MFIs under RBI scanner - Atasi Das

A Reserve Bank of India (RBI) panel including Kumar Mangalam Birla, Shashi Rajagopalan, and UR Rao, RBI deputy governor KC Chakrabarty and headed by financial expert YH Malegam has been appointed in October 2010 for conducting a comprehensive study of the Indian microfinance industry. The committee will address recent concerns raised about the high interest rates, coercive recovery processes and multiple lending practices being followed by the micro-finance institutions (MFI) in India and will submit its findings in three months time. 

As per the ‘National Bank for Agriculture and Rural Development’ (NABARD) data there are around 800 MFIs in India; the top ten enterprises cater to around 100,000 clients. The leading MFIs are registered with the RBI as ‘Non-banking Finance Companies’ and handle 80 percent of the microfinance business in India- they are under the regulatory purview of the apex bank. But interest rates charged by the vast number of unregistered MFIs are outside RBI supervision. ‘Intellectual Capital Advisory Services Pvt. Ltd’ (Intellecap), a microfinance investment bank states that, the Indian microfinance industry as on 31 March 2010 has extended credit worth around Rs 21,500 crore to 24 million clients.

The inside story…
Around 30 people committed suicide in Andhra Pradesh between September-October 2010 allegedly due to harassment at the hands of MFI loan recovery agents. In response, the Andhra Pradesh government passed an ordinance on 15 October 2010 restraining MFI activities in the state. The ordinance made it compulsory for the MFIs to undergo registration with the designated state government authorities; they were also to provide detailed information about their area and system of operation, recovery process and lending rates. A three-year sentence and Rs 1 lakh in penalty was fixed for MFIs found guilty of harassing borrowers for loan recovery. On 20 October 2010 the Andhra Pradesh (AP) High Court allowed ‘Microfinance Institutions Network’ (MFIN), an umbrella organisation of MFIs representing 31 Non-Banking Finance Companies (NBFC) to file a petition against the AP state ordinance. MFIN members (including SKS Microfinance, India’s biggest MFI lender) account for around 70 percent of the outstanding micro finance loans in India.

On 22 October 2010, the AP High Court passed an interim order on the dispute, which allowed the MFIs to resume operations if they stayed away from coercive recovery and got themselves registered within a week, failing which they would be liable to state prosecution. The MFI loan recovery process can now be either held in the Gram Panchayat office or in a public place to protect the interests of the poor debtors.

Government’s stand…
Public sector banks need to channelise 40 percent of their loan advances towards priority sector lending including loans to agriculture, small-scale industries and MFIs. The MFIs in turn lend to farmers, small entrepreneurs and *Self-help groups. The finance ministry had issued a September 2010 directive urging the public sector banks to enforce reasonable MFI interest rates, without setting any specific interest cap for the same. A host of public sector lenders like Bank of India, Union Bank of India and Bank of Baroda are now imposing a cap of 22-24 percent on MFI lending rates (to end users), failing which they will be denied bank financing. NABARD, the proposed MFI regulator has also followed suit.

India’s biggest commercial bank, the State Bank of India’s (SBI) MFI portfolio is worth around Rs 1,500 crore, inclusive of loans extended to Non-Governmental Organisations (NGO), NBFCs and Self-help groups. SBI MFI clients will now have to disclose their lending rates to the bank and get credit ratings from certified rating agencies; charging higher lending rates will pull down their credit ratings and reduce the possibility of securing fresh loans from the bank. SBI also plans to expand its SHG customer base from 18 lakh to 21.5 lakh; its current SHG lending rate is 10 percent. Corporation Bank with an outstanding Rs 600 crore loan to MFIs is also set to follow in SBI’s footsteps.

Microfinance: A primer
Microfinance is the provision of financial services like loans, savings, insurance and money transfers to low-income clients to enable them to pursue productive economic activities and improve their standard of living and that of their community; microcredit refers to the loan provision part of microfinance and includes both consumption and production loans extended for farm and non-farm activities. The SHG-bank linkage model is the predominant variety of micro credit dispensation route in India. Non-Governmental Organisations are often involved in the formation of SHGs and also entrust their credit linkage to the commercial banks. Microfinance services are provided by a plethora of institutions like NGOs, credit unions, cooperatives, private commercial banks, non-bank financial institutions and also state-owned banks.

Conclusion
Regulatory surveillance and a general public discontent about the high interest rates charged by the MFIs and their modus operandi have generated negative vibes about the MFI sector- the ground reality is that in most places the MFI industry is dependent on middlemen who procure borrowers for a profit margin and aid in recovery. Experts predict that a sizeable scale of operation and heightened market competition will eventually drive down MFI interest rates. MFIs depend on bank funding for around 80 percent of their capital and the public sector banks have tightened their lending norms. To hold on to the private investors and script more success stories like SKS Microfinance, the Indian MFI industry needs to promote transparency alongside operational efficiency, as big bucks are involved in the business as also the livelihood of the economically marginalised population of our country.