Mumbai: The National Bank for Agriculture and Rural Development, or Nabard, does not want to be the regulator for microfinance institutions (MFIs).
The newly appointed Nabard chairman Prakash Bakshi said on Thursday that there should be a single regulator to govern India’s Rs22,500 crore microfinance industry and that the Reserve Bank of India (RBI) can do that job. RBI currently regulates large MFIs, which account for around 90% of the Rs22,500 crore industry; the rest of them are unregulated.
A finance ministry panel, busy finalizing the draft of a proposed microfinance Bill, had earlier envisaged Nabard as a regulator for smaller MFIs while larger institutions, incorporated as non-banking financial companies (NBFCs), would continue to be regulated by RBI.
At the helm: Newly appointed Nabard chairman Prakash Bakshi.
Bakshi’s predecessor U.C. Sarangi had wanted Nabard to play the role of a regulator for relatively smaller MFIs. Nabard is fully equipped to handle the role, Sarangi had said.
“I will not hesitate to say that there should only be one regulator for the entire sector,” Bakshi told Mint on Thursday in his first interview after taking charge on 3 June.
According to him, Nabard is currently not prepared to take up the role of microfinance regulator as it lacks “some missing links to operate at the field level”, implying that the development organization is yet to build up the necessary infrastructure to function as regulator for smaller microlenders.
The MFI industry has been under pressure since October 2010 because of a new law in Andhra Pradesh, which accounts for a quarter of the business. It is also home to India’s largest and only listed microlender, SKS Microfinance Ltd.
MFIs give tiny loans to poor borrowers at 26% after raising money from banks.
The Andhra Pradesh law that restricted MFIs led to a drastic fall in loan repayments to 10-15% . This has curbed the debt-servicing capacity of MFIs and subsequently commercial banks have abstained from giving fresh loans to microlenders.
According to Bakshi, the route cause of the crisis in the microlending industry is not the high interest rates charged by microlenders but the coercive recovery practices followed by some of them.
The most important aspect of the new microlending regulations has to be that “if there is a grievance, it should be addressed quickly. All other aspects, including their operations, can be monitored”, Bakshi said.
Set up in 1982, Nabard has been acting as the main agency to refinance regional rural banks (RRBs) and cooperative banks.
In 2010-11, Nabard refinanced loans worth Rs34,000 crore to RRBs and cooperative banks and plans to increase the disbursal to Rs40,000 crore in the current fiscal. “In the next three years, our estimate is that we would take this number to Rs70,000crore,” Bakshi said.
As part of diversification and to boost revenue, Nabard began funding infrastructure projects in the power and agricultural sectors on a commercial basis from March 2010 and decided to expand its role in financing state-government sponsored projects.