Failure of regulation

This refers to your edit Banks should not be forced to lend to MFIs (ET dt 30/10/10). Micro Finance Institutions are in the news for the past few days for all wrong reasons. The MFIs emerged on the model of Grameena Banks in Bangla Desh as a panacea to remove the poverty levels among the poor in agricultural and rural sector through provision of small loans without requiring collaterals, have of late been a cause of concern for the authorities. They were allowed to grow and function without much of regulatory and supervisory controls and they had grown very fast exploiting the weaknesses in the credit delivery system particularly under rural segment.
The failure of banking system to make financial inclusion a reality and the inclusion of loans by banks to MFIs as a priority sector advances became very handy for MFIs to lay strong foundation in rural areas. In the garb of an institution and with the indirect encouragements they received as Non Banking Financial Companies they took the role of informal money lenders and could entice the poor with their initial concessions and incentives. Some of the new generation banks in particular found it convenient to expand their exposure to agriculture and village industries through MFIs and for the latter the funds they got from banks became a source to spread their business only to exploit the poor. The crux of the issue is financial exclusion and failure of authorities to come out with proper regulation and supervision of MFIs at appropriate time. As rightly pointed out in your edit, the solution to control MFIs is to make the financial inclusion compulsory with the aid of technology, mobile phones and UID.
Dr T.V.Gopalakrishnan

( An edited version of this appeared in Economic Times Dt 2/11/10)