Microfinance Focus, July 30, 2011: The current crisis in Indian microfinance has brought down the portfolios of Indian MFIs by 50% from their peak in October 2010. While some may see this as a cause for celebration, it has caused collateral damage to the lives of low income families, both recent and potential customers, which is a far more important issue. The RBI has attempted to resolve the issue by defining limits on interest rates, margins, incomes of microcredit borrowers, and the size of loans to be provided to such borrowers and on various other business conduct issues such as tenure, repayment frequency and collateral. This has generated hot debate but not much real light in terms of a close examination of the actual impact of the measures announced on the availability of microcredit to those who need it.

The purpose of this paper is to undertake such an examination. The content of this paper is particularly important in the context of the draft Microfinance Bill (now in the public domain) that seeks to formalize some of the measures that the RBI has announced as part of its definition of qualifying assets for priority sector lending by commercial banks.

The paper undertakes a time series analysis of the yields on loan portfolio of the 16 largest MFIs in India that account for over 80% of all the MFI services provided in the country. Historical yield data is compared with the pricing and margin caps announced by the RBI to determine the feasibility of MFI operations within the new regulatory regime. It also looks at the income limit and maximum loan size criteria to determine their relevance for the availability of microcredit to various income segments of the population.

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By G K Agrawal,

Microfinance Focus, July 30, 2011: THE MICRO FINANCE INSTITUTIONS (DEVELOPMENT AND REGULATION) BILL, 2011 (Bill) is the most timely initiative of the GOI -MOF and will be meeting the long outstanding demand of MFis and practitioners for a   formal statutory framework for its financial activities. The Bill is to provide access to financial services for the rural and urban poor and certain disadvantaged sections of the people by promoting the growth and development of micro finance institutions as extended arms of the banks and financial institutions and for the regulation of micro finance institutions. MFIs/other entities engaged in providing micro finance services both existing and new ones, except banks and coop. societies will be brought under the regulatory purview of the Reserve Bank of India. The Bill provides for a new category of MFIs viz., “Systemically important micro finance institution” deploying such amount of funds for providing micro credit to such minimum number of clients as may be specified by the Reserve Bank. The Bill provides for setting up of   Micro Finance Development Council, to advise the Central Govt., on formulation of policies, schemes and other measures required in the interest of orderly growth and development of the micro finance sector and micro finance institutions, to promote financial inclusion. The Bill also provides for setting of State Advisory Councils for Micro Finance at the State level. The Bill bestows wide ranging powers to the RBI   for registration, direction, regulating, inspection, fixing caps on margins and interest rates, setting repayment schedules, books of accounts, rating norms, capacity building, information system, etc. of MFIs. The Bill also provides for setting up of the Micro Finance Development Fund with RBI for receiving grants, donations and granting loans and other financial support for various purposes. The Bill provides for appointment of Micro Finance Ombudsmen for the purpose of redressal of grievances between clients of micro finance institutions and micro finance institutions with powers to issue directions to micro finance institutions.

The following comments /observations are made on various select provisions of the Bill, which may be taken into account by GoI MOF while finalizing the Bill.

Clause 2(f) of the Bill defines “micro finance institution” as an entity (irrespective of its organizational form), which provides micro finance services in the form and manner as may be prescribed but does not include among others banks and coop. societies.  Self Help Groups which are informal groups but constitute a significant portion of MFI lending and mf lending by cooperatives should also form part of  Micro finance institutions for the regulatory purposes.
Clause 2(g) of the Bill defines Micro Finance services. It should also stipulate a ceiling in financial terms both for individual and group micro finance services so that focus on micro finance services, mainly for poor, is not lost.

Clause 8(2) of the Bill providing for composition of State Advisory Councils for Micro Finance at the State level should also include a women representative on the pattern of composition of Micro Finance Development Council (clause 4(g))

Clause 26(1) of the Bill provides for   the Reserve Bank causing inspection to be made of books of account or any other record of any micro finance institution, by an inspecting authority approved by it. It is not clear whether such an inspecting authority will be within the ambit of the RBI or outside. 

