A big step for small lenders

A big step for small lenders

Last week, the finance ministry finally released a draft of the new Bill for the crisis-stricken microfinance sector.

There are several welcome features in the draft. A single regulator—the Reserve Bank of India (RBI)—and a single set of rules clear the uncertainty that has gripped the sector ever since the Andhra Pradesh government virtually shut down microfinance operations in the state, effectively pushing poor borrowers back into the arms of moneylenders. It is not surprising that industry insiders have heaved a collective sigh of relief. In fact, there is a clear attempt in the draft Bill to see that microlenders are not clubbed together with moneylenders and “usurious" loans.

The definition of microfinance has been expanded to include thrifts that collect deposits from poor customers. This newspaper believes that true financial inclusion should include not just access to credit products, but deposit products and insurance as well. It is good to see the scope of the industry being widened.

What lies ahead? The Bill has officially been named the Microfinance Institutions (Development and Regulation) Bill, 2011. The Bill does better on the regulation front than on the development front.

The attempt to treat microfinance organizations as quasi-banks is puzzling, since the reason microlenders have mushroomed is that banks have not done enough to promote financial inclusion. Yet, the draft Bill speaks of “promoting the growth and development of microfinance institutions as extended arms of the banks". This may hinder growth of the sector.

The decision to accept profit margin caps recommended by the Malegam committee goes against economic good sense; competition is a far better bet when it comes to curbing high profit margins. What’s more, the regulated profit margins can lead to micromanagement by RBI over how money is raised and lent, given that interest rates jump around a lot, not just over time, but from district to district. Meanwhile, smart microlenders will find ways to skip around margin controls.

It is now up to RBI to ensure that it uses a light touch so that growth in microfinance is not smothered.

Is the draft microfinance Bill a step forward? Tell us at views@livemint.com