Mumbai: New York-headquartered Women’s World Banking (WWB), the world’s largest network of microfinance institutions (MFIs) with operations across 27 countries to serve low-income women entrepreneurs, regularly conducts research to understand women’s needs and accordingly design products. In an email interview, Mary Ellen Iskenderian, president and chief executive officer, said over-regulation in the Indian microfinance sector could push the poor borrowers back to the hands of moneylenders. According to her, MFIs should be permitted to access public deposits to manage their high costs. Edited excerpts:
Indian microfinance is facing a crisis due to recent state-level regulations.
The crisis in Andhra Pradesh was a bit of a perfect storm-exponential growth without the right systems to support the growth, over-indebtedness, lack of appropriate infrastructure such as credit bureaux, inability to mobilize deposits, and the entrance of commercially-oriented investors. For some institutions, it was too much growth too quickly and they faced a lack of trained human resources and proper governance for a rapidly changing industry.
Shrinking space: Mary Ellen Iskenderian says the Indian microfinance sector is likely to see some consolidation in the near term
Your outlook on the sector.
We are genuinely concerned that over-regulation or micro-management by regulators puts the industry at risk and that women will end up with the same terrible choices they had prior to the introduction of microfinance-moneylenders or lack of any financial services.
It is appropriate for Indian regulatory authorities to impose both prudential and non-prudential regulations on MFIs, but there are many Indian institutions operating ethically, delivering on their mission of financial inclusion in a sustainable way, and onerous regulation will constrict their ability to continue to do this.
The Indian government and the Reserve Bank of India (RBI) are planning separate regulations for MFIs.
The Indian government and the Reserve Bank of India have publicly said they will have a harmonized set of regulations for microfinance as an activity, but possibly supervised by separate regulatory bodies. This would be a very positive development. The challenge is ensuring that the state governments don’t come out with their own state regulations.
What has been your experience?
We have experience with countries that have instituted regulation that both protects customers and allows the industry to grow. Several countries with strong microfinance sectors such as Peru and Bolivia have benefited from introducing credit bureaus and requiring all MFIs to report to them.
South Africa has gone one step further and penalizes the lender who knowingly pushes a borrower beyond their borrowing capacity. Bolivian regulators have also relaxed the type of collateral requirement for microfinance customers and loan amounts are large enough to support growing businesses.
They also put into place best practices that define microfinance by the source of the client’s income, instead of use of the loan.
You said over-regulation puts the industry at risk. Where is Indian microfinance heading towards?
The regulations are still being crafted and finalized. The state government of Andhra Pradesh took action without waiting for the RBI to act. The RBI, on the other hand, even with the Malegam recommendations in hand, is waiting for the microfinance Bill, which has been in and out of the committees for many years. There is a lot of work that still needs to be done to ensure that there is consistency in all these governing rules both at the state and national levels and ensuring the same rules for the same game.
If the final regulations move along the lines of the Malegam recommendations of prescribing how to run microfinance, then such rules will undermine market-led competition and clamp down on market-led alternatives or choices for low-income borrowers.
What will be the repercussions?
The growth of the sector will dramatically slow, even quality capital will think twice before entering the sector; there might even be some form of capital flight out of the sector.
Also, innovation-particularly, product and process innovation-will be discouraged as innovation and flexibility do not normally thrive in a restrictive environment.
For example, if the restrictions remain, there will be little room for MFIs to create products other than the outmoded joint liability group model.
Given that the loan tenure does not take into account business cycles of sub-sectors such as agriculture, low-income clients will find products increasingly less useful.
Competition will be significantly reduced as the biggest and most well-capitalized institutions (not necessarily the best) will be favoured to survive. This could result in some form of cartel or even monopoly situation.
The cost of credit for the MFIs will eventually go up as supply of funds move away from the sector and as MFIs deal with additional compliance costs.
Has Indian MFIs moved away from their primary goal?
Ultimately, the microfinance industry was built on intimate knowledge of the customer—both of her needs and of her capacity to repay. As much as anything, the crisis in Andhra Pradesh is the result of a gradual drift away from that deeply customer-focused finance.
Many Indian MFIs, especially in the southern part of the country, are on the verge of closure.
WWB is still assessing the situation and is not prepared to take a position on the MFI climate in India at this time.
What’s the future of the sector?
While it’s hard to predict, there will most likely be consolidation. Ideally, enlightened regulators would allow MFIs to generate and intermediate deposits on condition that the players meet the prudential and non-prudential norms for deposit-taking institutions. Over the long term, the sector will become stronger as the stakeholders learn from this episode. This has always been the case when other markets have gone through crises.
Do you have any plan to invest in the Indian microfinance sector?
India has been a critical country for WWB since its founding. It was instrumental in the creation of and in subsequent strategy building support for Sa-Dhan, the microfinance network organization in India.
We will continue to support our network members in the delivery of their mission, providing innovative products and services for low-income women, while holding the network accountable to social performance standards and promoting transparency. We are not planning to directly invest in the Indian market now.