Also, under Clause 38 (1) of the Bill, the RBI may, with the previous approval of the Central Government, delegate any of its powers conferred to it under the Act to the NABARD in respect of any micro finance institution or a class of micro finance institutions generally.
At present, the National Bank for Agriculture and Rural Development (NABARD) conducts statutory inspection of State Cooperative Banks, District Central Cooperative Banks, and Regional Rural Banks   on behalf of RBI under the Banking Regulation Act, 1949. Otherwise, also, NABARD is well conversant with the functioning of MFIs and their operations, as being pioneer of promoting Self Help Groups linked with banks and otherwise, which constitute a significant portion of MFI lending. If NABARD is envisaged to be designated as inspecting authority for MFIs, and/or delegated certain powers of RBI under the Act, it has to be ensured that its interests in promotion, development, capacity building, financial support by way of finance, refinance, bulk lending, equity support etc., to SHGs, NGOs and MFIs engaged in m f lending do not come in conflict with regulatory/inspection/delegated functions under the Act.  . Since RBI will be the policy making body for MFIs, it will be more appropriate if it conducts itself, in the initial years at least, inspection of MFIs and exercises powers under the Act, to get a pulse of MFI issues, problems, constraints and their practices especially in so far as they relate to poor to strike a balance between commercial and social lending compulsions of MFIs.

Clause 2(P) of the Bill provides for  “thrift” I.e.,  any money collected other than in the form of current account or demand deposits, by a micro finance institution from members of self-help groups or any other group of individuals by whatever name called, who are availing financial services provided by such micro finance institution.  Since MFIs will have their own limitations of expertise of managing such thrifts collected and as such thrifts will not be covered by the Deposit Insurance Corporation Act and by the statutory cash reserve/liquidity requirements, as applicable to banks, it may be advisable that such thrifts are collected as agents/Business Correspondents of banks and not otherwise.

Microfinance Focus, July 29, 2011: According to the recently released report of Pacific Financial Inclusion Programme (PFIP), Vanuatu’s enabling environment for financial services has become increasingly more flexible and transparent over the past five years.

Improved regulations such as the Secured Transactions Bill have allowed financial service providers to use movable assets as collateral against loans. Reduced Know Your Customer (KYC) regulations have permitted banking institutions to open accounts for people without official identifications.

Digicel has been given a letter of no objection to launch its mobile phone based payments system; and VANWODS, V-One credit union, the Vanuatu Agricultural Development Bank (VADB) and The Vanuatu National Provident Fund (VNPF) are now all under the supervision of the Reserve Bank of Vanuatu (RBV).

Further, a credit bureau will soon be introduced and other important regulations are under review.

The report however says that there is still significant room for further improvement and growth within the sector. It is estimated that only 37% of the demand for deposit services, 28% of the demand for loans and 25% of the demand for insurance are currently being met.

It was found that there is also a great opportunity to offer small short term loans that are not tied to entrepreneurial activities which money lenders and some small organisations are exploiting in urban areas.

The large amount of loans currently being taken for school fees reveal that people around the country have trouble managing short term household liquidity and need quick infusions of cash. However, most products are structured so that borrowers have to make cash deposits over a period of months in order to access credit, meaning they have to plan far ahead to take a loan when they need it.

Microfinance Focus, July 28, 2011: Pakistan’s Islamic Microfinance Network (IMFN) has now opened its membership for national and international organizations which are serving in the sector of Islamic Microfinance.

Launched in 2010, IMFN coordinates the efforts of its members to jointly address poverty alleviation issues, establish best practices in Islamic microfinance, develop and implement guidelines that comply with Shariah law.

Institutions which are practising Islamic Microfinance in their operations can now become IMFN’s Permanent members and other conventional microfinance institutions can become Observers members to learn about Islamic Microfinance System. The membership is also open for academicians and advisors.

