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Microfinance Bill - Falling short of making meaningful changes
Submitted by mffocus on Fri, 07/08/2011 - 00:21
By Sanjay Behuria,
Microfinance Focus, July 8, 2011: With apologies to all the practitioners and experts in microfinance, I am commenting on the Draft Bill - I am no expert, though I am a keen student. I have not been involved in either the drafting of it or followed the stages that it went through before this final draft. So please read this with caution. I am only commenting at the high level, without going into the nitty-gritty of what could well become law in the next parliament session. This therefore is neither a 'critic' nor an 'appreciative' - it is simply my assessment of how it is likely to impact the sector to deliver microfinance to clients whom this Bill seeks to protect. Considering what is going on in the sector, which is near collapse, the bill by itself is at risk of being consigned to 'has-been' rather than make any meaningful difference to well being of the sector it seeks to develop and regulate.
Defining non-prudential and prudential regulation:
The word “regulation” is a broad one that can produce confusion in this context. We need to distinguish between “non-prudential” and “prudential” regulation/supervision. Non-prudential requirements are not insubstantial, just that they do not involve the financial authority in vouching for or assuming any responsibility for the soundness of the “regulated” institution. Examples of such non-prudential requirements include:
• Registration and legal chartering of licensed entities
• Disclosure of ownership or control
• Reporting or publication of financial statements; norms for the content and presentation of such statements; accounting and audit standards
• Transparent disclosure of interest rates to consumers
• External audits
• Submission of names of borrowers and status of their loans (on-time? late? by how much?) to a central credit information bureau16
• Interest rate limits.
Regulation is prudential when in addition to non-prudential requirements, the provisions also include:
• Regulation is “prudential” when it is aimed specifically at protecting the financial system as a whole (systemic) as well as protecting the safety of small deposits in individual institutions.
• Prudential regulation involves the government in overseeing the financial soundness of the regulated institutions: such regulation aims at ensuring that licensed institutions remain solvent or stop collecting deposits if they become insolvent.
• Prudential regulation is generally much more complex, difficult, and expensive than most types of non-prudential regulation.
• Prudential regulations examples -capital adequacy norms or reserve and liquidity requirements, provisions, write offs.
Above definitions are courtesy of CGAP Occasional paper No. 4 -" Rush to Regulate".
In essence, intermediating agencies are required to be under prudential regulation while non-intermediating agencies may be under non-prudential regulation or some sort of licensing requirement. So is an MFI an intermediating agency? Looks to me here that RBI has imposed some kind of hybrid regulation on MFIs by calling them systemically important MFIs (though at places misspelt as systematically) and has recognized the long standing felt need of the sector to be recognized as a systemically important activity, thereby giving them the status of intermediating agency. If this is so, why should they be not allowed to take deposits - micro deposits, since everything else they do is micro? After all they are sought to be brought into micro prudential regulation?
As a part of this regulation MFIs will have to fulfill requirements of consumer protection, transparency, disclosure and truth in lending. All welcome measures that have already been hailed with the acceptance by RBI of the Malegam committee recommendations. This draft bill is a measure to confirm the authority of RBI to extend the Malegam committee recommendations over the authority of State governments and have one controlling institution over microfinance sector. To obviate any doubts on that it has specifically mentioned that microfinance is out of the jurisdiction of the State Governments, in section 42 of the Bill:
"The provisions of this Act shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.
Explanation : For removal of doubts it is declared that micro finance services extended by any micro finance institution registered with the Reserve Bank shall not be treated as money-lender for the purpose of any State enactments relating to money-lenders and usurious loans."
Also, I am a bit surprised that there is no mention of Local Area Banks as Banking Company?
Now the Bill, and its mission or preamble:
A BILL 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 and for matters connected therewith and incidental thereto.
