Finmin, RBI caution banks on MFI lending

Finmin, RBI caution banks on MFI lending

Indian Financial System is complex. There are private and public players all over. We have seen Chit Fund Companies, Blade / Fly by Night Finance Compaies, Private Money Lenders and others looting the gullible public over decades despite best efforts by the well organised, well-structured and robust banking system in place. The emergence of MFIs on the scene was silent and is expanding....

In the early fifties itself, several committees went in to study the rural lending system and hence the departure from cooperative system to commercial banking system. To begin with Imperial Bank of India was nationalised and asked to go rural in the new name - State Bank of India in 1955. Followed is bringing to its fold the seven (or eight? because Bikaner and Jaipur were again merged then) State Bank subsidiaries in 1957. Next step was two nationalisations in 1969 and 1980 to further bringing into public fold of the twenty commercial banks from private hands.

Thanks to Lead Bank Scheme of 1969 (also Service Area Approach in late eighties), Rural-Branches Licencing Policy and compulsory posting of staff to these areas during eighties, Twenty Point Economic Programs (for poverty alleviation), Integrated Rural Development Program (IRDP), Small Farmers Development Agency (SFDA), opening of Regional Rural Banks (RRBs) in 1975, Local Area Banks Scheme of 1995, and in the recent years the focus on Financial Inclusion, there have been conscious and strenuous efforts by the RBI and State/Central Government machinery to tackle most of the ills in the rural economy. Urban poor were also being attended to through various agencies and policies or schemes. NABARD (formed in 1980) and SIDBI have been exclusively overseeing the financing to agricultural and small scale industrial requirements in a very professional manner.

With all these, Non-Governmental Organisations and Voluntary Outfits have emerged in the last decade or so to focus on lending to the poor. Micro Finance Institutions have surfaced in a very interesting manner. Service may be the motto but in a country like ours, it is necessary to monitor if not regulate such organisations. Despite financial sector reforms since early nineties, there are several gaps in the financial system as also in the legal environment. MFIs Bill has been waiting for its turn in the Parliament for over three years. Like the NBFCs who made merry when the banking system was getting overhauled, MFIs seem to make hay while the confusion prevails.

The caution given by RBI and GOI is essential to be followed by the banking system. SEBI too must keep itself alert with the experience of SKS going public. It could be a pilot study................