According to IMFN, currently there are around 300 Islamic Microfinance Institutions in 32 countries including: Indonesia, Kenya, Afghanistan, Bangladesh, Sri Lanka, Yemen, Egypt, Sudan, Tanzania, Mauritius, South Africa, Malaysia and Pakistan are working on Poverty alleviation.

By Shakespeare Walla,

Microfinance Focus, July 28, 2011: Three editions of ‘the’ Bill to regulate microfinance in India have been scripted in 2006, 2007 and 2011. None have moved an inch from the Ministry of Finance, (Government of India) website, obviously forget being presented in the Parliament of India for ‘debate and decision’.

The latest 2011 Bill No. 3 gives a much needed temporary respite from the current MFI witch-hunt, however it appears to be drafted for this very purpose alone, its ends up too “ pro MFI” and hence may have to be a miracle for it to move a few inches from the website, forget being moved for debate and decision’.

Moreover given RBIs current role and bandwidth, don’t think the institutions would be very keen to regulate MFIs, especially given the large quantum of MFIs expected to mushroom under the new abysmally low minimum capital norms. NABARD eventually may, when proposed in the future Bill no. 4. Till then whatever little exists as regulation, is the best regulation.

“.. When fortune smiles on something as violent and ugly as revenge, it seems proof like no other that, not only does God exist, you’re doing his will…”   Quote from Kill Bill

Nominate to Delegate:  The RBI (i.e. RBI – Reserve Bank of India), like other central banks of the world  is inundated with several important roles  like monetary authority for India, exchange control, issue of currency, banker to the government, manage government securities, banker to other banks & such other important functions etc.

The 2011 Microfinance Bill proposes to make RBI (Yes, the same one with the same amount of work as in the above Para) the regulator for microfinance.

India aint West Africa where the central banks micromanage MFIs.

The drafters of the Bill know that getting RBI to regulate MFIs (under the new minimum capital norms) is impossible, if not difficult, hence they have provisioned for the RBI to delegate “The National Bank” for Agriculture and Rural Development i.e. NABARD (veteran institution for SHG Micro-Credit program, agriculture loans and rural finance in India) to regulate the sector, with ‘prior’ government approval.

Another approval towards this ‘prior’ government approval.  Why not be real & inline with previous Microfinance Bill versions 2007, 2010 propose NABARD as the regulator.

Free Markets and Archaic Caps:  The era of enjoying a 24%-60% APR range for MFIs is over. The commercial success of MFIs  attracted other players and competition got intense, buyer’s got savvier, a little nudging by banks complemented by some soul searching and introspection, the rates descended to the enjoying, chewable,  digestible 24%-34% APR range.

No magic wand, no legislation just good ol’ competition at work. The Bill proposes the regulator may impose certain limits on the interest rates and margins to be made.  What is the need for rationing, quotas and caps when India is progressive steering away from them across all sectors.  Let the markets determine the cost of the product (microcredit loan).

Constitutional Conflict: Money Lending is the item no. thirty in the State List of the Seventh Schedule of India’s Constitution which gives states jurisdiction over “money-lending and money-lenders” to control usury.

Amongst other rationale like dual regulation etc, MFIs argue that they do not ‘money lend’ but ‘lend money’ and hence do not qualify to be labelled as ‘money lenders’. Various cases (NBFC’s v/s State Governments) are pending across the three tiered court system of India. State Governments have argued for the need to control usury and usually won. They may be in no mood to relent when it comes to the Bill proposing to keep MFIs outside the ambit of money lending.  Intuitively, I think the Hon. Court will be supreme and decide. Get ready for a long haul.

Minimum Capital: The 2011 Malegam Committee had proposed US$ 3 Million as the minimum capital for an MFI NBFC, the Bill proposes US$ 12,000 for an MFI. Come one, Come all.

From the current 1000 or so MFIs, India would have 100,000 or maybe more MFIs, which the Bill proposes RBI (Yes, the same one as in Para 1) to, manage.  Maybe, NABARD would also think twice.

