9 PM Daily Current Affairs Brief – February 9th, 2023

Mains Oriented Articles

GS PAPER - 2

The fine print in the Indo-US pact, iCET

Source: The post is based on the article “The fine print in the Indo-US pact, iCET” published in the Indian Express on 9th February 2023.

Syllabus: GS 2 – Bilateral, regional and global groupings and agreements involving India and/or affecting India’s interests.

Relevance: About Initiative for Critical and Emerging Technologies (iCET).

News: Recently, India’s National Security Advisor held talks with the US counterpart on the first dialogue on the Initiative for Critical and Emerging Technologies (iCET) in the US.

What is the Initiative for Critical and Emerging Technologies (iCET)?

Read here: Inaugural iCET dialogue will accelerate US’ strategic technology partnership with India: US NSA

About Indo-US “strategic partnership” in the past

Both countries signed a) “Next Steps in Strategic Partnership” in 2004; b) “Defence Framework Agreement” in 2005, c) “Indo-US Civil Nuclear Agreement” in 2008 and d) all four key “foundational agreements”.

Both nations also launched the “Defence Technology and Trade Initiative” in 2012. The US accorded “Major Defence Partner” status to India in 2016, c) “2+2 dialogue” in 2018.

All of Indo-US “strategic partnership” has delivered $22 billion worth of military hardware purchases by India via the foreign military sales programme.

What are the advantages of iCET?

iCET could 1) Be a “game changer” in catalysing Indo-US technology cooperation by persuading the US to lift existing export control restrictions, 2) Encourage the private sector of both countries to cooperate in sensitive sectors, 3) Demonstrate a mutual commitment to investing in advanced technologies, such as quantum computing, AI and space, as well as the critical field of semiconductor design and manufacture.

What are the challenges faced by India’s defence sector?

India’s massive defence industrial complex, including the DRDO, defence public sector undertakings (DPSU) and the (erstwhile) Ordnance Factory Board, are associated with closely the Soviet/Russian arms industry.

India’s previous transfer of technology (ToT) resulted in engineers and designers acquiring only the “knowhow” of methods and procedures required for assembling or building aircraft, aero engines and armoured vehicles from parts or material supplied. Hence, the principles and laws of defence equipments are not completely understood.

What are the challenges faced by iCET?

-The US Arms Export Control Act not only requires clearances from the Departments of State and Defence for ToT but also imposes certain restrictions on the recipient state.

-The iCET aims to make the US a dominant player in India’s defence procurements by replacing Russia. But, this will face stiff resistance from Russia.

-While India is in dire need of technology, the US industry remains firmly focused on trade.

What India needs to do to make iCET comprehensive?

India need to leverage its considerable purchases in the arms, energy, civil aviation, nuclear and other sectors in a holistic manner to extract technology from the US.

Atmanirbharta must remain India’s ultimate aim. Hence, India should break free of Russia’s and US’s defence products and also regain “strategic autonomy” in international affairs.

The lesson from a court appointment drama

Source– The post is based on the article “The lesson from a court appointment drama” published in The Hindu on 8th February 2023.

Syllabus: GS2- Structure and organisation of judiciary

Relevance– Issues related to appointment of judges

News– Differences are emerging between higher judiciary and the political executive over the power to appoint judges to the judges of higher courts.

What is the recent controversy related to judicial appointments?

The appointment of L. Victoria Gowri to the Madras High Court has created controversy. She is alleged to be engaged in hate speech against Muslims and Christians.

A petition was filed in SC on this matter. The legal challenge to her appointment was rejected by the court.

What are structural problems with the process of judicial appointments?

The first problem is opacity. In other countries, the names of the judicial candidates are publicly known before the formal commencement of the selection process.

In such a scenario, facts, such as Ms. Victoria Gowri’s statements would come to light. They  would be known to the selection bodies.

In India, the candidate’s name is effectively made public after their selection by the collegium. The selection process is behind closed doors. The parties involved are the collegium and the government .

This has an effect on transparency. The government can simply withhold relevant information from the collegium .This can create a situation like the present one.

What are issues related to judicial review of appointments of judges?

Once a collegium recommendation has been made, the only way of contesting it is through a legal challenge before the Supreme Court. It leads to a set of awkward situations.

