Nabard set to regulate smaller MFIs

Nabard set to regulate smaller MFIs

Mumbai: Most microfinance institutions, or MFIs, will soon be regulated by the National Bank for Agriculture and Rural Development, or Nabard, once Parliament passes a Bill governing the sector.

The Micro Finance Development and Regulation Bill is expected to be tabled in Parliament in the winter session.

The larger MFIs, which operate as non-banking financial companies, or NBFCs, will, however, be kept out of its purview, a senior Nabard official said in an interview. They will continue to be regulated by the Reserve Bank of India (RBI).

While the 20 top MFIs such as SKS Microfinance Ltd and Share Microfin Ltd are incorporated as NBFCs and account for at least 75% of the industry, about 800 MFIs have been set up by non-governmental organizations, cooperative societies and trusts. They will be governed by Nabard.

The proposed Bill may allow smaller MFIs to collect public deposits, the Nabard official said.

Once these institutions come under the regulation of Nabard, there will be more transparency and efficiency in the way they function, as Nabard will have a say on the operations and loan pricing of such firms, the official said.

Such MFIs will then have to disclose their financials, interest rate structure and details of operations to Nabard periodically.

“They will have to register with us and will be treated as any other regulated financial institutions," the official said. He did not want to be named as the Bill is yet to be presented in Parliament.

Nabard has also initiated measures to put pressure on MFIs to reduce their rates to a “level that is in line with their operating cost", the official said.

The development assumes significance in the backdrop of an ongoing debate on the relatively high interest rates charged by MFIs and the recent government note to state-run banks to ensure that they should not charge more than 22-24% to their clients.

Many state-run banks are now insisting that MFIs must give a road map as an assurance that they will bring down interest rates over a period of time as a precondition to raise money from banks which they on-lend to their customers.

On Wednesday, financial services secretary R. Gopalan clarified that the government had no plans to cap interest rates charged by MFIs.

“It is not feasible to control interest rates. As far as we are concerned, the microfinance regulation Bill is in the offing... and in that Bill, we will never have a provision for control of interest rate," Gopalan said.

Loan rates charged by MFIs have been causing concern to policymakers.

The Andhra Pradesh government plans an ordinance to regulate MFIs even as the southern state has reported 25 deaths in the past one month due to the alleged harassment by loan recovery agents.

“We don’t intend to regulate interest rates. But if the state government wants to regulate interest rates under certain provisions, I think they have a right to do (so) but they should also look at the issue of credit reaching those areas where banks have not gone," Gopalan said.

“It is a tough choice for them. There are certain Acts within the ambit of which they can take action," Gopalan said.

Nabard has stopped giving financial assistance from its Microfinance Development and Equity Fund to those MFIs that have been charging more than 25% from borrowers, the official said.

The fund has a corpus of Rs400 crore.

Nabard is now encouraging funding through self-help groups (SHGs) in those areas where MFIs charge high rates.

“By doing so, MFIs will be forced to bring down their rates to face competition," the official said.

There are nearly seven million SHGs operating in India.

Since the start of this fiscal, Nabard has formed around 50,000 joint liability groups in states such as Orissa, Kerala, Karnataka and Tamil Nadu to ensure adequate credit access to the poor.

It aims to take this number to nearly 200,000 by the end of this fiscal. Only the top 10 MFIs have one lakh clients or more each.

While SHGs borrow from banks and lend to their members at a margin, members of joint liability groups can individually borrow from banks and the liability is shared among the members.

SKS Microfinance, the largest MFI, had disbursed Rs14,300 crore till March to nearly 6.8 million borrowers.

According to a study by research and consultancy firm Access Development Services, MFIs added 8.5 million consumers in fiscal 2009, up 60% from the year before, taking their consumer base to 22.6 million.

Reykam Jayasurya, chief executive officer of Hyderabad-based Asmitha Microfin Ltd, said bringing non-NBFC MFIs under Nabard may help improve their operating structure but could impact for-profit NBFCs.

“Since the proposed Bill may also allow these firms to raise deposits from the public, unlike for-profit NBFCs there will not be any level playing field," Jayasurya said. MFIs that are NBFCs do not raise deposits from the public.

Asmitha has a loan portfolio of Rs1,800 crore and a customer base of 1.6 million.

Sanjiv Shankaran contributed to this story.