A move to review and regulate when and how microfinance providers should be allowed to accept savings deposits is picking up speed.
In a bid to police the booming sector, finance minister P. Chidambaram introduced a Bill to regulate small micro-credit institutions through the National Bank for Agriculture and Rural Development (Nabard) requiring them to meet more stringent accounting standards.
The Bill, which Parliament referred to the standing committee on finance on 27 April, will also allow non-governmental organizations, organized as societies and trusts, to accept savings or “thrift” in the form of public deposits from their customers—the millions of India’s largely poor, rural women often beyond the reach of the formal banking network.
Organizations which can raise Rs5 lakh capital could theoretically apply for certification from the new regulator to accept public deposits, say industry officials.
“Even if they aren’t corrupt, even if they do it with a good heart, people who run NGOs are not bankers and they don’t know how to handle money in this way,” said Smita Premchander, the secretary of Sampark, a non-governmental organization based in Karnataka that has formed 200 women’s self-help groups since 1998 and provided them with skills training to start small enterprises. “Only banking institutions know how to invest and properly safeguard deposits from the public.”
Exactly what the regulations would consist of and how they would compare with Reserve Bank of India’s guidelines for public and private sector banks was not enumerated in the Bill. The finance committee has three months to review the Bill and issue its report, after which it is expected to come up for debate.
At the heart of the debate is the need to protect the poor from “fly-by-night” operators while making sure that regulations don’t stifle the need for more, organized financial services to people who don’t, or can’t, normally turn to banks and other established lenders. And there is a growing debate as to whether the proposed legislation also creates a two-tiered system within microfinance institutions by excluding large, by now well funded outfits from new regulations.
“Unfortunately, India has a very sad history where several (non-banking finance corporations) defaulted on their depositors,” said Sitaram Rao, a board member at SKS Microfinance who also sits on the board of several trusts and cooperatives. “I personally think that allowing anyone who can collect Rs5 lakh to take deposits could be quite dangerous. There must be protection.”
SKS has 304 microfinance branches in 11 states and is one of the largest players in this nascent field.
“We put the money of the poor at risk the moment we start diluting banking regulations,” adds Premchander, who spent several years with the Industrial Development Bank of India.
While the exact size of the microcredit industry in India is hard to measure, Sa-Dhan, the main association representing India’s community development finance institutions, says its 180 members had Rs2,600 crore of credit outstanding as of 31 March 2006, and that the number has grown over the past year.
Estimates on the need for savings, insurance and other products are also difficult to come by. “If you look at the experience on the ground, the poor actually require savings as much as credit,” said Mathew Titus, executive director of Sa-Dhan.
Most microcredit consists of loans below Rs5,000, primarily extended to women who have been organized into self-help groups of approximately eight to 15 at the village level, often to fund small enterprises. Some organizations lend directly to their clients, while others link the groups with banks for financial services. The funds are often lent at interest rates that climb past 20%.
Putting adequate safe guards in place will be among the tasks that should be undertaken by a national council on microfinance that the Bill seeks to establish, which can then draft the necessary rules and regulations according to RBI guidelines, said Titus.
“The question that needs to be asked is whether we design public policy based on what is or isn’t there or what people really need,” said Titus, who is “cautiously optimistic” that the Bill will help create better access to financial services for all.
“This is not a debate about NGOs. For us, it is a debate about ensuring that the poor have a rightful place and position in the financial system,” he added.
To open up access to financial services for the poor, Premchander says the government should do more to facilitate linkages between self-help groups and banks, as well as help build capacity at NGOs that already reach underserved poor and rural clients to transform into banking institutions that offer poor people who deposit their money as much protection as those given to bank customers.
“What this says to me is that anyone who has money and can access a bank is fine and that for poor people we can have lower standards,” said Premchander. “Even in the most remote village, the post man comes every so often,” she said. “Why neglect the resources that are already there?”
However, as microfinance institutions proliferate across the country, some in the sector say that the pending legislation will force small players to comply with new guidelines while exempting larger players, who are increasingly attracting crores of investment from private equity investors and state banks, and account for at least two-thirds of the microcredit industry.
SKS, for example, received Rs50 crore investment from private equity investors led by Sequoia Capital and is widely expected to receive another Rs100 crore in private funding this year. The firm, which has extended Rs700 crore in credit to six lakh clients since 1998, has said it is aiming for more than a 20% return on equity in the near future.
Microfinance organizations, such as SKS Microfinance or Basix, are already subject to RBI regulations since they are legally classified as non-banking finance corporations.
And non-banking finance corporations, which have some of the most transparent operations in the sector, can accept deposits under the law if they qualify with the RBI, but none have managed to do so yet. However, some industry giants say they would like to see uniform reporting standards across the board and that they should enjoy the same rights to collect deposits that is being proposed for smaller institutions.
“Whatever rights are given, make everybody subject to the same law,” said Rao, the SKS board member. “Microfinance institutions are growing and we need to make sure that growth is orderly. If you have uniform reporting you’ll have a clearer picture of where the sector is going and clearer collection of data.”
The proposed legislation is “not perfect, but it’s a good start toward setting up a regulatory framework” said Basix managing director Vijay Mahajan. The organization has a presence in more than 13,000 villages in eight states.
But, some smaller players complain that the bill will choke off their ability to survive in the face of the big lenders and private banks that are increasingly moving into the sector and actually restrict the number of players who can compete in the space.
“They have made two classes,” said Nirmala Buch, who heads Mahila Chetna Manch, a non-governmental organization in Madhya Pradesh that has extended Rs3 crore in credit to 3,000 rural women’s self-help groups since 1995. “If we’re asked to work within the regulation, we can manage. But we’re concerned because, I think, you may see a general inability to do that,” among some smaller non-governmental organizations in the industry.
“There is a need for regulations and to bring MFIs (mincrofinance institutions) under some law, but this Bill really needs to see changes from its current form,” said V. Satyamurti, chief executive officer of the All India Association for Micro Enterprise Development, who describes the legislation as it stands as “heavily-loaded,” in favour of the non-banking finance corporations. In terms of savings, “What we have done here is invited the fly-by-night operators to come in and mop up the savings of the poor people,” he added.
Premchander says many NGOs and other institutions, whatever their original intentions, will be unable to resist collecting savings from those they aim to serve, because “it’s one of the cheapest forms of money you can get.”
—Ashish Sharma contributed to this story