The decision of the collegium must be challenged before their own junior colleagues. These colleagues will be assigned the case by the CJI.

The judges insisted that the only question they could consider in judicial review was L. Victoria Gowri’s eligibility and not suitability.

It is problematic due to structural opacity of the collegium. It benefits the political executive. The government can influence the materials on the basis of which the collegium determines “suitability”.

What is the way forward to improve the appointment process?

In South Africa, the judicial appointments commission are subjected to judicial review. The courts have directed the commission to make their deliberations public.

There is a need for a degree of separation between the judicial appointments commission and the court. This will create a system of checks and balances, and a corrective mechanism in case of mistakes and errors.

There is an appointment process that genuinely safeguards judicial independence from executive dominance.

GS PAPER - 3

Our unique EV transition is a leadership opportunity

Source: The post is based on the article “Our unique EV transition is a leadership opportunity” published in the Live Mint on 9th February 2023.

Syllabus: GS 3 – Infrastructure: Energy, Ports, Roads, Airports, Railways etc.

Relevance: About electric 2Ws and 3Ws transition.

News: The 2023-24 budget gave the EV industry a boost by announcing the removal of customs duties on capital goods used for manufacturing lithium cells used in Electric vehicles.

A greater focus on passenger three-wheelers and commercial two-wheelers can accelerate India’s green push by improving livelihoods while reducing environmental and transport costs.

What are the challenges faced by EVs?

Electric two-wheelers and three-wheelers (including e-rickshaws) accounted for 92% of EVs registered in the country in 2022. Despite clear economic gains and the availability of EV models, e-2Wheelers(e-2Ws) and e-3Wheelers(e-3Ws) are still not being adopted at the desired pace.

Only 4.5% of three-wheelers registered last year were electric. Similarly, e-2Ws made up just 3.9% of total two-wheelers sales last year.

What are the advantages of the adoption of electric 2Ws and 3Ws?

Analysis by the Council on Energy, Environment and Water (CEEW) shows the total cost of owning an electric three-wheeler (e-3W) is 13-46% lower than that of owning similar vehicles using petrol, diesel and compressed natural gas. When drivers switch to electric, a 30% increase in daily savings is enough to pay back an e-3W loan.

What are the challenges faced in the adoption of electric 2Ws and 3Ws transition?

The slow uptake can be attributed to low awareness, lack of trust in EV performance, high finance cost, poor visibility and poor access to charging infrastructure.

What should be done to promote the electric 2Ws and 3Ws transition?

Setting up EV credit guarantee trust funds to de-risk financiers: Most 2W delivery riders and 3W drivers rely on high-interest loans from informal markets. MSMEs, which face a similar challenge, have benefited from credit guarantee funds. Hence, it should be extended to commercial EV segment as well.

Make chargers easily accessible: Auto-rickshaws spend their operational and non-operational idle times at specific parking locations with high footfall. Similarly, 2W delivery riders spend their idle time near pick-up hubs and restaurants. Hence, the charging infrastructure should be strategically developed for them.

Incentivize battery swapping ecosystems: Time loss is crucial for commercial EVs. So, India should promote interoperability among heterogeneous fleets within the same battery-swapping ecosystems.

Allocate higher funds to improve awareness: Swachh Bharat Mission-like awareness is required to improve awareness of FAME scheme.

India should double its electric 2Ws and 3Ws transition to maximize its benefits for the environment, people’s livelihoods and the Indian economy. With this, India has an opportunity to lead the efforts of other Asian emerging economies to chart their inclusive energy-transition strategies.

Quake Up Call – Turkiye, Syria impact magnified by poor construction. India must ensure building codes are followed

Source: The post is based on the article “Quake Up Call – Turkiye, Syria impact magnified by poor construction. India must ensure building codes are followed” published in The Times of India on 9th February 2023.

Syllabus: GS 3 – Disaster Management.

Relevance: About earthquake-resistant construction.

News: Recently, an earthquake of magnitude 7.8 struck south-central Turkey and Northwest Syria. Poor construction and rampant violation of building code is the primary reason for widespread damages in Turkey and Syria.

Around 59% of India is prone to earthquakes of different magnitudes – 11% in the very high-risk Zone V to 30% in Zone III. Hence, earthquake-resistant construction is essential in India to avoid such damage.