Let’s sum it; the bill gives a much needed temporary respite from the current MFI witch-hunt. Given the complex issue of state jurisdiction over ‘money lending”, the proposed new definition and resultant projected numbers of MFI, don’t think the central bank given its existing roles and bandwidth would be very keen to take up this task of also managing MFIs.  NABARD eventually may, whenever proposed in Bill No. 4. Till then whatever little exists as regulation is the best regulation.

Microfinance Focus July 28, 2011: Financiera Independencia, a Mexican microfinance lender of personal loans to lower income segment individuals and working capital loans through group lending microfinance, on Wednesday announced results for the three and six month periods ended June 30, 2011.

Independencia’s net income for the second quarter of year 2011 declined 60.3% year over year to Ps.57.0 million.

Highlights of 2Q11 are as follows:

·         Total loan portfolio of Ps.6, 742.9 million, a 25.2% year-over-year increase, driven by AEF and AFI acquisitions and significant growth at Finsol.

·         Independencia’s individual new loan origination increased to Ps.996.1 million, up 4.0% year-over-year and 14.8% quarter-over-quarter.

·         Non-performing loans to total loans ratio down to 9.8% in 2Q11 from 11.2% in 2Q10 and up from 8.2% in 1Q11.

·         NIM after provisions including fees improved to 44.6% in 2Q11 compared to 42.6% in 2Q10.

·         Provisions for loan losses increased to 34.0% of financial margin in 2Q11, compared with 32.5% in 2Q10, and 29.6% in 1Q11.

·         Funding cost decreased to 10.82% in 2Q11, from 11.63% in 1Q11.

·         Net income down 60.3% YoY, and 36.7% on a sequential basis.

·         Equity to total assets of 28.4% compared to 34.1% in 2Q10, and 30.0% in 1Q11.

·         ROE in 2Q11 decreased to 7.6% compared to 12.1% in 1Q11, and to 19.8% in 2Q10.

Commenting on the results, Noel Gonzalez, Chief Executive Officer, said, “Our total loan portfolio rose by 25.2% year-on-year this quarter to Ps.6, 742.9 million, particularly reflecting significant growth at Finsol since its acquisition as well as the acquisition of AEF and AFI earlier this year. We have also begun to see an early recovery in Independencia’s individual loan portfolio this quarter, with loan origination up 14.8% quarter-on quarter and 4.0% year-on-year. This is the first quarter since we tightened our credit scoring model at the end of 2009 that we see growth in this loan segment.”

By Sasidhar Thumuluri and Sonali Chowdhary,

Microfinance Focus, July 28, 2011: Recent media reports about potential collapse of BASIX’s flagship company Bharatiya Samruddhi Finance (http://www.livemint.com/2011/07/27003826/India8217s-oldest-microfina.html?h=E) are extremely troubling and severely detrimental to the future of microfinance in India. Banks, investors and the regulator can certainly prevent this catastrophe through swift action.

BASIX is an embodiment of financial inclusion in India, and its visionary founder Mr. Vijay Mahajan is a revered high priest of modern microfinance. Both BASIX and Mr. Mahajan have been pivotal to the emergence and growth of microfinance industry in the country. Since it’s commencement in 1996 this organization has continuously challenged the conventional wisdom of banking and tested every possible way of including the excluded in the financial system. Starting with a small experiment in Raichur district in Karnataka the organization has grown to serve nearly two million poor families today through a wide range of financial and non-financial services. Staying true to its mission BASIX always professed and practiced microfinance as one of the means to achieve the goal of livelihood promotion and not as an end in itself. Mr. Mahajan, through BASIX, introduced the practice of sustainable microfinance to the country and lobbied hard almost single-handed with banks, investors and governments for its due recognition much before other MFIs sought to transform themselves into commercial entities. BASIX’s experiments and bold initiatives helped pave way to an industry that today serves 30 million poor households, previously excluded from formal financial system.

