BackMicrofinance Bill set to lapse yet again
Consensus eludes proposed law, with RBI uncomfortable with proposed regulatory structure of MFIs
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Mumbai: The Microfinance Bill, which promised uniform national regulation of microlenders, is set to lapse for the second time in six years because it still faces many roadblocks that Parliament may not be able to clear before the winter session ends on 20 December.
The Bill is currently under the consideration of a parliamentary standing committee headed by former finance minister Yashwant Sinha of the Bharatiya Janata Party (BJP).
If the Bill lapses, scores of microfinance institutions (MFIs) operating in Andhra Pradesh will find it difficult to survive. MFIs source money from banks and give small loans to low-income borrowers at interest rates ranging between 24% and 36%.
A lack of consensus has held up the proposed law. The Reserve Bank of India (RBI) is not comfortable with the proposed regulatory structure for microlenders suggested by the legislation and the ministry of rural development believes it is designed to protect microlenders and will seriously hamper the country’s self-help group (SHG) movement.
“Since the term of this Lok Sabha will come to an end in May 2014, there is a high probability of the Bill lapsing—as was the case with the earlier Bill which was introduced in 2007," said Alok Prasad, chief executive officer of industry lobby Microfinance Institutions Network, or MFIN.
But Mathew Titus, executive director of Sa-dhan, another industry association, is hopeful that the Bill will be passed in the winter session. “The parliamentary standing committee is trying its best to push forward the Bill," Titus said.
A questionnaire emailed to Sinha on Friday had elicited no response as of press time.
Efforts to formulate a national regulation on microfinance began in 2007 but failed due to the absence of consensus.
The proposed national regulation—The Microfinance Institutions (Development and Regulation) Bill—envisages RBI as the sole regulator for all microlenders, including the smaller ones operating as trusts and non-governmental organizations, or NGOs.
But the apex bank doesn’t want sole regulatory status of the sector as it doesn’t want to regulate smaller MFIs. It wants to confine its regulatory ambit only to for-profit MFIs that enjoy the status of non-banking finance companies, or NBFCs.
Chandra Shekhar Ghosh, managing director of Kolkata-based Bandhan Financial Services Pvt. Ltd, said microlenders which are not converting their operations to the NBFC model will have problems raising money from banks.
“RBI has clarified that it is not interested in regulating non-NBFC MFIs," Ghosh said. “(In the absence of national regulation), the problem will be for non-NBFC (microfinance companies). How they will manage to get funding from banks?"
In April last year, rural development minister Jairam Ramesh wrote to the finance ministry expressing his reservations on the final draft of the proposed law. “Basically, this Bill is oriented to protect microfinance institutions," Ramesh wrote.
“I personally believe that the Bill is not the way forward. It has to undergo major changes. The Bill, as currently drafted, will have adverse impacts on the SHG movement in India," Ramesh had told reporters in Mumbai in April 2012.
His ministry’s position remains the same.
That apart, the centre has not yet been able to generate a consensus on the Bill from some state governments, including that of Andhra Pradesh , the epicentre of the 2010 crisis that ripped through the sector forcing many microlenders to down shutters. The crisis halved the size of total loan assets of the sector and over 35,000 people lost jobs.
Since then, the Andhra Pradesh government has maintained its view that moneylending is a state subject and that the regulation of microlenders should stay with the state government. In a meeting of the parliamentary panel held last week, the state reiterated this view. The parliamentary panel is currently awaiting the views of finance ministry.
For Andhra Pradesh-based MFIs, the microfinance Bill presents the only way to resume operations in the southern state. “If indeed the Bill lapses, the chances for revival of the MFI industry in Andhra are low," Prasad of MFIN said.
About ₹ 6,000 crore worth of loans given by microlenders are stuck in the southern state. MFIs claim that they are unable to recover the money because of a state law dating back to 2010.
That law banned MFIs from collecting weekly loan instalments and reaching out to borrowers at their residences (or so-called doorstep lending). . It also made it mandatory for MFIs to secure government approval before giving a second loan to a borrower. Following this, collection rates of MFIs in Andhra Pradesh plunged to 5-10%, and banks stopped giving money to MFIs.
After RBI drafted regulations for NBFC-MFIs in December 2011, bank funding to MFIs operating outside Andhra Pradesh improved. As on 18 October 2013, bank loans outstanding to microcredit firms, which includes loans to self-help groups and joint liability groups—small groups of women borrowers—stood at ₹ 17,100 crore as compared with ₹ 15,300 crore a year ago.
In 2011, after the crisis in Andhra, at least six microlenders restructured their loan obligations to banks after the RBI allowed them to do so. MFIs that opted for the debt recast include Bhartiya Samruddhi Financial Services Ltd, Spandana Sphoorty Financial Ltd, Share Microfin Ltd, Asmitha Microfin Ltd, Trident Microfinance Pvt. Ltd and Future Financial Services Ltd. The debt restructuring, however, has not helped the majority of these companies resolve the crisis as loan recoveries from borrowers in Andhra Pradesh remain dismal.
SKS Microfinance Ltd, India’s lone listed microlender, was rescued by the money raised from its initial share sale in August 2010. It later pulled out from the southern state.
Samit Ghosh, managing director and chief executive officer of Ujjivan Microfinance Ltd, said the industry is pinning hopes on RBI’s plans to award differential banking licences to institutions undertaking specific banking activities.
“MFIs can take up the role of banks engaged in financial inclusion," Ghosh said.
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