Active Stocks
Thu Mar 28 2024 15:59:33
  1. Tata Steel share price
  2. 155.90 2.00%
  1. ICICI Bank share price
  2. 1,095.75 1.08%
  1. HDFC Bank share price
  2. 1,448.20 0.52%
  1. ITC share price
  2. 428.55 0.13%
  1. Power Grid Corporation Of India share price
  2. 277.05 2.21%
Business News/ Money / Calculators/  Most important aspects of MFI Bill are not debated
BackBack

Most important aspects of MFI Bill are not debated

Mathew Titus, executive director, Sa-Dhan, talks about the problems that are hindering the MFIs

Ramesh Pathania/MintPremium
Ramesh Pathania/Mint

The microfinance sector has gone through several ups and downs in India. After the euphoria of exponential growth, the crisis in Andhra Pradesh and the subsequent freeze in business along with non-repayments saw many organizations going under, while many are still on the edge. Mathew Titus, executive director, Sa-Dhan, an association of microfinance institutions, talks about the chronology of events since 2010, the problems that are hindering the sector’s revival and the road ahead. Edited excerpts:

There has been a lot happening in the microfinance sector in the past few years. Can you recap the changes?

Essentially, October 2010 is when the Andhra Pradesh government brought in the ordinance that put a stop to collections. The ordinance said that disbursements can only happen within strict conditions. But that effectively led to the supply being stopped. Once that happened, the portfolio started deteriorating over time. In fact, by December, repayments had actually stopped. Now there is a small fringe element, the not-for-profits, which continued getting repayments. Then there are the cooperatives, which are outside the purview of the law. But interestingly, by late-2011, even the cooperatives stopped getting payments.

The damage was quite significant. The non-repayment culture affected all entities. Cooperatives are actually very large all over India, and old. In fact, they were given freedom on various counts. But it was still a classic case of contagion effect. Around 7,200 crore went down.

Some entities even went under.

SKS Microfinance Ltd made provisions because they had just gone public. Basix is starting to go under now. The Reserve Bank of India (RBI) gave a two-year moratorium on repayments and classified that as standard asset subject to repayments coming in. The view was that the state will get its act together, get the whole thing fixed and allow for repayments to take place. But that did not happen. No attempt has been made to get their (microfinance entities) money back, and consequently, the whole portfolio has deteriorated. The other entities were Share Microfin, Asmitha Microfin Ltd, Spandana Sphoorty Financial Ltd and, of course, Basix—all their loans were restructured.

Basix had a really large Andhra Pradesh portfolio, but it also had a non-Andhra Pradesh portfolio. Due to the absence of liquidity, it could not service the non-Andhra Pradesh portfolio as well. Axis Bank Ltd, which has a large exposure in Basix, did the restructuring and also managed to get some fresh equity, but the non-repayments are so huge that it is defaulting.

Spandana has managed to grow its non-Andhra Pradesh portfolio quite aggressively with the help of the corporate debt restructuring—it did not have to pay back any money. It is just about crossing the edge and if it gets fresh money now, it may survive. Share and Asmitha are still on the edge. There is another much smaller entity called Trident (Microfin Pvt. Ltd), which is now going under.

Did the Malegam Committee report help?

The report did try to strike a balance between the practices that were there and what the Andhra Pradesh government was asking for. There were a few things that it brought in. One was a margin cap, under which one could charge the cost of borrowing plus 12 percentage points if your net worth is less than 100 crore, and 10 percentage points otherwise. The total interest cap was at 26% if one was using priority sector. Then there was a code of conduct, which we anyway had for our association. The other component was credit bureau reporting so that multiple borrowing and over-indebtedness could be avoided. The last component, which came out in November 2013, was self-regulation. Now, associations can apply to become a self-regulatory organization (SRO). This was embedded in our founding principles, so we plan to become an SRO.

Most of your members are non-NBFC (non-banking finance company) MFIs (microfinance institutions) and the regulator is not interested in regulating them.

I won’t say the RBI is not interested in regulating non-NBFCs but the DNBS (department of non-banking supervision) is definitely not interested. All this money comes out of priority sector, and the priority sector department is keeping a close eye on this. The way it is playing out is that the rules have been brought out by DNBS but all banks are enforcing the rules on the priority sector portfolio irrespective of which entity you are. So, your legal format does not matter; you still have to follow those rules. According to the Malegam Committee report, RBI is the regulator and supervision is divided between banks, who are supposed to supervise at the headquarters and also at the branch level, and the associations. The report sees all these three working together. The rating agencies will be working in tandem with the banks. So, we will be looking more at the customer side.

The MFI Bill was not passed in Parliament. Also, some people had reservations about it.

The standing committee’s reservations are basically that the Bill is looking at MFIs’ interest. The fundamental intervention by Andhra Pradesh was questioning the authority of RBI in this (suicides) matter, because the state government claimed that it was a law and order problem. As an SRO, tomorrow we can be questioned to certify the behaviour of these MFIs. The Bill very clearly assigns a role to RBI. For once and for all it says that regulation of this market is extremely important and that RBI is the regulator.

The second point that the government made was that the money is not linked to the banking sector. But the fact is that 28,000 crore comes from the banking sector. Therefore, the regulator has to be the same. These two very fundamental parts of the Bill are not playing out in the debate.

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Published: 04 Mar 2014, 06:17 PM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App