Even while the regulatory apparatus for microfinance is under serious debate, the Reserve Bank has chosen to introduce one more classification of non-banking financial companies purveying credit to micro-finance activities — namely, NBFC-MFIs — based on the recommendations of the Malegam Committee.
This raises several concerns in the backdrop of the legislation by the Andhra Pradesh (AP) State already in vogue, the overall interest rate policy, and policies relating to financial inclusion.
The trigger for this move is evidently the micro-finance crisis in Andhra Pradesh, following reports about usurious lending practices combined with coercive recovery procedures adopted by microfinance institutions. The Andhra Pradesh legislation draws its powers from ‘money lending’ Constitutionally coming under the States’ jurisdiction. The Act applies to all entities engaged in the business of microfinance, including NBFCs regulated by the Reserve Bank.
The Reserve Bank recognises the inherent conflict of this move when it comments on AP legislation in its Trend and Progress Report thus: “If State Governments start enacting their own legislations to regulate MFIs, including the ones regulated by the Reserve Bank, there will be a plurality of regulation, leaving scope for regulatory arbitrage.
The responsibility for regulating NBFCs has been given to the Reserve Bank, thus empowering it to regulate the NBFC-MFIs. If other States also come out with legislation similar to the AP Government, it will raise concerns not only about multiple regulations but also about client protection, as borrowers would then be subject to different regulations.
If there are separate regulations governing NBFC-MFIs in individual States, the task of regulation by the Reserve Bank of MFIs operating in more than one State will become even more difficult. This may also impact the business of MFIs, which are operational in more than one State.” One question that arises is that in the case of Andhra Pradesh at least, how this inherent conflict will be handled in respect of NBFC-MFIs.
According to press reports, the Andhra Pradesh Government feels that while some aspects of the RBI norms were good, the lack of implementing mechanism would make them ineffective. The State government has taken the stance that micro-loans in the State would continue to be regulated as per the State Act.
What are the implications of this? First, there will be dual registration. Second, the codes of conduct for recovery would be different. The AP legislation prohibits recovery agents and coercive methods of recovery and all repayments have to be made at the office of the gram panchayat or at a designated public place. Third, AP legislation stipulates that loan recoveries have to be made only in monthly instalments, whereas the RBI directives have a different provision.
MFIs as a Class
MFIs as a class gained its significance in the recent past mainly because of their ability to borrow from commercial banks and, in turn, the ability of commercial banks to include such lending as part of priority sector lending. According to the Trend and Progress report, the number of MFIs increased from 581 in 2008-09 to 691 in 2009-10, but came down to 469 in 2010-11.
The loans disbursed by these institutions which went up from Rs.3,732 crore to Rs.8,063 crore but declined to Rs.7,605 crore during the same period. The total loans outstanding with commercial banks of MFIs as at end March 2011 is placed at Rs.10,689 crore.
The Reserve Bank has been expressing concerns about growth of bank lending to NBFCs because of the systemic linkage. The systemically important non-deposit-taking NBFCs’ borrowing from the banking system showed a whopping growth of 46 per cent in 2010-11 to Rs.1,37,827 crore.
Though MFIs are not as systemically important, some of them may grow into that category.
RBI has been following a policy of deregulating interest rates, and only recently the savings deposit rate was freed for the banking system. The current directives for NBFC-MFIs go against this stance. Furthermore, a ceiling of 26 per cent rate of interest would make it appear that usurious lending has RBI’s blessings. Even at the peak of interest rate cycle in the past, when directed credit was the norm, never was there a norm like 26 per cent for any sector. The question is whether this will set the trend for other microfinance lenders, such as non-profit MFIs, non-governmental organisations and self-help groups.
According to former RBI Governor, Dr. Y.V.Reddy, the for-profit MFIs are no different from money lenders and hence they need to be regulated as money lenders. Also, while money lenders lend out of their own funds, the for-profit MFIs lend out of leveraged funds obtained at lower cost.
Dr. N.A. Mujumdar, in his presidential address at the Indian Society of Agricultural Economics, welcomed non-profit MFIs into the stream of microfinance, but came out with a scathing attack on for-profit MFIs, calling them rogue MFIs.
Overall, while the RBI’s move brings in some equity angle of regulating for-profit MFIs, a better option would have been to apply the current regulation over non-deposit-taking NBFCs in general to MFIs, without treating them as a separate class, and disqualify commercial bank lending to NBFCs as part of priority sector, which also militates against the overall interest rate policy.
