Good friend Dr. Savita Shankar (her thesis was on the Indian microfinance sector) had sent me this link. It is an article based on Dr. Reddy’s speech on the Indian microfinance sector and the new (draft) Microfinance Regulation Bill that the the Ministry of Finance of the Government of India had proposed.
I began reading it with an intent that I would find enough room to disagree with Dr. Y. V. Reddy after I finished reading. I made a mental note that I would write him a mail as to why I find his article disappointing, etc.
But, after I finished reading it, I get the sense that he has strong points.
It is so true that financial inclusion is not economic inclusion. It does not constitute a stepping stone and, in fact, turned out to to be the wrong substitute or even foundation for economic inclusion in the US. It was used as a drug/painkiller for the lack of jobs and wages in the US at the dawn of the new millennium.
Second, if you do not do anything else and only lend money, then you are a money lender. As simple as that.
Third, he is right that States or (even Panchayats) are in a better position to monitor these institutions. However, as a friend gently reminded me, in the case of Andhra Pradesh, the State is both a competitor and a regulator. That is not done. Of course, that is par for the course in India.
He talks of problems with their behaviour since 2005. He should know. He is right about their life-styles and, I think, he has his facts on their poaching.
But, where he is silent on what empirical results on the ground have been observed since the AP Ordinance became a bill.
It is one thing to discipline the sector. But, it is another thing to encourage willful default. It is setting up a bad precedent. Third, what has been the alternative for the borrowers?
If the ‘no-frills’ accounts of banks have succeeded, why would they have gone to MFIs? Now, after the AP bill, what exactly is happening to the borrowers? Have they become better off or worse off?
In the end, we can keep writing pros and cons until cows come home but economic policies are eventually (in)validated by empirical reality. There is no substitute for it. On that, his article is silent.