About the earthquake in Turkey

Read more: How are earthquakes measured and how massive is the Turkey one?

About the status of earthquake-resistant construction in India

India doesn’t have norms for earthquake-resistant construction. As they require 3-4% extra of the total construction cost for residential buildings and 2-3% extra for offices.

Even though National Building Code (NBC) 2016 has a specific section on earthquake-resistant design and construction. But there’s no law asking for compliance.

For instance, In Delhi an estimated 90% of buildings are at risk of collapsing in case of a strong earthquake.

What should be done to ensure earthquake-resistant construction?

Earthquakes can’t be predicted, but measures to minimise loss of lives must be prioritised. This can be done by a) There needs to be greater public awareness about NBC guidelines to boost voluntary compliance, b) Municipalities should be encouraged to adopt NBC guidelines in their building bye-laws, making them mandatory.

All governments are crony capitalists

Source: The post is based on the article “All governments are crony capitalists” published in the Business Standard on 9th February 2023.

Syllabus: GS 3 – changes in industrial policy and their effects on industrial growth.

Relevance: About business-political nexus.

News: Political connections for business purposes often happen due to complex rules and regulations and the evasive nature of rules in India. The recent Hindenburg report on the Adani group again created a debate on the business-political nexus.

Why there is a debate on the business-political nexus at present?

This is because the a) Adani group has a dominant presence in areas in which government policy plays a major role — ports, airports, electricity, green energy — and the principal competition mostly comes from the public sector, b) CAG report also raised questions about “undue benefits” that the Gujarat government gave to Adani Ports by waiving waterfront and other charges, c) Involvement of government-owned Public Sector Banks participation and d) Both the NITI Aayog and the finance ministry raised questions citing financial risk and performance issues in the Adani group’s airport projects.

What are a few examples highlighting the business-political nexus?

The telecom sector spectrum allocation has highlighted the business-political nexus. The Supreme Court’s judgement cancelled all those allocated licences.

The sand mafias, who are destroying the environment, would never have flourished without local political backing.

The construction business, which has long been India’s largest and fastest growing employer, is a good example of cronyism.

To prevent the business-political nexus some degree of moderation is required to ensure the government’s incorruptibility.

Counting the Female Labour Force Participation Rate accurately

Source– The post is based on the article “Counting the Female Labour Force Participation Rate accurately” published in The Indian Express on 8th February 2023.

Syllabus: GS3- Indian economy and employment

Relevance– Measurement of statistics related to employment

News– Economic Survey tries to address a longstanding policy problem by developing a better method to count women’s participation in the labour force

What is PLFS?

It is defined as the percentage of persons in the labour force in the population. LFPR is the percentage of the population that is employed, or is looking for work, but is unemployed.

What is the importance of women participation in the workforce?

As per a McKinsey report, if India achieved gender equality, it would add 700 billion US dollars to GDP in 2025. Annual GDP growth will increase by 1.4%. There are other such studies with other such numbers.

What are the issues with calculation of PLFS by official estimates?

In any informal economy, arriving at numbers like LFPR is difficult. An enterprise survey won’t work. Despite increasing formalisation, self-employment is large.

Even within the formal sector, informal contracts are the norm. Roughly 50% of employment is self-employment. More than 20% is wage employment with a regular contract and the rest is casual labour.

Hence, employment numbers have to be generated through household surveys, not enterprise ones.

Economic survey observations– Economic Survey 2022-23 highlights an important measurement issue. The common narrative of Indian women’s low LFPR misses the reality of working females integral to the economy of the household and the country.

Measurement of employment through the survey design and content can make a significant difference to final LFPR estimates. This matters more for measuring female LFPR than male LFPR.

Three main measurement issues have been highlighted: Overly broad categories, reliance on a single question to categorise labour force status, and the narrow approach of limiting productive work to labour force participation.

Use of overly broad categories that clubs productive work like collection of firewood, poultry farming with domestic duties can shift a significant proportion of women in the labour force into the out-of-labour-force category.

For example, unless the production of primary goods is identified as the main activity by the respondent, the PLFS would categorise women who do both domestic activities and primary goods production as out-of-the-labour-force.

