Micro finance growing at 82 per cent

Recent years have seen mushrooming of several micro finance institutions in the east. However, with this growth, many of the same challenges and opportunities present in the south are surfacing in the east, the study points out.

Also, there exist a great disparity in the penetration of micro finance within the region, with Orissa and West Bengal witnessing high levels of penetration, and states like Assam, Biharand and Jharkhand lagging behind.

MFI's in the east have also managed to maintain their low costs, while serving smaller client bases, as they have the lowest total cost ratio, at 17.92 per cent, against 22.65 per cent in the country as a whole.

However, rapid expansion of micro finance has led many organisations competing for the same client base in many areas.

The study also said that the absence of the rule of law due to widespread Naxalite activity has further complicated the provision of financial services to rural segments.

Speaking at a seminar on micro credit organised by the Confederation of Indian Industries (CII), Abhijit Banerjee of Massachusetts Institute of Technology (MIT), said "Putting a ceiling on the rate of interest charged by the micro finance institution would not be a good idea, more so on this juncture when the economy is passing through a high inflationary regime."

According to him, "One should look for a couple of years before putting a cap on the lending rates, with the increase in competition the interest rate might even moderate. Moreover, in the current inflationary situation, it would become all the more difficult for these MFIs to sustain".

Banerjee admitted higher transaction cost associated with micro loans.

Generally a borrower repaid the loan weekly and so for a annual loan of Rs 5000, a collection officer had to visit 52 times, pushing up the transaction cost per loan.

"Hence the interest rate is higher," he explained.

The Micro Finance Bill was expected to be presented in Parliament in 2007, but faced opposition from the Left parties as the Bill did not contain any provision regarding ceiling on interest rates that could be charged from borrowers.

Currently, rates were in the range of 20-30 per cent.

According to Doug Johnson of CMF, while India witnessed tremendous growth in access to micro finance service, over the last five years, vast majority of this growth occurred in a few areas, especially in the south.