(The author is Director, EPW Research Foundation. The views are personal. firstname.lastname@example.org)
The government has already drafted the Micro Finance Sector (Development and Regulation) Bill, 2011. The Bill seeks to make it mandatory for all micro finance institutions (MFIs) to be registered with the Reserve Bank of India (RBI). It also entrusts the task of regulating the sector with the RBI
New Delhi: Pitching for early enactment of the Micro Finance Bill, HSBC India chief Naina Lal Kidwai has said the MFI sector has huge potential but needs regulations for growth, reports PTI.
“The MFI sector has a lot of potential. But it needs to have a defined set of rules to function in a proper way… The Micro Finance Bill needs to get cleared at the earliest to achieve this,” Ms Kidwai told PTI.
The government has already drafted the Micro Finance Sector (Development and Regulation) Bill, 2011. The Bill seeks to make it mandatory for all micro finance institutions (MFIs) to be registered with the Reserve Bank of India (RBI). It also entrusts the task of regulating the sector with the RBI.
She said, “The sector should be developed but the interest rates should be checked… it should be seen that there are not many loans given to a single person.”
If State Governments start enacting their own legislations to regulate micro-finance institutions (MFIs), including the ones regulated by the Reserve Bank of India, there will be plurality of regulation leaving scope for regulatory arbitrage, says the report on ‘Trend and Progress of the Banking in India 2011-12′.
The report raises concerns on future regulation of MFIs, if other States also come out with legislation to regulate the sector, as was done by the Andhra Pradesh Government last year. “If other States also come out with legislation similar to the AP Government, it will raise concerns not only about multiple regulations but also about client protection, as borrowers would then be subject to different regulations,” says the report.
It adds that such plurality in regulation would not only make the task of regulating MFIs operating in more than one State difficult, but would also impact the business of such institutions.
Ms Achla Savyasaachi, Vice-President, Sa-Dhan, told Business Line that the Andhra Pradesh experience has shown that impact is not only on the MFIs, but also on loans reaching the underserved segment. “We need a regulator that understands the responsibilities and challenges of those regulated, which the RBI is best placed to do,” she said. Regulators need to understand that it is indeed the depositors’ money, which is granted to the MFIs and in turn to the customers, that needs to be protected.
“Credit linkage through the bank-sponsored self-help group programmes or the business correspondent model of financial inclusion is still a serious concern,” she added. According to the report, in 2010-11, the growth under the MFI-linkage programme in terms of both number and amount of loans was much higher than the corresponding growth under the SHG-bank linkage programme in 2010-11.
“We need to develop a frame-work which is client-friendly, and does not suffocate the main channels of facility,” pointed out Ms Savyasaachi.
From The Economic Times
NEW DELHI: The government on Wednesday released the draft Micro Financial Sector (Development and Regulation) Bill, 2011, which seeks to make it mandatory for all microfinance institutions to be registered with the Reserve Bank, making it the sector regulator.
The Bill in its earlier avtar had proposed that the National Bank for Agriculture and Rural Development (NABARD) will be the regulator of the sector.
The government had introduced the Micro Financial Sector Bill in March 2007 in the Lok Sabha. However, the Bill lapsed as the term of 14 Lok Sabha expired in 2009.
The latest draft Bill proposes that a micro finance institution has to be registered with the Reserve Bank with the minimum net owned fund of Rs 5 lakh.
Besides, a Micro Finance Development Council will be set up to advise the government on formulation of policies, schemes and other measures required in the interest of orderly growth and development of the sector and micro finance institutions, to promote financial inclusion.
The council will comprise of members not below the rank of Executive Director from NABARD, National Housing Bank, RBI and SIDBI. Besides, Joint Secretaries from Ministry of Finance and the Ministry of Rural Development will also be members.
It also proposes that any micro finance institution which is not a company registered under the Companies Act, 1956 and which becomes systemically important micro finance institution shall convert its institution into a company registered under the Companies Act, 1956 with or without a licence under section 25 of the Companies Act, 1956.
It should happen within six months from the date of the balance sheet which shows that it has become systematically important micro finance institution in terms of the rules prescribed by the Central government, its draft Bill said.
The RBI may pass an order directing micro finance institution to cease and desist from continuing the micro finance activities if it is found acting in manner prejudicial to the interest of its clients or depositors.
The RBI would cancel the certificate of registration granted to a micro finance institution if it fails to comply with the directives or condition.
From The Economic Times
MUMBAI: Stable regulation is the need of the hour for microfinance companies in order to survive in financial markets, says sFitch Rating in its report on India’s MFIs.
Fitch recognises that the challenges faced by MFIs in India are similar to the global trend. However, the report stresses on the need for a single regulatory authority instead of multiple regulatory bodies monitoring the industry.