Using the improved methodology, the Survey recomputes female LFPR with a better definition. Female LFPR ia counted 46.2% for FY21 for ages 15 years and above. It is much higher than the 32.5% estimated by the conventional definition.

ILO estimates– A similar attempt was made in an International Labour Organisation research paper published in 2014. It arrived at a female LFPR of 56.4% in India for 2012, against the lower official estimate of 31.2% for 2012.

The role of labour unions in emerging sectors

Source– The post is based on the article “The role of labour unions in emerging sectors” published in The Hindu on 8th February 2023.

Syllabus: GS3- Indian economy and employment

Relevance– Labour rights

News-There have been many reports of layoffs in the last few months, especially in emerging sectors.

In 2022, startups including Byju’s announced lay­offs. At the global level, Alphabet, Amazon, Meta, Microsoft, Twitter and Apple have laid off employees.

What is the current status of trade unionism in the emerging sector?

There are Unionisation attempts in these giant companies. Amazon workers at the warehouse at Staten Island called JFK8 succeeded in forming the Amazon Labour Union.

On the other hand, employees at the warehouse near Albany voted overwhelmingly against unionisation in October 2022 as many of them were sceptical of the bargaining power of a union against a giant like Amazon.

In India, the Information Technology Employees Senate, which works for the welfare rights of IT professionals, complained to the Union Labour Minister about retrenchment by Amazon.

Why forming unions in modern and emerging sectors is much more difficult as compared to conventional industries?

IT­ Services employees felt no need for trade unions as unions are typically associated with manual labour. IT employees are associated with “elitism” and “professionalism”.

They have competitive compensation pay packages, supposedly good conditions of work and a mechanism to address grievances. So, they stay on and are loyal to the company and the industry.

They switch to other organisations as they have the required skill sets. They do not collectively bargain or resort to legal action as middle class employees who go to court would be stigmatised.

Unions in the IT sector have to deal with both Indian and Western giants. It is a huge task.

The state obviously needs MNCs to stay on in India.

Multi­national corporations don’t take labour departments seriously. They ignore conciliation meetings more often than trade unions.

What are other issues faced by labour Unionism in India?

Trade unions are fighting on multiple fronts. They are struggling for historical labour rights, social security for the informal workers and fighting against adversities created during and after COVID­19.

Industrial accidents are frequent. Many garment and electronics industries violate labour rights.

Unions have sometimes succeeded in securing marginal rights. But there is only so much that they can do.

A Nordic-India connect to power a green transition

Source– The post is based on the article “A Nordic-India connect to power a green transition” published in The Hindu on 8th February 2023.

Syllabus: GS3- Bilateral, Regional groupings and agreement affecting India interests

Relevance– Relations between India and Nordic countries

News– Trade Ministers of Norway and Finland are currently visiting India together.

What is the importance of the Nordic region?

Over the last decades, Nordic countries have been at the forefront of developing new green technologies and solutions such as hydrogen, offshore wind, and carbon capture and storage.

The Nordics have succeeded in building stable, secure, welfare based societies to a large extent.

The Nordic region has ambitions to become the most sustainable and integrated region in the world by 2030.

What is the current status of relations between India and Nordic countries?

The Nordic ­India Summit was held in Copenhagen in May 2022. The five Nordic leaders and Indian Prime Minister agreed to intensify cooperation on digitalisation, renewable energy, maritime industries, and the circular economy.

PM of India expressed an interest in joint Nordic solutions that can support India’s green transition.

The Nordic business community in India is also growing. There are now 240 Norwegian and Finnish companies in India.

India and Finland– The past year has seen a significant rise in trade and investments between Finland and India.

India has grown to become a priority country for Finland. Finland has recently opened a new Consulate General in Mumbai.

Several Indian companies are looking towards Finland for its expertise in areas of technology and innovation, sustainability, digitalisation, carbon neutrality and more.

An increasing number of Indian students, researchers, and experts have been moving to Finland as well. Finnish companies such as Nokia and Fortum have some of their most significant investments in India.

India and Norway– Trade between Norway and India has doubled in the last three years. The Norwegian Sovereign Wealth Fund is likely to become one of India’s largest single foreign investors with around $17.6 Billion investment.

