India: NABARD to partner with Rural Development Ministry in expanding the Self Help Group movement

From Press Information Bureau, Government of India

The Union Minister for Rural Development, Mr. Jairam Ramesh has stressed the need for expanding the women’s Self-Help Group movement, as a tool of empowerment and promoting economic well being. Interacting informally with media after a crucial meeting with NABARD officials in Mumbai today, the Minister said “the National Rural Livelihood Mission would connect at least one woman from every poor household across the country with self-help groups in five years. Presently we have 3 crore women who are members of SHGs and we have to raise it to 7 crore in five years”.

Mr.Ramesh noted that at present the southern states of Tamilnadu, Kerala, AP and Karnataka account of 70% of women Self-Help Groups and 80% of credit flow. “This is a highly geographically distorted scenario, we need to spread the Self-Help Group movement across the country” he remarked. The focus of the new initiative will be on Madhya Pradesh, Chhattisgarh, Jharkhand, Bihar, Uttar Pradesh, Rajasthan and even Gujarat and Maharashtra. The Minister informed that the NABARD is creating a Rs 1500 crore fund to cater to the Self Help Groups in weaker districts. NABARD participates in the process by way of refinancing banks who lend to women Self-Help Groups.

Needed, flexibility in rural lending

Mr. Ramesh said there is an urgent need to bring in flexibility in lending norms of organized banks to Self Help Groups. “The SHGs require variety of kinds of loans, which the Public Sector banks are not being able to cater to. As a result the poor are driven to micro-finance institutions, who offer credit on flexible terms, but charge an exorbitant rate of interest.”

The Minister stressed the need for developing an organized and well regulated micro-finance institutions network but felt that the Microfinance Bill, in its present form has too many loopholes. “In its bid to protect the micro-finance institutions, it will kill the SHG movement” he said. The Minister re-emphasized that micro-finance institutions are not the instruments of alleviating poverty, “Micro-finance cannot provide a definite answer to the challenges of poverty alleviation, but it can lead to financial inclusion by providing credit to the customer as per his/ her own needs,” he said.

Aajeevika Cell set up in NABARD

Mr Jairam Ramesh also inaugurated that ‘Aajeevika Cell’ in NABARD which will work in close coordination with the Ministry of Rural Development in achieving the goals of the National Rural Livelihood Mission. The NABARD CMD Mr. Prakash Bakshi said the Aajeevika Cell will facilitate convergence of wide variety of approaches and best practices to mobilize poor households into Self-Help Groups.

India: Long-term future of MFIs ‘not too rosy’: Report

From The Hindu Business Line

There are some signs of easing of equity and loan fund flows into the microfinance sector in the second quarter of 2011-12, according to a State of the sector report-2011.

The report, authored by Mr N. Srinivasan, formerly of Nabard (National Bank for Agriculture and Rural Development) and an independent consultant, said the immediate future holds out a promise that the sector will recover.

STACKED AGAINST

But the long-term future appears not too rosy, in view of the various factors stacked against it, including competition from peer models and initiatives.

Mr Srinivasan listed them out: stiff competition from banks through their business correspondent (BC) model; a restructured self-help programme (SHG); the National Rural Livelihood Mission (NRLM) that would use institutions of the poor to deliver financial services; and the impending rollout of mobile-based financial services.

Even as they emerge from the current struggle for survival, the MFIs should rethink their long-term business objectives and competition strategies.

The SHG II will hopefully remove the cobwebs and infuse fresh energy into members, groups and banks and supporting institutions.

CONVERGENCE ISSUE

Achieving a convergence of SHG-Bank Linkage Programme (SBLP) with NRLM, the Mahatma Gandhi National Rural Employment Guarantee Programme (MGNREGS) and the financial inclusion programme is one of the tasks before Nabard.

But, overall, the dark clouds seem to be clearing in the short-to-medium term, the state of the sector report said.