“The experience of co-operative banks in India suggests that multiple regulators may not be as effective as a single strong regulator and may also make it difficult for MFIs to comply with different sets of guidelines,” said Ananda Bhoumik, senior director (financial institutions) at Fitch.
The report comes in the wake of the state governments’ move to bring MFIs under their ambit. There are reports that Bihar might soon pass its own ordinance on this. “Since MFIs cater to a large population, state governments’ intention to regulate the industry is commendable,” said Mr Bhoumik.
“But having a common and consistent set of regulations would add stability to MFIs’ operations and enhance creditor comfort,” he added. Last year, the Andhra Pradesh government passed an ordinance capping the interest rates charged by MFIs.
According to the report, this ordinance has resulted in mounting bad debts and there are chances of spillover in the neighbouring southern states. According to Fitch, the initial recommendations of the YH Malegam committee will not be a huge blow to large MFIs.
But the smaller companies might get affected due to the interest rate and margin caps on lending, leading to consolidation in the sector and forcing MFIs to rethink their business models. The funding for MFIs might be hard to come, both in debt and equity, as investors would rethink their investment in MFIs.
“From a creditor’s perspective, the lower pace of growth is good news while lower margins would somewhat erode the defence against shocks to asset quality, the minimum core Tier-I ratio of 15% provides comfort,” said Mark Young, MD (financial institutions) at Fitch.
By Vrishti Beniwal, Business Standard
The Micro Finance (Development and Regulation) Bill proposes to cover all types of microfinance institutions (MFIs).
The Bill’s 2007 version covered only MFIs not regulated by the Reserve Bank of India (RBI). As a result, banks and a few categories of non-banking finance companies (NBFCs) were outside its purview.
The Bill is likely to be tabled in the monsoon session of Parliament.
The players in the sector comprise Self-Help Group-Bank linkages, which account for about 58 per cent loans, followed by NBFCs (34 per cent) and others such as trusts and societies (8 per cent of the total portfolio).
Banks and NBFCs are regulated by RBI. There is, however, no separate category for NBFCs operating in the microfinance sector.
An RBI committee under Y H Malegam that was set up to suggest microfinance reforms had said the Bill should apply to only MFIs not covered by RBI.
“All stakeholders, including the industry and banks, feel there should be a Bill to regulate all MFIs. The new Bill will cover all kinds of MFIs, including NBFCs, non-NBFCs, trusts and societies,” a finance ministry official told Business Standard.
The MFIs could be regulated by the National Bank for Agriculture and Rural Development, or RBI, or both, said the official.
The Bill may also restrict MFIs from taking deposits. The earlier Bill had a provision for deposit-taking NBFCs. The Malegam committee has also expressed concern over MFIs collecting deposits.
The finance ministry is also debating whether an interest rate cap should be provided in the law itself or should the regulator be empowered to specify interest rate limits from time to time. The Bill, officials say, may either cap the rate on individual loans or limit the difference between the amount charged to the borrower and the cost of funds to MFIs.
The official said the Bill would be in harmony with RBI’s regulation for NBFCs. He added the final call on these issues would be taken after receiving RBI’s comments on the Malegam panel report.
The committee has recommended an average margin cap of 10 per cent for MFIs with a loan portfolio of Rs 100 crore and of 12 per cent for smaller MFIs, besides a cap of 24 per cent on individual loan rates. Most MFIs are at present charging over 24 per cent.
From Deccan Herald
The government is actively considering to put in place a regulatory framework to deal with ‘undesirable’ practices in the field of Micro Finance Institutions (MFIs).
“The government is considering to introduce a necessary legislation to regulate the functioning of MFIs keeping the legitimate interests of all stake holders,” Financial Sector Secretary in Ministry of Finance, Shashikant Sharma indicated while addressing a national conference on microfinance organised by Ficci here.
Pointing out that microfinance is an important plank in the government’s agenda for financial inclusion, he said “the sudden and rapid growth of MFIs has given rise to lending malpractices by some MFIs.”
“A strong and effective regulation of the sector is therefore imperative to put an end to undesirable practices and put the sector on the path of providing inclusive growth,” Sharma said.
The proposed legislation to regulate the functioning of MFIs would incorporate recommendations made by the Sub Committee of the Central Board of Directors of the RBI.
In the wake of growing criticism over lending malpractices by some MFIs like charging of high interest rates, coercive recovery processes, multiple lending practices, the RBI set up a high level committee to study the issues and concerns in the microfinance sector including ways and means of making interest rates charged by them reasonable.
The RBI’s Malegam Committee on microfinance in its report released in January this year has recommended creation of a separate category for Non-Banking Financial Companies (NBFCs) operating in the microfinance sector.