The Norwegian government has also recently established a new Climate Investment Fund for investments in renewables abroad, and India has been defined as a focus country. Almost ₹1,500 crore have been invested so far in India through the climate investment fund.

What is the scope for future collaborations between India and Nordic countries?

Both Norway and Finland have ongoing free trade agreement and investments negotiations

with India. Finland, is a part of the EU­ India FTA negotiations, and Norway is negotiating through the European Free Trade Association.

Finalising the free trade and investments agreements should be a priority.

There is a great deal of complementarities in our trade relations. In addition, trade in services is an area of significant potential, especially with tourism, education, IT, energy, maritime and financial services.

Together, the Nordics and India can power the green transition the world needs.

Microfinance: Status, Benefits, Challenges and Solutions – Explained, pointwise

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Introduction

The RBI had recently released its 26th Financial Stability Report (December 2022). In the report, the RBI remarked that the credit to the Microfinance sector has grown at a steady pace. However, the report highlighted the building stress levels in the loans portfolio (i.e., bad loans are increasing). The share of loans overdue by more than 90 days has risen to 14% in September 2022, from 12% in March 2022. Microfinance is considered a potent tool to ensure balanced and inclusive growth, especially by providing access to credit to the rural citizens and small entrepreneurs. The rising delinquency (Being delinquent refers to a situation wherein the borrower is overdue on a loan payment by a certain number of days) in Microfinance is indicative of the challenges faced by the sector. The Government has been supporting the sector through various initiatives. The Government has to step in to address the issues faced by the sector.

What is the meaning of Microfinance?

Micro Finance is defined as ‘provision of credit and other financial services and products of very small amounts to the poor in rural, semi urban or urban areas, for enabling them to raise their income levels and improve living standards‘. It is an economic tool designed to promote financial inclusion which enables the poor and low-income households to come out of poverty.

Components of Microfinance

Micro credit: Micro credit is the extension of very small loans to borrowers who typically lack collateral, steady employment or income stream and verifiable credit history. It is designed to support small-scale entrepreneurship, alleviate poverty, empower women and uplift the poor social class by extension. Microcredit is delivered through a variety of institutional channels including Scheduled Commercial Banks (through Business Correspondents), Regional Rural Banks (RRBs), Cooperative Banks, Non-Banking Financial Companies (NBFCs) and Microfinance Institutions (MFIs).

Micro Insurance: It is the insurance with low premiums and low coverage. Micro-insurance covers low income/net-worth persons and transactions are of low value. Like normal insurance, it can cover wide range of risks including damage to crops and livestock.

Micro Saving: Micro saving is targeted at people with low incomes and low savings. They are similar to saving accounts, but designed for small deposits. Typically, the limit of minimum deposit/balance is low and there are no service charges.

Microfinance Institutions: Institutions providing Microfinance services are called Microfinance Institutions (MFIs). A large number of organisations with varied size and legal forms offer Microfinance services. The MFIs exist as separate institutions because of the unique features of Microfinance like high transaction costs, short duration of loans, high frequency of repayment/instalments, absence of collateral and relatively higher rate of default.

Types of Microfinance Institutions in India

Joint Liability Groups: JLGs are informal group of 4-10 people that seek mutually assured loans. Agriculture-related loans are typical. Farmers, rural labourers, and renters are among the debtors in this category. JLG members are equally responsible for loan repayment.

Self-Help Groups: An SHG is a group of people in similar socioeconomic situations who come together to help each other. They are self-governed. Members come together (often for a limited time) to form a shared fund for their mutual business requirements. This type of cooperative financing does not necessitate the use of collateral. In addition, borrowing rates are often cheap. Several banks have formed partnerships with SHGs in order to increase financial inclusion in the country’s rural areas e.g., the NABARD-SHG linkage program, allows numerous self-help groups to borrow money from banks if they can show that their borrowers have made regular payments.

Regional Rural Bank Model: The main purpose of this strategy is to boost the rural economy. They have been created to serve rural areas with basic banking and financial services.

Cooperatives: Rural cooperatives were established at the time of India’s Independence. Through the cooperatives, resources of the poor are pooled and financial services are made available.

MFIs, based on their set-up, are regulated as NBFCs by the RBI, or through Companies Act, 2013.