With some regulation in place and more comprehensive regulation on the anvil, the MFIs will get an identity and will be able to operate under a set of known norms with certainty.

PRODUCT PROFILE

The credit reference bureau becoming functional will deal with some issues in customer selection and examination of multiple lending.

The MFIs need to get back to the drawing boards to look at their products and processes and find ways of complying with the regulatory guidelines.

Building confidence in the minds of banks and funders does seem to be a harder task; the MFIs could do with some support from the Reserve Bank of India and the Centre in this.

India: RBI to regulate micro finance sector, says new Bill

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.

India: RBI should be the sole regulator for MFIs, says new Nabard chief

By Dinesh Unnikrishnan, Livemint

Mumbai: The National Bank for Agriculture and Rural Development, or Nabard, does not want to be the regulator for microfinance institutions (MFIs).

The newly appointed Nabard chairman Prakash Bakshi said on Thursday that there should be a single regulator to govern India’s Rs22,500 crore microfinance industry and that the Reserve Bank of India (RBI) can do that job. RBI currently regulates large MFIs, which account for around 90% of the Rs22,500 crore industry; the rest of them are unregulated.

A finance ministry panel, busy finalizing the draft of a proposed microfinance Bill, had earlier envisaged Nabard as a regulator for smaller MFIs while larger institutions, incorporated as non-banking financial companies (NBFCs), would continue to be regulated by RBI.

Bakshi’s predecessor U.C. Sarangi had wanted Nabard to play the role of a regulator for relatively smaller MFIs. Nabard is fully equipped to handle the role, Sarangi had said.

“I will not hesitate to say that there should only be one regulator for the entire sector,” Bakshi told Mint on Thursday in his first interview after taking charge on 3 June.

According to him, Nabard is currently not prepared to take up the role of microfinance regulator as it lacks “some missing links to operate at the field level”, implying that the development organization is yet to build up the necessary infrastructure to function as regulator for smaller microlenders.

The MFI industry has been under pressure since October 2010 because of a new law in Andhra Pradesh, which accounts for a quarter of the business. It is also home to India’s largest and only listed microlender, SKS Microfinance Ltd.

MFIs give tiny loans to poor borrowers at 26% after raising money from banks.

The Andhra Pradesh law that restricted MFIs led to a drastic fall in loan repayments to 10-15% . This has curbed the debt-servicing capacity of MFIs and subsequently commercial banks have abstained from giving fresh loans to microlenders.

According to Bakshi, the route cause of the crisis in the microlending industry is not the high interest rates charged by microlenders but the coercive recovery practices followed by some of them.

The most important aspect of the new microlending regulations has to be that “if there is a grievance, it should be addressed quickly. All other aspects, including their operations, can be monitored”, Bakshi said.

Set up in 1982, Nabard has been acting as the main agency to refinance regional rural banks (RRBs) and cooperative banks.

In 2010-11, Nabard refinanced loans worth Rs34,000 crore to RRBs and cooperative banks and plans to increase the disbursal to Rs40,000 crore in the current fiscal. “In the next three years, our estimate is that we would take this number to Rs70,000crore,” Bakshi said.

As part of diversification and to boost revenue, Nabard began funding infrastructure projects in the power and agricultural sectors on a commercial basis from March 2010 and decided to expand its role in financing state-government sponsored projects.

India: PSU lender, AP govt may start NBFC for microfinance credit

From Economic Times India

HYDERABAD: A city-based public sector bank is mulling to start a Non-Banking Financial Company, in which the Andhra Pradesh government will join in the equity participation, to extend microfinance credit to the poor, said a state government official said.

The state government move may spell doom to the already crippled microfinance institutions with significant exposure in the state.

“A couple of banks are in touch with us. We also want to take part in the equity participation. By August 15 we may start operations,” R Subrahmanyam, principal secretary, told PTI.

He said the feasibility study has been entrusted to Andhra Pradesh Mahila Abhivruddhi Society (APMAS) a non- governmental public society stands under the Foreign Contribution Regulation Act.

