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Tech in Banking

In: Business and Management

Submitted By praveensammetla
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Malegam Committee Report

Malegam Committee was setup in November, 2010 after the crisis in Andhra Pradesh which recorded an increase in suicides committed due to failure of loan repayment. The committee was formed as the debts of MFIs were increasing year on and around $4 billion were borrowed by the MFIs from banks which could affect the countries growth at some point of time and also due to improper means of recovery method used by the MFIs.

One of the main reasons for failure of MFIs was due to high interest rates being charged. When microfinance started in the country, it was more about getting the banks to finance microcredit to the poor, and attracting investments. Nobody discussed interest rates.RBI the regulator body under which MFIs comes under initially thought that Interest rates would fall and settle with volumes, technology and competition providing a reasonable return to the lenders.

What should have the government done?

* Let it be. The bubble will burst and institutions will collapse at some point. The lenders, banks that have exposure to MFIs will lose money. This does pose a systemic risk.

* Investigate the implication of multiple lending; examine what it would do to the families of the poor and whether it would pauperize them. Take action to moderate the lending based on findings.

* Signal MFIs to be cautious in their growth and indicate that they are being.

The government has taken the third path initially; even then the MFIs were not picking up the signals and are responding by forming more associations and credit bureaus instead of an internal clean-up. Since these institutions are not keen on an internal clean-up, the state has to step in. The best option for the state would be to inspect a few large MFIs and check if the systems and processes are fine, due diligence is done on the client, identity and…...

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