Microfinance Focus, August 17, 2011: Galvanizing support for the Microfinance Institutions Development and Regulation Bill 2011, the Association of Karnataka Microfinance Institutions (AKMI) and FKCCI (Karnataka Chambers of Commerce and Industry) jointly organized a roundtable on the Bill this Tuesday in Bangalore, Karnataka.

Moderated by Ramesh Ramnathan, Chairman, Janalaxmi FInancial Services, the meeting saw the participation of Bangera J R, President FKCCI, Aloysis Fernandez, Chairman, AKMI and K R Ramamoorthy, EX-CMD of Corporation & ING VYsa Banks.

"Bill was necessary for Indian Microfinance Sector, this is just a framework, the industry need to change the present scenario and work towards making an enabling environment" said Aloysis Fernandez.

Some of the other attendees included Vijay Kumar, GM Syndicate Bank, Prabha R, Ex-GM - Canara Bank, Achala Savyasachi, Vice President - Sa-Dhan, Sandeep Farius, MD, Elevar Equity, K Sheshadri, Chartered Accountant, Suresh K Krishna, MD, Grameen Koota, Varadarajan Krsihnamurthy, Hindu Business Line, Vivekanand Shalimath, Chairman, IDF Financial Services and Shivashamugam K , Sr. VP , FKCCI.

Speaking about the factor that led to the microfinance crisis, Mr. K Sheshadri said that the donor money which later converted Prompters equity by converting NGO to NBFC is the fundamental issue of all problems.

Ujjivan’s MD and CEO, Samit Ghosh said that since RBI is independent body, it is good that they should regulate the industry. Sandeep Farius, MD, Elevar Equity added that this legislation brings consumer at the centre stage which is important.

While AKMI feels that the draft microfinance bill is a very positive development for the sector as it brings the sector into the ambit of organized financial services, it said that the regulations, norms & requirements set by this bill should not only cover the microfinance institutions but any organization: state government or bank led microfinance programs serving the same customers base.

The Association has listed out specific feedback of its member institutions on the Bill

Section 2.(a): APR-Definition

The APR has been defined as “aggregate rate consisting of interest, processing fees, service charges and any other charges or fees charged by the micro finance institution on any financial assistance granted to any client”.

The APR should contain only the interest rate & processing fee charged by MFIs. Other charges like insurance premium etc, if any levied by MFIs are not their income since they are associated with the additional services rendered.

Section 2.(f): Purview

Banks and Co-operatives are excluded from the purview of the bill tough they are also undertaking microfinance activities. This should be appropriately addressed in the bill.

Section 2.(g): Scope of  Microfinance

It is mentioned that micro‐credit, thrift, remittance, pension &insurance services can be provided by MFIs. Does it mean SI-MFIs can offer saving products to their clients? If so, it is a welcome measure which facilitates MFIs to have access to cheap funds. Hence the Bill to mention the type of MFIs eligible to offer thrift facility and the mandatory pre-requisites.

Further the task of insuring depositor protection needs to be incorporated in the bill.

Section 2.(p)

Thrift services should be provided not just SHG or other groups but also to individuals. Thrifts are allowed as term or recurring deposits. Flexibility of frequent withdrawal by the clients has to be provided.

Section 2.(g).(1):  Microcredit Definition

The present micro-credit limit of Rs. 50,000 has remained unchanged since a long time. RBI may be authorized to define the microcredit and lending limit periodically keeping in view the inflation.

Section 5: Micro Finance Development Council

The Micro Finance Development Council should have representation from industry bodies like MFIN or Sa-Dhan and independent experts of the microfinance industry from the rating agencies

Section 8.(2): Constitution of State Advisory Council

There should be at least two members in the council from the microfinance institutions. These members should preferably be from the MFIs representing different models of microfinance (SHG,JLG etc.).

Section 8.(3): Functions of State Advisory Council

The state advisory council should also oversee the development of microfinance in the state in terms of area of coverage of underserved areas etc.

Section 12.(1).(c): Net owned Funds limit

The minimum cap of net owned funds should be stipulated as Rs. 25 lakhs as it will prevent mushrooming of large number of MFIs and would encourage only the interested and capable organizations. It would also facilitate better regulatory supervision.

Section 24.(2).(e): APR specification

While specifying the maximum limit of APR charged by MFIs to the clients the RBI should also specify the maximum APR which the banks could charge to MFIs. The same should be revised from time to time by RBI so that requisite APR margin is maintained to meet the operating and other costs of MFIs. This may be imbedded in the bill.

Section 24.(2).(h): Common Code of Conduct

The Bill to specify the code of conduct to be uniformly followed by all MFIs irrespective of their constitution on the lines of Fair Practices Code of RBI to NBFCs for effective client protection practices. This will help in having common code of conduct for all categories of MFIs instead of adopting CoCs of various voluntary organizations like MFIN, Sa-Dhan etc.

Section 24.1)(g) & (i)

The requirement to provide information to the credit bureau & client protection code should also extend to state government, banks and other organizations providing micro finance to this customer segments.

Section 30.(1) Microfinance Development Fund

The size of the fund and the financing microfinance sector needs to be well defined. The size of the fund needs to be substantial to take care of the financial requirement of MFIs

Section 29: Micro Finance Development Fund

It is more appropriate to create an independent organization to manage the micro finance development fund instead of RBI.

Section 38.(1): Delegation to NABARD

The RBI, with the previous approval of the Government, may delegate any of its Powers with respect to any class of MFIs to NABARD. It indicates that NGO-MFIs may be governed by NABARD till they become SI-MFIs. However the nature of delegation, class of MFIs needs etc. to be clearly spelt out in the Bill. Also a consideration should be done whether NABARD should be given the role of regulator of MFIs given its active participation in SHG promotion.