I am not sure what the extended arms of BFIs means in this preamble. It would normally mean that they would do what BFI's are meant to do, but not doing - as an agent to a principal. This also means that principal is responsible for the agent's acts, as if it had itself done those acts. A real extended arm is where the entire transaction flow of microfinance is conducted by the MFI on behalf of the BFI for commission. It will also mean that the portfolio sits on the BFIs book. Nowhere in the Bill does it suggest that any such status is granted to either MFIs or BFIs. MFIs will borrow from BFIs to do what BFIs would normally be required to do and lend that fund at a prescribed margin. Now the RBI can tell BFIs that where they do not wish to go, they can go through MFIs, because RBI can under this Bill force the MFIs to follow RBI directives. What MFIs will do is Financial Inclusion for RBI, the same that BFIs do, with similar responsibilities but with dissimilar rights. Financial Inclusion for MFIs thus far was a positive outcome activity and not the prime reason for their existence or mission. They will continue to depend on BFIs for debt to fund their operations without corresponding financial leverage of an intermediating agency that a BFI has.
This Bill will marginalize MFIs as instruments of financial inclusion which the BFIs are unable to fulfill. Since most policies will be dictated by RBI, the safety of the funds will be no one’s responsibility and the activities of systemically important MFIs is unlikely to make any social or economic impact on the lives of the beneficiaries, if loans are not repaid and new loans are not extended. The RBI could have either made the MFIs real extended arms - shared responsibility of BFIS and MFIS in proportion to their roles, or allowed micro deposits and made MFIs into truly micro intermediating agencies - responsibilities corresponding to the proposed regulation. With this hybrid variety of regulation the chief mission of MFIs is lost, as their source of funds is not assured. There will be consumer protection, but there may not be any consumer - for the MFIs.
Author: Mr. Sanjay Behuria is an independent access to finance consultant working globally with funders and consulting firms. His views in this article are purely his own and in no way reflect the views of the organizations he is associated with.
(Disclaimer: Views expressed in the article by the author are his own and do not necessarily represent those of Microfinance Focus. Microfinance Focus does not take any responsibility for correctness of the data presented by contributors.)
Whats the diffrence?
Like Mr. sanjay, I am just commenting on the Draft Bill - I am no expert, though I am employee of a small MFI. This therefore is neither a 'critic' nor an 'appreciative' - it is simply my views and questions.
As per my view the proposed bills is leading to lots of confusion getting into industry and the sector:
It is said that MFI now will come under the purview of RBI. So what's the diffrence, previously the major industry players are NBFC (which contributes to around 90% of microfinance portfolio or can say cover 90% of Industry Portfoilio) directly comes under RBI purview?
Is the bill has been brought to cover the rest of small MFI's which does not even cover 10% of industry portfolio. Also individually none of them even cover 1% of Industry portfolio. This will discourage the small MFI and/or will lead to vanish them from industry as they are in there very initial levels and the bill will lead them to comply with lot of legal formalities which they lack during there intial levels. Also they have to spend lot of there financial strenth formally or informally to comply with this Laws.
Also the proposed bill doesn't disclose the actual hurting issues to MFIs as well as Clients of MFIs i.e. intrest cap %, processing fee cap %, Margin caps in new as well as old MFIs%, How will Multiple lending and defaulting client would be handled. what should be steps of recovering from defaulting clients( All this point has brought this crisis and creep to the sector from AP also the same has brought the thought of having regulatory ). Hope rather than discussing and bringing much on MFI getting registered or not or is a company or not Law will be much focused on this points.
In my views a regulatory framework is Important to hold the wrong practise and defaulting clients of the MFI sector like tracing defaulters, tracing loans to reduce multiple lending, mandotory check of loan utilisation and its purpose, a intrest cap to avoid explotation of members, etc which are needed and are also well descibed in Malegam comitee report. But a mandatory on converting into a company as well as getting registered with RBI whether its a small company which has portfolio less than 2 crore is not needed. As it helps small investors to come into the sector with there small corpus. And if you look at all big players in Industry they have started somehow as NGO or small firms later on when they have ability to stretch and grow they themselves has converted into NBFC as its very much needed to get organised to raise funds from banks or Private sector. So there is no need of putting this kind of Mandate.
