Microfinance Bill to help MFIs - Devendra Prasad Pandey

The Union Cabinet approved Micro Financial Sector Development and Regulation Bill, 2011, a bill to regulate the micro finance industry and bring the micro lenders under the purview of the Reserve Bank. The Bill, which was drafted in the backdrop of problems faced by borrowers of MFIs in Andhra Pradesh and other states, would now be introduced in Parliament for consideration.

As per the draft, it would be mandatory for micro finance institutions (MFI) to be registered with the Reserve Bank and have a minimum net-owned fund of Rs 5 lakh. In addition, 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 with a view to promote financial inclusion. The council will comprise members not below the rank of executive director of NABARD, National Housing Bank, the RBI and SIDBI. Joint secretaries from the ministry of finance and the ministry of rural development will also be its members.

Microlenders have been accused of aggressive lending and recovery practices and high interest rates, which attracted calls for regulation. India's once-thriving microfinance sector was devastated by a crackdown more than a year ago by the government of Andhra Pradesh, which was the industry hub and largest market. The state rules resulted in a drop-off in loan collections and a drying up of funding for microlenders.

However, the much-needed amendments suggested by industry experts and states like Andhra Pradesh seem to have gone unheard. The Andhra Pradesh government, for instance, had objected to the description of the MFIs as extended arms of the banks, considering the pure-play money lending activities of the MFIs. Though the MFIs have been welcoming the bill since it is expected to allow them to expand their business, the Andhra Pradesh government had also raised an objection to the free hand given to the MFIs to collect thrift from the MFI customers.

Though it was largely agreed that a central legislation, unlike the one promulgated by the AP government, would bring the much required discipline in the microlending sector, official sources are sceptical about the actual implementation of the legislation since it is the RBI that has responsibility of the regulation.

However, the bill also empowers the RBI to penalise the erring MFIs with a penalty extending up to Rs5 lakh. The bill has gone soft on the issue of interest rates charged by the MFIs though the MFI sceptics were expecting the capping of the rates.

On the other hand microfinance institutions welcomed the Bill saying that it would help them recover their outstanding that are due for the past one-and-a-half years in Andhra Pradesh.
The MFIs are not able to collect their dues as the AP MFI Act mandates every company to take government approval before extending fresh loans to borrowers besides making payment collection cycle to monthly instead of weekly. According to Vijay Mahajan, president of industry body Microfinance Institutions Network (MFIN), if the AP government helps, the MFIs would be able to collect more than 35 per cent of their outstanding which is estimated to be around Rs. 6,500 crore in the state.

According to SKS Microfinance, the company suffered Rs. 1,360 crore loss in FY 2012 due to non-collections which forced the micro lender to write of as much as Rs. 1,120 crore. Shares of SKS Microfinance, the only listed microfinance company in India, soared nearly 20 per cent to an intraday high of Rs 105.70 Friday after the cabinet approved a bill aimed to bring microlenders under the Reserve Bank of India's oversight yesterday. The Microfinance Institutions (Development and Regulation) Bill needs parliament's approval to become a law. The need to regulate the sector arose after microlenders were accused of aggressive lending and recovery practices and high interest rates. In October 2010, the Andhra Pradesh government cracked down on the sector, which resulted in a drop off in loan collections and a drying up of funding for microlenders.

SKS Micro's business in Andhra Pradesh, which was a microfinance hub earlier, was also hit though the lender has said it is not planning to close its business in the state. The company's loan portfolio in Andhra Pradesh shrunk to Rs 236 crore in the March quarter from Rs 1,311 crore a year ago as it was forced to write off some credit.

SKS Micro has been beset with slowing business and a boardroom struggle that has sent its stock plummeting after a successful initial public offering in 2010 in which it raised $358 million (over Rs 1,500 crore). It saw the exit of its founder Vikram Akula in November 2011. The stock is down 92 per cent since its market debut. Company announced cutting 1,200 jobs and closure of 78 of the 180 branches it operates in the Andhra Pradesh. SKS Micro employs 3,400 people in the state.
SKS Micro's loss in the January-March quarter more than quadrupled to Rs 330 crore, reflecting the sliding fortunes of the country's beleaguered microfinance sector. It has been posting losses for the last six quarters.

The Microfinance Bill in its present form may hurt the growth of the Self-Help Group (SHG) programme being run across states to bring people above the poverty line, according to Union rural development minister Jairam Ramesh. "The Bill needs to be rewritten. MFIs are not instruments for poverty alleviation," Ramesh said in an interaction with reporters after he reviewed initiatives by NABARD in an SHG-bank link programme. He, however, did not elaborate the kind of changes necessary in the Bill before the Parliament. At present, there are 1.34 million active SHGs in the country. Most of them are concentrated in southern states. Andhra Pradesh alone has 0.71 million SHGs in 16 districts.

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The author teaches rural management in MGCG University, Chitrakoot, MP