proposing the proper role of market players in ensuring orderly growth of this sector.
Ensuring complete access to finance for every individual and every enterprise in India will require a flurry of innovations in financial products, delivery channels, and human resource management by a wide array of strong firms competing with each other to do business with the low- income household in a responsible manner.
Efforts to stifle this innovation by the Malegam Committee – no matter how well intentioned – must be reconsidered.
We believe that there is an important role for the regulator to play in making sure that innovation is encouraged among responsible players in a manner that benefits low income households, and we are hopeful that the RBI will agree with our view when it reviews the Malegam Committee’s report.
Although we appreciate the positive intention of the Malegam Committee, the report that it issued has numerous sections that will undoubtedly (1) hurt low-income households, (2) protect the largest incumbent MFIs, and that (3) perpetuate the convenient myth that low income households are more irrational than the rest of us.
The following is our perspective with respect to several sections of the report that we believe require additional consideration.
Recommendations that will hurt low income households
Recommendations that will protect the big incumbent MFIs
Many of the recommendations favour the largest existing MFIs, are likely to drive smaller MFIs out of businesses, and create entry barriers for any new players.
The larger MFIs benefit from economies of scale and will be more easily able to comply with the increased capital requirements. They will be more easily able to build the infrastructure recommended and move faster into the market place where they could corner the maximum market share thereby preventing the entry of smaller or newer MFIs in that market.
Recommendations that improperly assume that low income households are more irrational than the rest of us