Status of Microfinance

According to NABARD, the SHG-Bank Linkage Programme, covers 14.2 crore families through 119 lakh SHGs (87% of which are women) with savings deposits of INR 47,240.48 crore (March 31, 2022).

NABARD has sanctioned a cumulative grant assistance of INR 255.81 crore to Joint Liability Groups Promoting Institutions (JLGPIs) for promoting 12.77 lakh JLGs (March 31, 2022). There are 188 lakh JLGs of which 54 lakh were promoted during FY 2021-22 (as against 41 lakh promoted in FY 2020-21). During FY 2021-22, loan disbursed was INR 112,772.75 crore.

According to NABARD, Microfinance operations in India are spread across 595 districts of 28 States and 5 Union Territories. As on 31 March 2022, the combined micro credit portfolio of 225 lenders is INR 262,599 crores.

What are the benefits of Microfinance?

Credit to Low-Income Borrowers: Microfinance provides credit to the poor people with low income and assets who face difficulty in accessing finance from formal banking institutions. They help in providing funds to small entrepreneurs in poor regions.

Collateral-Free Loans: No collateral is required for Microfinance loans. This helps persons with little or no assets to access credit.

Financial Inclusion: Microfinance helps those sections of population who are unable to access credit from Banks/formal institutions.

Income Generation: Loans provided by MFIs help small entrepreneurs set-up/expand/scale-up their operations. This enables them to improve their income.

Women Empowerment: Microfinance facilities have proven to be vital in providing financial independence to women and thus empowering them. As noted by NABARD Report, SHG-Bank Linkage Programme has benefited 119 lakh SHGs, 87% of which are women. Access to finance will help increase women-led MSMEs.

Rehabilitation: Microfinance is able to provided access to finance in naxal areas as well. It has thus helped in rehabilitation of the conflict-affected people.

Rural Development: Microfinance boosts economic activities in the rural area and thus aids in rural development. It helps create livelihood opportunities as well.

Encourage Self-Sufficiency and Entrepreneurship: MFIs can provide much-needed funds to an individual for the establishment of a new business that requires small investment and offers long-term profit. Thus they promote entrepreneurship and self-sufficiency among the lower-income population.

What are the challenges associated with Microfinance?

Financial Illiteracy: Financial illiteracy leads to lack of awareness about various MFIs, and the services the offer. This makes the poor people reluctant to approach the MFIs.

Inability to Generate Funds: MFIs face difficulty to raise sufficient funds as they are generally not ‘for-profit’. This restricts their access to funds from private equity investors or other market-based avenues of funding.

Heavy Dependence on Banks: MFIs are dependent on borrowing from banks. For most MFI’s funding sources are restricted to private banks. Funds available from these banks are typically for short term, generally 2 years. Moreover, Banks tend to disburse loans at the end of financial year to meet the targets. This can create issues for MFIs if there is delay in repayment of loans by borrowers.

Weak Governance: Many MFI’s are not willing to convert to a corporate structure; hence there is lack of transparency. This also limits their ability to attract capital. MFI’s face challenge to strike a balance between social and business goals.

Interest Rate: Some MFIs charge high interest rates, which the poor find difficult to pay. MFIs are private institutions and do not get any subsidized credit for their lending activities. Thus they tend to charge higher interest rate.

Regional Imbalances: There is unequal geographical growth of MFIs and SHGs in India. About 60% of the total SHG credit linkages in the country are concentrated in the Southern States. In poorer regions like in Jharkhand, Bihar etc. where the proportion of the poor is higher, the coverage is comparatively lower. This could be attributed to lack of State government support, NGO concentration and public awareness

What steps have been taken to promote Microfinance in India?