Such NBFCs could be designated as NBFC-MFI. The Committee has noted that “The future cannot be left entirely to the stating of good intentions. It, therefore, calls for strong regulation.”
It further said “we believe that if the recommendations made by us are implemented and if MFIs honour the commitments they have proposed in the agenda of the industry associations and if these efforts are accompanied by adequate and effective regulation, a new dawn will emerge for the microfinance sector and the need for state intervention will no longer exist.”
In the wake of reported harassment of small time consumers and farmers, who borrowed from MFIs, the Andhra Pradesh government came out with an ordinance making registration of MFIs with the state government compulsory.
From Indian Express
Nobel laureate and Bangladeshi economist Muhammad Yunus, who brought radical changes in the micro-credit area in his country by setting up the Grameen Bank, called for a separate regulatory mechanism for the Indian microfinance sector.
“It is not about more or less regulation. What your microfinance sector needs is a separate set of regulations because the area they operate in is different from the area of commercial banks and other lending bodies,” he told PTI on the sidelines of a CSR summit, organised by the Wockhard Foundation.
Yunus, who was answering a question about whether Indian MFI sector needed more regulation, demanded that companies like SKS Microfinance and others like it, who have turned “loan-sharks” overnight by commercialising, should stop calling themselves microfinanciers.
This is the best service they can do to the “real micro- lenders,” he said.
By Dinesh Unnikrishnan, Livemint
Andhra Pradesh insists that it won’t change a stringent new law that has brought the activities of microfinance institutions (MFIs) to a virtual halt in the state that accounts for one-fourth of the Rs.20,000 crore industry.
This runs counter to the conclusion of a panel set up by the Reserve Bank of India (RBI) that the state law “will not survive” if the recommendations it has made are accepted.
“That does not change our stand,” Reddy Subramaniam, principal secretary of the Andhra Pradesh government, said in a phone interview. “We are fully aware of the situation.”
He was asked whether the panel recommendations covering contentious issues such as high interest rates and over-lending would suffice to replace the state Act.
RBI is currently in the process of studying the proposals made by the Y.H. Malegam panel on MFIs.
Top central bank executives, including deputy governor K.C. Chakrabarty, are likely to meet Andhra Pradesh government officials and senior bureaucrats of some other states on 22 February to discuss the effects of dual regulation, according to two persons familiar with the development.
Subramaniam confirmed that RBI has called a meeting on 22 February for feedback from the Andhra Pradesh government on the Malegam committee report.
The banking regulator may seek a consensus on MFI regulations by asking states not to promulgate separate laws on the sector, said one of the persons cited above. “This (states having separate regulations) can create huge difficulties for MFIs operating in multiple states,” said the person, who heads a Hyderabad-based MFI.
Nearly 80% of the industry is controlled by MFIs that are incorporated as non-banking financial companies (NBFCs). A proposed Central microfinance Bill, yet to be tabled in Parliament, envisages the National Bank for Agriculture and Rural Development as the regulator for smaller MFIs.
Next week’s meeting assumes significance in light of the Malegam panel’s contention on the state law.
“We would, therefore, recommend that if our recommendations are accepted, the need for a separate Andhra Pradesh Micro Finance Institutions (Regulation of Money Lending) Act will not survive,” it had said.
Malegam amplified on this aspect in a Mint interview on 28 January.
“There is no harm in a state having its own law. But the difficulty is that if an MFI operates in five different states and each state has its own law, and in addition there is a regulation by RBI, then how will it manage its operations?” he had said.
The state law came about in mid-October to check coercive practices allegedly followed by certain microlenders, making it necessary for MFIs to register their details and get government approval to give a second loan to a borrower. It also asked MFIs not to collect their instalments weekly at the doorstep of debtors.
MFI collection rates crashed to 10-15% in the state from more than 90% till October. It also narrowed MFIs’ access to bank finance and forced many of them to stop fresh disbursals to borrowers.
MFI officials said if the state government did not make changes in the law or repeal it, the lenders, especially, smaller firms, will be badly hit.
“There is definitely a state of duality of regulation,” said Alok Prasad, chief executive officer of industry lobby Microfinance Institutions Network. “That duality can go away only if the Central government comes with a Central legislation, which clearly says that regulation of NBFC-MFIs should only be within the regulatory ambit of the Reserve Bank and not with state governments.”
Prasad said the Andhra Pradesh government is caught in a political bind and scrapping the law won’t be easy.
“It will require strong political will for repeal to take place,” he said. The Andhra Pradesh government “can still create conditions on the ground by which MFIs are able to operate and carry on their normal business activities by framing rules that are helpful”.
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.