Letters: It's the banks, not MFIs

This refers to the report “SKS shares slip below issue price” (October 26). Microfinance institutions (MFIs) have of late been in the news for wrong reasons. In Andhra Pradesh, where MFIs have taken strong roots, the state government is acting tough against these institutions. The MFIs, however, want commercial banks (their source of funds) to reduce interest rates. At present, commercial banks charge 12-14 per cent to MFIs, which, in turn, charge an interest of 25-27 per cent. Net interest margin (NIM) of 13-14 per cent is clearly an indication of the operational inefficiency of MFIs. Commercial banks have always had an NIM of 6-8 per cent despite high establishment costs. But one aspect that has been missed out in the whole analysis is that commercial banks (including public sector banks) have always avoided customers targeted by MFIs. It is quite strange that despite a strong presence of public sector banks in rural areas (including Andhra Pradesh), MFIs have done well. Thus the root cause of people being under-financed is not the usurious rates of interest charged by MFIs but the fact that public sector banks avoid financing customers in rural areas.  

K V Rao, Bangalore