Pigs will never fly again: The Regulatory Trigger
microfinance crisis

By Shakespeare Walla,

Microfinance Focus, December 9, 2011: Current sentiment around commercial financial inclusion (microfinance, business correspondents or anything to do with banking the poor) is at historic rock bottom. Government has over the past 2-3 years systemically tightened control, ordered closure of several channels i.e. removal of gold loans from PSL, banning chit funds, ordering a shutdown of retail deposit accepting RNBFC’s and most recently murdering the livelihood of over half a million post office savings agents.

Moreover with the only listed Indian  MFI  trading at an Atkins’s diet friendly 10% of its IPO price and other big MFIs  banging lender doors for the borrower friendly corporate debt restructuring packages, the mood is sharply reminiscent of Dickensian times. However unlike London weather, dark clouds won’t last and the author believes sunshine is around the corner.

Three triggers: a benevolent policy thanks to India’s stud central bank and a real robust demand powered by a constantly rocketing Indian population growth, increasing unemployment, worsening inflation, a proven puncture in the resilience of India’s growth story or the worst performing BRIC economy in recent times and stable like the rock of Gibraltar, universe fame stark Indian poverty.

NBFC-MFI. The Real Trigger: Basically, India’s stud Central bank of India which famously ducked the global financial mess has woken up to a decade old demand for a special category of NBFC’s i.e. NBFC-MFIs.  Result, MFIs have arrived; the Government has realized the role and importance of the MFI channel for financial inclusion. RBI will play a role similar to a venture capitalist: ‘policy’ investing in a category called NBFC-MFI and ensuring they grow by making the right policy and procedural framework.  A circular full of rules was issued last week, which I will categorize in three:

(Real) Rules of the Game (Entity Level)

$1 MM/INR 50MM capital requirement –Great, most existing MFIs comply.

Loans upto $1000/INR 50,000 – Great, most existing MFIs comply.

12% margin cap – Great, most existing MFIs ‘can’ comply. Concern only for Hedge Fund   investee MFIs

Take for Granted (Product Level)

Tenor - –Great, most existing MFIs comply.

Moratorium –Great, most existing MFIs comply.

Fillers: (These kind of conditions have never worked for any sector,  in any capitalist economy. Most of them are duds.)

1. Not more than 2 MFIs to a borrower – Well borrowers will always lie. See 3.

2. All sanctioning and disbursement of loans should be done only at a central location and more than one individual should be involved in this function – How on earth do you define central, say some kms of the equator? Well RBI should define the locus;

3. Household Income Eligibility for the Micro Loan to qualify as a Qualifying Asset – 5 Million of the 1200 Million in India pay taxes. Every one claims to be below the tax bracket. So again a real dud. Can’t expect MFIs to be playing the role of Income Tax Assessors (Not a bad idea though for increasing fee income)

The Secret Sauce: Banks will need to do periodic reporting to the central bank (RBI) on their exposure to NBFC-MFIs as a part of their priority sector targets and financial inclusion efforts. Due apologies to banks but don’t think any bank can or will want to displease the RBI through reporting stagnant cesspool figures for financial inclusion (exposure across various categories SHG’s, MFI-NBFC’s et. al.) and hence we will all see a definite uptick in bank disbursements to NBFC-MFIs.  Just wait for a quarter or two!

(Disclaimer: Shakespeare Walla is the author’s pen name. The opinions expressed are solely those of the author and do not necessarily represent opinion of Microfinance Focus. Microfinance Focus does not take any responsibility for correctness of the data presented by contributors.)

Author can be reached at shakespeare.walla@gmail.com


Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.

The RBI & Indian

The RBI & Indian Banking/Financial system still works on the famous 'chaturvarna caste system' where doing business with poor requires special status and to back them we have white clad souls whose sole agenda in life is to make false promises to win elections. The fall out in AP is due to lack in financial knowledge of Politician & Bureaucrats of their own subjects , whose cause they champion in their offices & assembly wells. The RBI looked most weak in all this episode many bankers silently whisper even today that Financial Inclusion is not possible without MFIs , since they cover the last mile in the Caste/class race.

Just like the judiciary says "let 100 culprit go scot free including kasab, let not one innocent be punished" now the Fin Min/ RBI motto is " let million poor die of hunger , but not due to pressure to repay loans" assuming debt pressure caused suicides!

So why this 'Kolaveri Di'!

Well thats the price we pay in democracy look at what happened to FDI in retail , no I am not supporting it but just to clarify when has Sushmaji last visited the sabji mandi to buy onions or a local store to buy oil. Thats the level of micro issue knowledge that our dear politicos have.

I would have loved to see more prudent approach of apex bank considering the option of MFIs becoming banks in these locations and be covered under disciplined norms so that they are more accountable for their work rather than shutting the shops altogether.

Just like we laugh at our previous generation for kicking coke out of India in name of swadeshi someday our children would laugh of us for inhibiting those million poor of their dream for me Micro Finance is kind of venture capital which every poor deserves in his flight/fight out of his/her caste & class!

Post new comment

The content of this field is kept private and will not be shown publicly.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Allowed HTML tags: <a> <em> <strong> <cite> <code> <ul> <ol> <li> <dl> <dt> <dd>
  • Lines and paragraphs break automatically.

More information about formatting options

This question is for testing whether you are a human visitor and to prevent automated spam submissions.

Sponsored Links

Microfinance Focus

Copyright @ Microfinance Focus. All rights are reserved. Managed by Ekayana Media