MFI have preferred to focus more in the areas where banking network is active and on the groups that are already in the financial inclusion, taking advantage of the awareness of poor in group dynamics and lending methodology, the state government had earlier said.

The proposed NBFC would have Rs 500 crore of authorised capital and Rs 150 crore of paid-up capital.

Besides, a PSU Bank, both the central government and the state government would join the company as equity investors along with the National Bank for Agriculture and Rural Development (Nabard).

Once the feasibility study is completed, the proposal will be sent to Reserve bank for further proceedings and approvals, Subrahmanyam said, adding the NBFC will extend microfinance to mandal samakhyas in the state through self help group (SIG)-bank linkage programme.

The MFI lending in the State has come down drastically after the state government came out with a regulation to control microfinance activities.

Microfinance Institutions Network strongly criticised AP Microfinance Bill and said it the Bill will create hurdle for the legitimate RBI-registered microfinance in providing access to finance for the poor.

“The issue of unavailability of credit to 97 lakh borrowers and outstanding loans of Rs 7,500 crore is looming large before the industry and passing the bill without required amendments will impact the ability of MFIs to function smoothly,” Alok Prasad MFIN CEO had said earlier. 

New draft of MFI Bill to give more teeth to RBI

By Dinesh Unnikrishnan, Livemint

Mumbai: The proposed microfinance Bill for governing India’s Rs. 22,000 crore microlending industry is set to give more teeth to the Reserve Bank of India (RBI) to regulate larger microfinance institutions (MFIs). This will be done by removing such entities from the purview of laws enacted by state governments such as the recent Andhra Pradesh Act.

The Union government last week appointed a committee under financial services joint secretary K.V. Eapen to redraft the Bill factoring in the current realities in the microfinance industry and the recommendations of the Malegam panel, appointed by RBI. The panel had suggested the creation of a new category of non-banking financial company MFIs, or NBFC-MFIs.

In keeping with the recommendations of the Malegam panel, the Bill will focus more on borrowers and strengthen the hands of RBI to regulate MFIs by way of clearly defining such institutions, according to two members of the panel.

Both of them declined to be identified because they are not supposed to talk to media until the committee redrafts the Bill.

More importantly, the modified Bill is expected to cover the entire microfinance sector, including the larger entities.

The earlier draft covered only non-NBFC MFIs incorporated as trusts and non-governmental organizations that constitute a very small part of the total industry. It also envisaged National Bank for Agriculture and Rural Development (Nabard) as the regulator for smaller MFIs.

The proposed microfinance Bill assumes significance as it is expected to resolve the regulatory uncertainty in the ailing Indian microlending sector by providing a clear framework. Most banks have stopped giving fresh loans to MFIs due to this uncertainty.

Top officials from RBI, Nabard and microfinance industry associations are members of the committee headed by Eapen.

The committee is expected to submit the modified Bill to the government by the end of April and this will be tabled in Parliament in the monsoon session, according to members of the panel.

“There is a complete clarity that it (microfinance sector) will come outside the purview of state governments. The new microfinance Bill will categorically say that microfinance is a properly defined financial service and not moneylending,” one of the two members said.

“Through a process of clarifying things, the Bill will strengthen the hands of RBI with respect to MFI regulation,” this person added.

So far, moneylending is treated as a state subject and, hence, a state has the powers to control MFIs. Exercising this power, the Andhra Pradesh government passed the Andhra Pradesh Micro Finance Institutions (Regulation of Money Lending) Act, 2010.

The Act defined an MFI as any person or entity “in whichever manner formed and by whatever name called, whose principal or incidental activity is to lend money or offer financial support of whatsoever nature to the low-income population”.

“The committee has been formed to quickly redraft the Bill so that it can be presented at the monsoon session of Parliament. We do have the Malegam recommendations before us. The microfinance sector has evolved from the past and is on a different scale now. Hence, the need for new regulation,” a second member of the government panel said.

