By George Mathew, Express India
Mumbai Deputy Governor of Reserve Bank of India KC Chakrabarty went on record last week saying the central bank is not capable of regulating microfinance institutions (MFIs) in the country and that “it needs to get equipped to do the job”. However, YH Malegam, the person who headed the RBI committee to look into MFI operations, says MFIs can be regulated through four pillars of compliance.
While Malegam admitted that “it’s impossible for the regulator to ensure compliance when loans run into thousands,” he also said, “the regulator should look at whether MFIs have an internal organisation for compliance. Whether you have an internal audit department, or an inspection department.”
“The second pillar is an association. If one third of MFIs become members of an association, they (RBI) will recognise it. The association will have its own code of conduct. If discipline is not observed, the association, which will be something like an SRO (self-regulatory orgnisation) can remove that member,” he told The Indian Express.
As per the draft Micro Financial Sector (Development & Regulation) Bill, 2011, the RBI will become the sole regulator for the micro-finance sector.
“If the MFI applies for a bank loan, it can say it’s a member of the association and it’s safe. There will be a lot of incentives for MFIs to become a member,” he said.
“The third pillar being, banks that gives funds will supervise MFIs as this funding comes under priority sector lending. Fourth: the RBI will inspect the MFIs to see if they have the systems for internal regulation.” Malegam said.
According to Malegam, MFIs which are affected are those which have substantial exposure to Andhra Pradesh.
“The problems in the state is that borrowers were encouraged not to make repayments. So there’s a virtual paralysis in the recovery process. There was a fair amount of over indebtedness in the state. Borrowers who took money from one MFI approached another at the time of the repayment, and then another,” he said.
The change in regulations is already having its impact. “When we started our work, the interest rates charged by MFIs were 35-40 per cent. Now I’m told it has come down to 24 per cent. Now that’s a major benefit,” Malegam said.
“Once the Central Act comes into practice, it might be argued that it supersedes state laws. In this case, the Ordinance (in AP) becomes ineffective. On the other hand, states can probably argue under the Constitution, money lending is under the states purview,” he said.
Most microfinance companies in India continue their struggle for survival. This is despite banks agreeing to recast the existing debts of micro-lenders and the Reserve Bank of India (RBI) adopting the broad recommendations of the Malegam committee on regulating the sector.
The situation at the ground level remains grim. The legislation imposed on the microfinance sector by the Andhra Pradesh government continues to affect loan recoveries and erode the profits of microfinance institutions (MFIs) in the state. Banks have dismissed micro-lenders’ pleas for additional loans, which, the MFIs claimed, was critical to sustaining their business. Even private equity investors, who own sizeable stakes in many microfinance companies, have refused to increase their investment in the sector until the regulations are clear.
“It is important to understand that the reason for this crisis, and the related debt restructuring, is the Andhra Pradesh Microfinance Act, and not the MFIs, their promoters or the banks who have lent money to MFIs,” said Mark Stoleson, chief executive officer, Legatum, a multi-billion dollar global fund that manages proprietary capital. The fund is also a majority shareholder in Share Microfin, a Hyderabad-based microfinance company.
“Legatum believes in order for debt and equity capital to once again flow into the microfinance sector, any ambiguity in the regulatory framework must first be addressed. The Andhra Pradesh Microfinance Act should be urgently repealed and RBI must re-establish its authority as the regulator of non-banking financial companies,” Stoleson said.
While RBI had adopted the broad recommendations of the Malegam committee on regulating the microfinance sector with effect from April 1, investors remain worried. This is because the Andhra Pradesh government has persisted with its law that affected the microfinance companies in the state.
“At the ground level, the situation has not improved. Recoveries are still not happening. As a result, investors and lenders are scared to provide additional funds to us,” said a senior official of Trident Microfin, a Hyderabad-based microfinance company that opted for debt recast.
“Banks are not lending to MFIs. In our discussion with banks, they had promised us once the guidelines (on regulating the MFI) sector are finalised, they would give loans. But banks’ promises, you know…,” RBI Deputy Governor K C Chakrabarty had said in a conference last week.
