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lending 30 years ago. What is referred to as Grameen II is reported to be developing interesting new
approaches in Bangladesh, and these need to be studied. 9 Moreover potential technological innovations,
alluded to in Chapter 7A, offer the promise of substantial reductions on transactions costs, but they are
still around the corner. For the present, MFIs need to feel they can afford to incur the risks of
experimentation, and make a few mistakes. Pressures to squeeze interest rates further are not conducive
to such a frame of mind.
...it would help
if the sector
could set up a
self-regulatory
mechanism to
monitor MFI
interest rates
itself, so that
it can rap the
knuckles of any
member
charging
unusually high
interest rates,
either because
of inefficiency
and an attempt
to push
excessive costs
on to the
borrower, or in
order to grow at
an
unsustainably
high rate
Finally, there is the need to build up reserves to leverage loans in the case of all MFIs, and in the case of
those seeking to transform to for-profit status, to accumulate the initial entry capital requirement of
Rs 2 crores. While the latter can now be sought from the new venture capital funds or NABARD's Micro
Finance Development and Equity Fund (MFDEF) (the corpus of which was doubled by government in
the 2005 budget) equity capital still has to be serviced with dividends, albeit modest ones. The new
microfinance act proposes to reduce the entry capital requirement for microfinance organizations with
a portfolio above Rs 1 crore, to Rs 25 lakhs (as against eight times this amount to register an NBFC).
This will certainly help. However until it happens, MFIs are faced with yet another in a whole host of
pressures to maintain interest rates that appear high to the uninitiated, and certainly to politicians.
At least a couple of studies have been conducted recently on MFI transactions costs (one of them
described in Chapter 9, which describes some of the ongoing research in the sector). 10 While their
findings need to be given widespread publicity, the somewhat arcane topic of transactions costs does
not make very exciting copy for the media, upon whose shoulders falls the task of enlightening public
opinion. What would seem required is a massive public education campaign, using public relations
firms, and full page ads in the papers, as well as much greater media contact by the sector. Certainly,
more than seminars for the already converted are called for. The sector should capitalize on the Nobel
prize for peace awarded in 2006 to Professor Yunus and the Grameen Bank, perhaps by inviting him to
India for a lecture tour. 11
Side by side with attempts by the sector to instill a greater awareness of the need to allow MFIs full
freedom and flexibility in setting interest rates, it would help if the sector could set up a self-regulatory
mechanism to monitor MFI interest rates itself, so that it can rap the knuckles of any member charging
unusually high interest rates, either because of inefficiency and an attempt to push excessive costs on
to the borrower, or in order to grow at an unsustainably high rate in terms of borrower relations and
public and political acceptability. If this were to happen, there is surely a case for the RBI or the new
Microfinance Development Council proposed under the microfinance bill to enunciate the principle of
reasonable, cost recovering interest rates, loud and clear. While the sector must indeed fight its own
battles, it is entitled to some help from the regulator in this respect.
The importance for the MFI sector of building long-term and
healthy relationships with government and other stakeholders
As the AP crisis and one of the studies reported in Chapter 9 remind us, the question of building
communication strategies to combat the MFI image problem, and build (or rebuild) public support, is
a much broader one than that of interest rates. Indeed the AP crisis was not about interest rates at all,
but stemmed from the fact that MFIs and the government are now increasingly occupying the same
space. This is the new threat facing the sector and requires MFIs to become much moré adept at
building communication strategies that entail more than publicizing their good work (essential though
that is), but more importantly, long-term healthy relationships with government and other stakeholders
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