MFIs are in the business of giving tiny loans to low-income borrowers. They typically charge their borrowers 24-32% and raise money from banks at 9-12%.

More than a quarter of India’s microfinance industry is concentrated in the southern state of Andhra Pradesh, which is home to some of the leading Indian MFIs such as SKS Microfinance Ltd, Share Microfin Ltd and Asmitha Microfin Ltd.

MFIs plunged into a crisis in mid-October following a state law by the Andhra Pradesh government to check alleged coercive recovery practices of some microlenders.

The law created an uproar among MFIs after it prohibited them from collecting dues on a weekly basis and instead asking them to do so once a month. It also made it mandatory for them to secure government approval for every second loan issued to the same borrower.

MFIs’ loan collection rates dropped to 10-20% in Andhra Pradesh and they virtually stopped issuing new loans.

This, in turn, prompted banks to stop fresh lending to MFIs.

In October, RBI appointed the Malegam panel, which suggested, among other things, capping the interest rates charged by MFIs at 24% and their margins at 10-12%.

Senior executives in the microfinance industry said the Central legislation is expected to put an end to the crisis.

“Today, all of us (MFIs) are worried about the political risk and regulatory uncertainty looming over the microfinance industry. The proposed Bill is expected to solve these issues by giving a single regulatory framework,” Raja Vaidyanathan, chairman and managing director of Asirvad Microfinance Pvt. Ltd, said.

Chennai-based Asirvad has a loan book of Rs. 115 crore and 230,000 borrowers.

dinesh.n@livemint.com

M S Sriram: Microfinance policy – Rewind or Turnaround?

By M S Sriram, Business Standard

RBI?s role in giving MFIs policy support was remarkable, but an appropriate regulatory framework for the sector is long overdue

As the debate on the future of microfinance continues, it is worth examining the Reserve Bank of India’s (RBI’s) own discourse from 1998 onwards. This is particularly relevant after the Economic Survey tabled on February 26 and the Budget speech both make positive references to microfinance as being an important part of the inclusion agenda.

Contrary to what we are led to believe – that microcredit grew on its own and RBI stepped in at this stage to take note of the current practices – RBI played a crucial and catalytic role in the development of microcredit by encouraging and prodding banks to lend to micro-finance institutions (MFIs).

In 1998, MFIs had made early forays and the practitioners had asked for a policy framework. In response, the National Bank for Agriculture and Rural Development (Nabard) set up a task force on Supportive Policy and Regulatory Framework for Microfinance in the late 1998. This task force found microfinance an emerging activity to be nurtured. It was ahead of its times in calling for registration, and regulation through a self-regulatory organisation (SRO). Pending an SRO, the task force recommended that RBI should put an interim regulatory framework. At the same time, Sa-Dhan, the association representing diverse non-governmental and private sector players in microfinance, was established. Sa-Dhan was expected to evolve as the voice of the industry and an SRO.

This task force had a profound and simultaneous impact on policy making. In April 1999, the word microcredit was used for the first time in the credit policy, months after the task force was set up, but ahead of its report (October 1999). The statement said, “Micro-credit Institutions … are important vehicles for delivery of credit to self-employed persons, particularly women in rural and semi-urban areas.”And further: “A special cell … is being set up in RBI in order to liaise with Nabard and microcredit institutions for augmenting the flow of credit to this sector. The time frame for the cell … will be one year and its proposals will be given the highest attention.”

The credit policy (and a notification in April 1999) drew a distinction between small loans given by banks (with a ceiling on interest rates) and the loans given to MFIs for on-lending (without a ceiling). This notification created a two-way incentive for the commercial banks:

• to abdicate (to the extent possible) their own work of reaching out to the poor;
• to advance bulk loans to MFIs with no ceilings.

The banks did not have a level playing field, but were possibly happy to outsource small credit to MFIs. This opened bank finance to the MFIs, who were largely dependent on donor money.