BASIX has too many firsts to its credit which in a lot of ways opened doors for rest of the industry. First regulated microfinance institution in India. First commercial MFI to endorse and develop synergies with government’s flagship microcredit initiative – self help group (SHG) bank linkage program. First MFI to bring private investments into the sector including foreign direct investment. First to raise loans from commercial banks. First MFI to successfully lobby for and set up a local area bank. First MFI to introduce micro-insurance including crop, health and livestock insurance. First and perhaps the only MFI to offer cash flow based agri-finance to farmers and commercial intermediaries. First MFI to experiment with home improvement loans, education loans, water and sanitation loans as well as small business loans. First MFI to structure a securitization deal with a commercial bank. First and perhaps the only MFI to provide capacity building and financial support to other MFIs. First commercial MFI to offer business development services to borrowers.

BASIX, being the oldest professionally run MFI in the country, has contributed a lion’s share of well trained professionals to Indian as well as global microfinance industry. Today the organization has direct reach much beyond India. It offers in-house support to several microfinance institutions spread over some of the least developed countries in Asia and Africa.

Mr. Mahajan, despite an impressive line-up of degrees from some of the finest schools – IIT, IIMA and Princeton – that could have landed him on a career path envy of many, voluntarily chose to embark on a less familiar but much too difficult journey seeking to professionalize the “development sector”. For past 30 years he worked tirelessly in search of sustainable solutions to the economic problems facing the country while influencing scores of professionals to join him on the way. He virtually redefined the business of rural development through his two most important creations – PRADAN and BASIX. He deliberately engaged in policy, advocacy and sector building work right from the beginning as a complement to his direct work on the ground with a humble acknowledgement that no single individual or institution can meet the overwhelming challenge of promoting livelihoods for millions of poor. He has played key roles in shaping the financial inclusion agenda  of the country through memberships in high level committees of the Reserve Bank of India and other government bodies including the Committee to Reform Regional Rural Banks Act, Committee on Financial Inclusion, Committee on Financial Sector Reforms, RBI Task Force on Microfinance, Committee on Microfinance for Low Income Housing, Tenth Plan Working Groups of Planning Commission on Poverty Alleviation and Voluntary Action, Eleventh Plan Working Group on Microfinance and Poverty Alleviation and National Rural Livelihoods Mission Task Force. He was appointed Principal Advisor to Rajasthan Mission on Livelihoods by previous state government. He serves on the boards of Insurance Regulatory and Development Authority and Microfinance Development and Equity Fund. Mr. Mahajan has led the creation of several sector support institutions including Sa-Dhan, APMAS and MFIN. In 2006 He was elected to the Executive Committee of CGAP, a global microfinance consortium housed in the World Bank and currently serves as it Chairperson. Mr. Mahajan received several national and global accolades for his contributions to the society.

As a true leader BASIX has always placed the larger purpose of its being above short term organizational interests. The microfinance industry is at crossroads today and, as always, role of BASIX remains vital in leading the way forward. Thanks to Andhra Pradesh government BASIX now finds itself in the line of fire. The industry just cannot afford to let the peerless leader fall. In larger interest of all the stakeholders including millions of poor households it is essential to prevent the victimization of this champion by ill advised political action. Swift response by banks and investors through infusion of much needed capital is crucial and promises to yield positive dividends not just to these saviors but to the whole sector in the long run.

About the authors:
Sonali and Sasi are proud alumni of BASIX and currently live and work in Washington DC area

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Microfinance Focus, July 28, 2011: According to the latest findings from the Emerging Insight series of the ILO’s Microinsurance Innovation Facility, Micro insurers are now partnering with virtual networks for distribution of their microinsurance products.

Partners with virtual networks are attractive as they provide access to a concentration of clients (including unbanked and informal workers) at low costs, a financial transactions platform, and substantial brand power.