Government Programmes: (a) SHG-Bank Linkage Programme (SHG-BLP): This channel was initiated by NABARD in 1992. This model incentivises women to unite together to form a group of 10-15 members. Women belonging to financial backward classes contribute by giving their individual savings to the group at regular intervals. Loans are provided to the members of the group by their contributions; (b) Micro Enterprise Development Programme (MEDPs): The programme enables SHG members to be up-skilled to take up income generating livelihood activities. The main objective of the programme is to enhance the capacities of participants through appropriate skill up-gradation in existing or new livelihood activities in farm or non-farm activities. It helps enrich knowledge of participants on enterprise management, business dynamics and rural markets; (c) Livelihood and Enterprise Development Programme (LEDP): It was initiated on a pilot basis in 2015 with a view to create sustainable livelihoods among matured SHG members and to obtain optimum benefit from skill up-gradation. LEDP is a holistic intervention mechanism conceived to take care of the entire ecosystem required for livelihood promotion in both farm and off-farm activities. It is implemented through cluster-based approach within contiguous villages. It has a provision for intensive training for skill building, refresher training, backward-forward linkages, handholding and escort support for credit linkage; (d) Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE): It implements the credit guarantee scheme for Micro and Small Enterprises (MSEs). It has added MFIs to the list of member lending institutions (MLIs).

Financial Support by NABARD and SIDBI: (a) NABARD supports MFIs in their formative years (as NGO-MFIs) with grant support and Revolving Fund Assistance (RFA). NABARD had also created the Micro Finance Development and Equity Fund (MFDEF) in 2006 to help a number of MFIs with quasi-equity and subordinated debt instruments; (b) SIDBI has aided the growth of MFIs through its SIDBI Foundation for Micro Credit (SFMC). The India Microfinance Equity Fund (IMEF) of SIDBI has also supported MFIs, especially the medium and smaller ones with equity and quasi-equity. Since IMEF had similar function as MFDEF, it (MFDEF) was withdrawn in 2013; (c) MUDRA: Support to Microfinance sector was scaled up by Government of India by setting up the Micro Units Development & Refinance Agency Ltd (MUDRA) in 2015. It is an NBFC that focuses on micro-enterprises, extending financial support to MFIs for on-lending to individuals/groups/JLGs/SHGs.

Regulatory Initiatives: (a) Y H Malegam Committee: It was set-up in the wake of AP Microfinance crisis in 2010. It was constituted by the RBI to study issues and concerns in the Microfinance sector; (b) Introduction of Regulations for NBFC-MFIs: Based on the recommendations of the Malegam Committee, RBI introduced a comprehensive regulatory framework for NBFC-MFIs in December 2011. The regulations prescribed eligibility criteria for Microfinance loans linked to core features of Microfinance i.e., lending of small amounts to borrowers belonging to low-income groups, without collateral, and with flexible repayment schedules; (c) Regulatory Framework for Microfinance Loans: RBI has implemented Regulatory Framework for Microfinance Loans, effective from April 1, 2022, to update Microfinance regulatory policy. This will create regulatory parity between Regulated Entities (RE) that provide Microfinance, harmonise regulations to protect customers from over-indebtedness, and define Microfinance. Microfinance loans are now collateral-free loans for households having annual income up to INR 3 lakh.

What more can be done?

Regulation: The Microfinance sector has expanded a lot in the last 2 decades. Hence there is a need for a comprehensive regulatory framework for the sector, instead of piecemeal and reactive regulatory initiatives.

Interest Rate Transparency: MFIs are employing different patterns of charging interest rates and a few are also levying additional charges. MFIs should transparently inform the borrowers regarding the interest rate charged on the loans.

Encourage Microfinance Penetration: Encouraging MFIs for opening new branches in areas of low Microfinance penetration by providing financial assistance will increase the outreach of the Microfinance. This will increase rural penetration of Microfinance.

Expand Product Range: MFIs should provide complete range of products including credit, savings, remittance, financial advice and non-financial services like training and support. This will enable the people from underserved access all financial services.

Use of Technology: MFIs should use new technologies, IT tools, and applications to reduce operational costs.

Different Sources for Raising Funds: In the absence of sufficient finances, the reach of MFIs becomes limited. MFIs should look for other sources for funding their loan portfolio e.g., by converting to for-profit company (NBFC).

Conclusion

The Microfinance sector has played an important role in ensuring inclusive and balanced development. Yet the benefits of Microfinance have been limited to some regions. Moreover, the sector faces issue of rising bad loans along with several operational challenges for the MFIs. There is a need for comprehensive regulation of the sector to make it more inclusive and sustainable.

Syllabus: GS III, Indian Economy.

Source: Financial Express, NABARD, RBI,

Prelims Oriented Articles (Factly)

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