The task force submitted its report in time for the mid-term review of the credit policy. RBI showed remarkable alacrity in acknowledging the recommendations. The review said, “The recommendations made by the Task Force are being ‘processed’ by Nabard in consultation with RBI and Government as appropriate.” The recommendations of the task force were already creeping into the policy much before “processing”, which was unlike the usual policy-making protocol of putting the report in the public domain, encouraging deliberations and incorporating feedback to convert recommendations into actions.

The mid-term review reiterated the importance of MFIs and asked banks to include microcredit in their corporate strategy to be reviewed on a quarterly basis. A detailed notification of February 2000 made six significant points:

• No interest cap on loans to MFIs and their loans to clients.
• Freedom to banks to formulate their own model/conduit/intermediary for extending microcredit.
• No criteria for selecting MFIs.
• Banks to formulate their own lending norms.
• Banks to formulate a simple system, minimum procedures and documentation for augmenting flow of credit by removing all operational irritants.
• Banks to include microcredit at the branch, block, district and state credit plans with quarterly progress to be reported to RBI.

The fact is that RBI gave policy support without an appropriate regulatory framework. The notification defining microcredit is stark: “The provision of thrift, credit and other financial services and products of very small amount to the poor in rural, semi-urban and urban areas for enabling them to raise their income levels and improve living standards. Micro Credit institutions are those which provide these facilities.”

We do not know if it was a deliberate attempt to keep this vague by leaving out amounts or incomes. However, the regulatory discourse was just about opening up another channel of financial services.

Even as the somewhat regressive Malegam committee report is being discussed, RBI, on February 14, released a master circular on microcredit which refers to its historical circulars, with little addition: “A joint fact-finding mission looked at the issues plaguing the microcredit sector and ends with saying that findings were brought to the notice of the banks to enable them to take necessary corrective action where required.”

In the current circumstances, the finance minister has made a bold and affirmative statement in the recent Budget. He has also thrown in some money for an India Microfinance Equity Fund. This augurs well for the MFI sector — showing policy continuity rather than policy turnaround based on Malegam’s recommendations. Otherwise we would only be able to say microcredit had a bright future behind it, not ahead of it.

Govt may introduce Microfinance Bill in 3-4 months: Sources

From Money Control -

The government is likely to introduce the Microfinance Bill in the next three-four months, learns CNBC-TV18 from reliable sources. The bill may be introduced in the budget session of parliament. The proposal will use inputs from the YH Malegam Committee.

The Malegam Panel on microfinance Institutions was set up by the Reserve Bank of India to define microfinance institutions or MFIs and microfinance.

Sources close to the development say that no consensus has yet been arrived at on many aspects of the Bill. The Malegam Committee’s inputs on intermediation cost is now being termed as very crucial. The inputs from the committee will help determine the nature of the regulator. A regulator for Microfinance Institutions could be either ‘soft touch or strict’, sources said.

The Bill has proposed National Bank for Agriculture and Rural Development or NABARD as the regulator for microfinance institutions. The present Bill keeps Non-Banking Finance Companies out of the purview of the regulator. The 20 NBFCs account for 80% of the microfinance instituion sector.

Sources in the government said that a cap on interest rates is not a solution to solve the issue. The key problem, sources said, lies in classifying MFIs as money lenders.

Microfinance under severe stress

By C. R. L. Narasimhan, The Hindu -

Micro Finance institutions (MFIs) that are for profits are in the news for the wrong reasons. The ‘for profit’ MFIs have grown spectacularly in recent times. But along with the large profits have come allegations of sharp practices.

In Andhra Pradesh, where such MFIs have a sizable presence, the climate has now drastically changed.