During its recent webinar “New Frontiers in Microinsurance Distribution”, Microinsurance Innovation Facility illustrated how MicroEnsure in Ghana which recently launched mobile insurance life products in partnership with two mobile operators, MTN and Tigo is benefitting from this opportunity.  The operators control 80 per cent of the Ghanaian mobile market.

These products are designed so that they drive the core business of the partners. For the MTN product, clients can complete enrolment, premium payment, policy management and claims through the mobile handset. The premium is automatically deducted from the client’s Mobile Money wallet.

The Tigo product provides cover based on clients’ airtime use. Though the product is free, clients must opt-in to the policy at a Tigo office. Each month clients receive a SMS message that details how much cover they have earned based on their airtime use.

Through these products, MicroEnsure expects to double the number of Ghanaians insured (excluding government-based health insurance) in one year.

With such networks existing in other countries as well, Microinsurance Innovation Facility believes that they can provide exciting opportunities for microinsurance.

Microfinance Focus, July 28, 2011: In the ongoing Pacific Microfinance Week 2011, International Financial Corporation (IFC) a member of the World Bank Group, is holding a workshop for microfinance operators to better understand and manage risk, helping them to build stronger institutions and service more clients in the long-term. IFC is a key sponsor of the Week, held in Vanuatu.

During the workshop, IFC trainers will provide attendees with an overview of globally accepted standards and approaches to managing credit, market, liquidity and operational risks. Participants will use IFC’s Risk Management Toolkit to gauge their preparedness to manage risk and assess where they can improve their systems and working culture. Trainers will discuss solutions to help institutions improve their risk management practices.

“Microfinance institutions need to develop strong risk management policies, structures and training programs for staff to manage risk effectively,” said Deva de Silva, IFC’s Access to Finance Program Manager for the Pacific. “Operators who cope with risk well are better equipped to handle downturns in the financial markets, making them less vulnerable and more resilient in the future.”

Along with the risk management workshop, IFC experts will also be discussing global trends in microfinance, including the role of women, and ways to overcome the challenges of distributing microfinance.

Microfinance Focus, July 27, 2011: During the Asia Network Summit (ANS) 2011, held in Manila 26-27 July, delegates representing the Asian microfinance sector discussed the future of the industry and the role of regional collaborations in enhancing efforts of building a stronger and more responsible sector.

Funded by the Citi Foundation with support from Appui Au Développement Autonome (ADA), the ANS 2011 is an initiative of the Banking With the Poor Network (BWTP).  It was attended by microfinance stakeholders from Bangladesh, Cambodia, China, India, Indonesia, Laos PDR, Nepal, Philippines, Pakistan, Sri Lanka and Vietnam.

The Summit was co-organised with the SEEP Network, ADA, the Foundation for the Development Cooperation (FDC) and the Microfinance Council of the Philippines, Inc. (MCPI). The ANS 2011 was held in conjunction with the MCPI annual conference which will be held 28 – 29 July 2011.

For furthering the collaboration, BWTP Network will facilitate discussion of its regional network collaboration strategy, which has been produced with support from the Citi Foundation and the SEEP Network and crafted with input from the region’s national microfinance networks.

The strategy aims to outline a blueprint for collaboration between microfinance networks, with an emphasis on strengthening the capacity of networks to provide services to their members and coordinate efforts towards advocating for a regulatory environment supportive of microfinance, with the ultimate aim of building stronger financial systems for the poor.

The participating networks included Credit and Development Forum (Bangladesh); Cambodian Microfinance Association; China Association of Microfinance; Sa Dhan (India); South Asia Microfinance Network; Indonesian Microfinance Association; Laos Microfinance Working Group; Center for Microfinance (Nepal); Microfinance Council of the Philippines, Inc.; Pakistan Microfinance Network; The Banking With the Poor Network; Lanka Microfinance Practitioners Association; Vietnam Microfinance Working Group.

According to Jack Lord Rubillar, BWTP Network Coordinator, “The ANS is a significant event for the industry, as collectively the practitioner networks and associations in attendance represent a significant percentage of the providers of microfinance products and services in Asia.”