Barring a few large ones like SKS Microfinance and Bhartiya Samruddhi Finance, most microfinance companies in Andhra Pradesh are currently facing a liquidity squeeze. According to officials of microfinance companies, banks have promised to offer fresh loans if the situation improves in six months. “It is difficult to continue our business in an environment like this. If we don’t get additional funds soon, we may have to shut shop,” said a senior official of a microfinance institution in Andhra Pradesh. The official requested anonymity, since he was currently negotiating with banks for additional funds.
The Reserve Bank of India (RBI) wants banks to tighten due diligence when lending to microfinance institutions (MFIs) to ensure they follow rules that became effective from 1 April.
“This process should be initiated immediately to ensure that MFIs availing finance from them (banks) are capable enough to put up the systems in terms of corporate governance, human resource management, customer protection and other aspects of the proposed regulatory framework,” the central bank said in a statement on Tuesday.
MFIs, who extend micro-loans to the poor, are likely to find borrowing tougher. Banks will now have to make compliance certificates mandatory, track MFIs’ business performance and may even demand higher collateral by way of personal guarantees, bankers said.
State Bank of India, the country’s largest lender, will increase scrutiny of loan eligibility of MFIs after the central bank’s directive, an official at its microfinance division said.
“Banks will put in place systems to examine the field-level operations of MFIs and whether they follow the proposed rules before considering the loan proposals,” he said, requesting anonymity.
“MFIs will need at least a month to change processes and systems in compliance with the new RBI rules,” said Chandra Shekhar Ghosh, chairman and managing director of MFI Bandhan Financial Services Pvt. Ltd. “The transition will be more difficult for the smaller MFIs.”
The banking regulator on Tuesday capped MFI margins at 12% and interest on loans at 26%, in the main accepting recommendations made by a panel led by chartered accountant Y.H. Malegam. RBI also said individuals with an annual household income of more than Rs.60,000 will not be able to access micro-loans. RBI said 85% of total loans of MFIs should comply with the new norms and at least 75% of the loans had to be extended for income-generating activities. Besides capping MFI borrowing at Rs.50,000 for an individual, the regulator also said any loan above Rs.15,000 should have a minimum repayment tenure of two years.
“We will definitely ask MFIs to produce compliance certificates,” said Tilisa Gupta Kaul, head of microfinance and agricultural lending at private sector lender Dhanlaxmi Bank Ltd. “Also, periodical examination of the business will also be made.” The bank has lent around Rs.300 crore to MFIs.
RBI’s intention is to discourage banks from lending to MFIs which do not adhere to prudential norms, according to Vibhav Agarwal, vice-president, research at Angel Broking Ltd. “There could be some reduction in bank lending to MFIs.”
More than one-fourth of the Indian microfinance industry is located in Andhra Pradesh, which was plunged into a crisis in October when the state government passed a law to control alleged coercive loan recovery practices by MFIs.
MFIs in the state saw collections falling to 10-20%. Banks stopped lending to the MFIs due to the heightened uncertainty.
RBI on Tuesday also said MFIs that do not comply with the new norms will not qualify for priority sector lending with effect from 1 April. Banks have to extend 40% of loans to agriculture, exports and some other sectors as a priority. When they fall short, they can lend to MFIs to meet this target, making it easier for the latter to borrow.
From Business Standard -
Reserve Bank of India (RBI) Governor D Subbarao today said a decision regarding the implementation of the Malegam committee recommendations on microfinance would be taken by March-end.
“We will interact with banks, state governments, the government of India and microfinance institutions (MFIs) and also invite feedback from the public before taking a decision,” Subbarao said while talking to analysts and researchers at the customary post-policy meet.
The committee had recommended, among other things, the creation of a sub-category for MFIs under non-banking financial companies (NBFCs) for the purpose of regulation. It had also prescribed a 24 per cent cap on interest rates charged by MFIs.
As part of a review of the report, RBI is planning to conduct a half-day workshop under Deputy Governor K C Chakrabarthy in which the issue will be discussed with stakeholders. “We will try to understand their issues,” Subbarao said.
On Tuesday, he had said more clarity was needed for regulation of MFIs.
Released last week, the Malegam report suggested a four-pillar approach to MFI regulation. This included sharing of responsibility by MFIs, industry associations, banks and RBI.
“Regulations should be neat, should not overlap and should be clear not only to us, the regulators, but also to the general public as to what has to be done by whom,” said Subbarao.
This will become clear as we implement the recommendations, he added. He further said that like Andhra Pradesh, other state governments might also bring some regulations.