Microfinance industry needs a dedicated regulator

Microfinance industry needs a dedicated regulator

The microfinance industry needs a dedicated regulator, not the RBI.

What's proposed? The Ministry of Finance recently released the draft Microfinance Institutions (Development and Regulation) Bill 2011, aimed at providing a common regulatory framework for the microfinance industry in India, as well as greater protection to borrowers. Broadly, the Bill proposes to make the Reserve Bank of India, or RBI, the sole regulator of the sector, while setting up microfinance development councils to assist the government in framing policies. It also envisages starting a fund for staff training, capacity building and implementation of new technologies, and creation of credit information bureaus to assess overindebtedness among clients due to multiple borrowings. The ministry is seeking comments from stakeholders before sending the Bill to Parliament for clearance. Once it becomes law, it will supersede all state laws such as last year's Andhra Pradesh ordinance banning microfinance institutions, or MFIs, from collecting payments from borrowers, following allegations of coercive practices employed by them.

What will change? The Bill brings under RBI's purview all institutions offering microfinance services, including not-for-profit ones like trusts and societies as well as for-profit ones like the non-banking finance companies, or NBFCs, which account for some 80 per cent of the total outstanding loans in value terms. The previous draft Bill had proposed the National Bank for Agriculture and Rural Development as the regulator and excluded NBFCs from the list. The new Bill also legitimises other services offered by MFIs such as insurance, remittances, collection of thrift, and pension schemes. It allows MFIs to collect thrift and small savings by micro-clients that can be used to meet emergency credit needs. At present, NBFCs are not permitted to collect savings on behalf of their clients.

Advantages: The Bill empowers self-regulatory outfits such as Microfinance Institutions Network and Sa-Dhan to take strict actions against erring MFIs. "The endeavour is to provide multiple layers of consumer protection and avoid recurrence of incidents like those that happened in Andhra Pradesh," says Vijay Mahajan, founder of Hyderabad-based MFI Basix, whose firm cannot stay afloat for a long time if he doesn't get fresh loans from banks. Basix loan book has shrunk to around Rs 1,000 crore from Rs 1,808 crore in September last year. Banks are not willing to lend money to MFIs as there's uncertainty around the future of the industry. Mathew Titus, Executive Director of Sa-Dhan, says the Bill also shows the government's concern for the industry. "The Bill signals the government's intention to stabilise the industry." SKS Microfinance, the only listed MFI in India, reported its worst-ever quarterly results recently by posting a net loss of Rs 218.74 crore for the quarter ending June 2011, compared to a net profit of Rs 66.69 crore in the same quarter last year. Losses were largely on account of huge writeoffs, as the company suffered large-scale defaults.

What more needs to be done?
Mahajan of Basix believes there should be a separate regulatory authority for the sector. "This sector affects a large population. The total outstanding loans to people through both MFI and SHG (self-help groups) models add up to around Rs 50,000 crore. But the industry works with nearly 110 million households who deserve a dedicated regulator," he says. "Pakistan and Indonesia have microfinance banks that raise resources on one side and lend on the other. They are not dependent on any other institution and even their transaction costs are much lower."