It will be an understatement to state that the business of microfinance, as it has existed till now, is under serious threat. And not just from one direction. An ordinance issued by the Andhra Pradesh Government compels MFIs to register with the district authorities, avoid coercive recovery practices and multiple lending. The MFIs have not been successful in staying the operation of the ordinance but the A.P. High Court has allowed them to continue with their business after registering themselves. However, they cannot levy the high interest rates they are used to. They have been directed to desist from ‘ coercive’ practices while recovering the loans. Nor should they indulge in multiple lending, giving loans to those who are customers of other MFIs, including the ones promoted by the State governments.

The ordinance, which gives substantial powers to the State government, has had the initial effect of freezing all microfinance activity at least in the State.

For the MFIs, it is unlikely that conditions that existed before the ordinance will ever prevail. With other States likely to emulate the A.P. model, MFIs will have to reckon with the regulation.

The Reserve Bank of India has appointed a sub-committee to look at the governance issues and there are reports that the National Bank for Agriculture and Rural Development may be asked to regulate the MFIs. At present, only MFIs registered as non-banking finance companies with the RBI come under the central bank’s regulatory control.

There have been other developments that serve to heighten the regulatory scrutiny of the MFIs. The Union Ministry of Finance has asked public sector banks to monitor the lending rates of MFIs. Indeed, it is the high interest rate — in the region of 30 per cent — that first showed MFIs in a bad light.

The accusation of ‘coercive’ practices to recover the loans has been laid at the doors of some leading players.

Although there is nothing to suggest that the practice is widespread, there are bound to be complaints and allegations of an even more serious nature such as abetting the suicide of borrowers. Even a few instances of misconduct or overzealousness on the part of the MFIs and their officials will bring the whole business into disrepute. In Andhra Pradesh, even as far back as two years, the conduct and practice of some MFIs had not gone down well.

The sudden developments that are threatening the very foundations of their business model may yet lead to a positive denouement but as of now the microfinance sector, especially its leading players, have some hard work to do.

With an estimated aggregate outstandings of about Rs.22,500 crore spread over nearly 2.67 crore active borrowers, microfinance can by no means be viewed as some fringe financial activity.

Yet, if by many parameters — volume growth and coverage — microfinance has become mainstream, it appears to be short on traits that are necessary to sustain any successful business model. High up in the list of what is missing is the inability to live with, leave alone ‘manage’ the environment. Negative perceptions about their business would not have been as pronounced had the leading MFIs paid attention to the environment. Left unchecked, the negative perceptions threaten to overwhelm the sector. That will be a pity considering the altogether positive role of these MFIs in meeting the credit needs of the poor, especially in rural areas.

Check misconceptions

A few of the leading MFIs started as not for profit enterprises but over time converted themselves into ‘for profit’ organisation. It is in the latter phase that they have had to straddle objectives that are not in harmony with one another. For instance, SKS Microfinance, whose share issue was hugely successful, appeared to have started a trend among MFIs of accessing the capital market, thereby widening their resources base. Nothing wrong in that, except for investors who look for dividend, capital appreciation and so on.

If the MFIs match those expectations — as indeed they seemed to be on course until recently — their financial success would be known more widely.

The process of making their shareholders happy possibly means alienating their customers (borrowers) who pay high interest rates on their micro loans?

It is difficult to convince both their shareholders and borrowers simultaneously. Already all the trappings of successful coporates, the high profit figures, employees’ compensation packages and so on have led to questions as to whether they can lower their interest rates and still make a reasonable profit. It will take a long time in India that profitability and apparently social objectives can co-exist.

The interest rates

The two related issues here are estimating the interest rates on several well-defined parameters such as cost of resources, incorporating the risk premium and so on. There appears to be a case to lower the lending rates even without linking it to the cost of bank finance. By bundling other financial products such as insurance, MFIs can bring down the lending rates. Also, over time competition should work in the same direction.

A related issue is how these MFIs present their case for the high interest rates in the public sphere. Adopting a rigid stance and, say, that any interest rate below 28 to 30 per cent is not feasible will not do.

Especially now when some MFIs have chosen the capital market route and disclosed their track record of profitability and munificence to the owners and senior executives.

Nabard set to regulate smaller MFIs