Old wine in a new bottle
Dear Sanjay
Old wine in a new bottle
1. Development through credit or poverty alleviation through micro credit , we had enough regulations and guidelines of expert committee’s recommendations for the formal sector institutions (commercial banks, RRB,s Cooperatives )since nationalization of banks in 1969. This norms broadly cover mandatory annual targets, concept like priority sector advances, weaker section advances, Lead Bank scheme, District credit plans, Village service area credit plan , coordination forums like DCC/SLBC,BLBC at various level , dovetailing government subsidy linked programme, SHG-Bank linkage programme etc. We do have par excellence regulators and controllers policy makers at apex level but all these factors helped much in strengthening the institution in the financial landscape but has not contributed substantially towards the ‘end’ ( the ultimate purpose of regulatory norms and institution, ) or the purpose for which these institutions have surfaced , being poverty alleviation at least as part of their financial intermediation task. .At this juncture, NGO/MFI/SHG sector showed some positive signal in making some dent in poverty canvas through Microfinance. But again I wonder these regulation have not made any significant transformation in the state of affairs particularly in social front Desired level of change is not possible unless ‘end’ perspectives are also incorporated in prudential norms and effective monitoring are ensured.. After all MFI emerged exclusively for the cause of the poor and regulatory measures should ensure more for achievement of the mission goal rather than strengthening them to become NBFC and , later LAB .Then what about the status of the poor client of the institution?
Lack of conceptual clarity
2. Coming to the Microfinance Bill referred to in the post , when the term ‘Microfinance’ is invariably used, it is imperative to define the MF concept clearly first in the bill. By any accepted definition (World Bank-CGAP,ADB, NABARD )we could observe that MF covers various micro financial services viz, micro savings, micro credit, micro insurance, transfer services, micro pension (of late)etc, It is unclear whether the bill covers all these MF services or only micro credit only? In that case of micro credit only , it should be termed as ‘Micro credit bill.’ and if MFI confines to micro credit only it should be rationally called Micro credit institution (MCI). Other wise blindly calling it MF and MFI is misleading due to lack of conceptual clarity the fact has been ignored by both academicians and practitioners as well in the past.. . In case of India post and Insurance companies, these institutions also provide MF services like micro savings and micro insurance services to the poor. Apex institutions like NABARD, SIDBI also extend micro credit services. By virtue of their MF services they also deserve to be called as MFIs and if so do they also come under the purview of this so called Micro Finance Bill. Further, how to bring other micro financial services under regulation or it is not necessary for the said purpose?
Prudential norms for institutional strengthening only
3. Malegam committee is ‘one more’ in the basket of committees related to rural finance. The contents of the bill pertains more on regulatory aspects for the institution delivering micro credit. Under prudential and non prudential regulation requirements to be honored by the institution are spelt out. Again these prudential norms are drafted more from the intuitional perspectives from the supply side (up to the delivery of credit). At the same time , the impact of the regulated delivery (after the delivery of the credit) at poor client level from demand side also assumes importance from the point of ultimate purpose of MF and its institutional formalities These norms are necessary to help strengthening the institution but it is not enough for the achievement of Microfinance social mission. To put it specifically is it not necessary to include the factors such as ‘ impact of credit’ and the level of advancement of the poor client either in prudential norms or non prudential one particularly from the pro poor MFIs? Here what is emphasized is that both regulatory aspects for supply side and development aspects for the demand side need to be taken cognizance of justifiably in the Bill for facilitating candid poverty alleviation
Rengarajan
Mr. Sanjay Behuria' comments on Micro Finance Bill 2011
Mr. Sanjay Behuria's comments on Micro Finabce Bill 2011 can best be considered as his apprehensions without any supportive facts and figures. At present MFIs are not regulated except NBFC -MFIs by RBi and many of the MFIS are follwing exploitative , anti poor, pro owner practices in the name of sustainability and profitability. Need of the Hour is to have some regulatory/ supervisory system for MFIs and RBI is the best agency to
regulate MFIs. Based on the experience and the emerging needs, amendments can always be brought in the Micro Finance Bill. Mr. Sanjay can be specific in suggesting amendments to the Bill ibid.
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