MFIs – Malegam Report ………..(3)

After a bit of interregnum, series on MFI – Malegam Report continues…

Today issues relating to Multple-lending, Over-borrowing and Ghost borrowers

Multiple Lending / Over-borrowing

General perception for multiple lending / over borrowing

– A deluge of loan funds available to borrowing resulting in excessive borrowing

– Emergence of ring leaders as key intermediaries between MFIs and potential borrowers distorting market discipline

Other reasons as ascertained by the Committee include:

– Period of moratorium between disbursal of loan and commencement of repayment schedule is inadequate, particularly considering the loans are for income-generation activities. Often resulting in repayments being from the loan itself, leaving inadequate amount for investment.

– MFIs use existing SHGs as target for new borrowers, since this minimises MFIs costs.

Recommendations

§          A borrower cannot be a member of more than one SHG/JLG.

§          MFIs should lend to an individual only if member of a JLG.

§          MFIs need to ensure that a borrower is not a member of another JLG.

§          Not more than 2 borrowers should lend to the same borrower

§          There must be a minimum period of moratorium between grant of loan and commencement of repayments.

§          Recovery of loans given in violation of the regulations be deferred till all prior existing loans are fully repaid.

Ghost Borrowers

Ghost borrowers generally arise in two circumstances, one when borrower on record is benami for the real borrower, and second when actually ficitious loans are recorded in the books.

Recommendations

§          All sanctioning and disbursement of loans be done only at a central location and more than one individual be involved in this function.

§          There should be close supervision of the disbursement function.

…………to be cont’d

Please do initiate your comments / queries to further broaden the understanding of the developments in the sector.