Posted on July 6, 2009 - by boris

Support needed by Microfinance Institutions…

The Economic Times posted:

6th July: The indentity of microfinance of an emerging high potential and influential industry by itself ought to be considered given a place in this years budget, given that the past few years’ budget has seen heavyweight industries like IT, autos, telecom, banking and infrastructure swiftly pushing out the microfinance.

The former Govrenor of the Reserve Bank of India who is now a nominated member of the Rajya Sabha, the veteran economist who is also the chairman of Madras School of Economics in Chennai, C rangarajan and his committee on financial inclusion this spring officially declared that Micro Finance Institutions (MFIs) “could play a significant role in facilitating inclusion, as they are uniquely positioned in reaching out to the rural poor.”

The government has laid importance on the fact that one important way of reducing poverty in the country is the the way of financial inclusion. MFIs provide everything under financial services, including small loans as well as insurances to numerous unbanked households across the nation, thereby helping in reducing poverty. Despite this, MFIs are kept from reaching their full potential by means of several fiscal constraints.

MFIs do not enjoy tax reductions and other exemptions like the other banks on top of paying service taxes that the poverty stricken public India ends of paying, even though they should be allowed not to do so.

Another way of making the nation less impoverished is proving MFIs better is provisiong them with level playing field, thereby enanbling them to lower interest rates, reaching a bigger customer exposure.

Although the MFIs are now as well regulated, supervised same in following in requirements as banks, their poor customers still do not enjoy the same fiscal policies that the middle-class customers of te banks enjoy.

In order to rectify this issue, the ministry of finance ought to put aside service tax on all of the micro-loans which will be by definition less than Rs. 25,000, as well as on micro-insurance products that insure less than the sum of Rs. 25,000, inspired by the upper and middle class people who enjoy the benefit of getting tax breaks on insurance premiums and housing loans interests.

The poor MFI customers, many of them unread and residieng in villages suffer a lot already: they do not fiule for tax returns and hence, lose outon a benefit of tax refunds.

However, they still pay 1-2% of processing fee on both their micro-loans, besides paying a service tax of upto 10.3% on their micro-insurance policies.

Moreover, since they can’t make the better of tax breaks enjoyed by the m iddle and upper classes, they also end up paying a “poverty premium”.

Moreover, as an additional measure, the MFIs ought to be allowed to tax concessions of upto 40% on profits, which is already enjoyed by finance and infrastructure companies: these areas having been recognized as priorities by the government.

However, no less is the part of rural development and financial inclusion under the classification of priorities so as to achieve growth.

Finally, banks and financial institutions, so as to keep as an amount against possible bad debts, should get a tax reduction of upto 7.5% of gross total income. If not that, then, banks should be allowed to lay claim on dedcutions of upto 10% on assets that are classified as doubtful or loss assets.

Further, interest rates could be reduced if MFIs were to be given the tax breaks that are already enjoyed by banks, thereby reducing their costs and passing on those savings to the borrowers in our nation.

Given that these measures be appropriately included in the budget, Microfinance would be more affordable for the impoverished and more across India would flourish.

Source:http://iitrade.ac.in/news-archive.asp?news=871