Micro Finance in India

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The Planning Commission of India had in 2007 set up a High Level Committee for looking into reforms to be made in the national microfinance sector. The committee was chaired by Raghuram G Rajan who was a professor with the Graduate School of Business of the University of Chicago. The committee had provided its report during September 2008.

In its report the committee had stated that the microfinance sector of India was a successful one but several factors were limiting its progress. A major issue was the capability of the micro finance institutions (MFI) to generate substantial capital. The approximate demand for micro-credit in India is a significant one and so the MFIs needed to have several sources for generating their finances, in addition to loans from banks that may be regarded as a traditional source of finance.

Yet another major problem in this regard was the regulatory scenario that was in a far from desirable condition. The management information system in India at that time was also not developed well enough, thus adding to the problems.

The supply of management staff, which is properly trained, was a major hindrance as well. The report stated that if this problem could be addressed properly then the micro finance companies could think of increasing their operations substantially.

Micro Finance Institutions (Development and Regulation) Bill 2012

The Department of Financial Services has formed the Micro Finance Institutions (Development and Regulation) Bill 2012. According to Namo Narain Meena, a Minister of State of Finance the main aims behind introducing this step may be enumerated as below:
  • To create an accepted regulatory structure for promoting, regulating, and developing the micro finance sector
  • To provide the section of Indian population, which does not have access to banks, the ability to avail proper financial services
  • To assist with the consistent growth of the sector

The bill is a modified version of the one introduced in 2007 – Micro Financial Sector (Development and Regulation) Bill 2007, which had lapsed when the Lok Sabha was dissolved at that period.

The new bill is also expected to provide a constitution that will be used for the Micro Finance Development Council. The council will be suggesting the government on developmental policies, programs and other relevant steps.

The bill, introduced in May 2012, will aim to help the RBI set performance benchmarks for different sectors. These standards will be regarding justifiable means for recovering loan and other operational methods of the MFIs.

The RBI is also supposed to establish a microfinance fund that will be used for providing them loans, seed capital, and grants. This fund will also be used to provide training to professionals who are working in this sector.

State Micro Finance Council

The Micro Finance Institutions (Development and Regulation) Bill 2012 also enables the setting up of the State Micro Finance Council – this will be done either on a per state basis or for 2 or more states at a time. The decision will depend on the amount of microfinance business a state has.

The Council will be reporting to the Central Government on how the various measures, meant to help with the micro finance institutions’ progress, have been implemented.

Micro Finance Institutions (Development and Regulation) Bill 2012 – Industry Reception and Effect

There have been some last minute alterations to the microfinance bill and this has created a lot of problems for banks and other members of the financial industry. The bill has increased limit for loan credit by ten times, from INR 50 thousand to INR 5 lakh and this is expected to the nature of operations of the MFIs from lending to the poor to lending to the economically well-off classes. According to the bill this amount can be taken up to 10 lakh rupees by the RBI as well.

The suggestions made in the draft bill have been supported by the Malegam Committee, which had been established by the RBI in order to look into the various problems that plague the country’s microfinance sector.

A senior manager of Sa-Dhan, which was assisting the Finance Ministry implement the feedback on the bill, has revealed that the previously mentioned clause has been a recent addition. Sa-Dhan is a forum of companies that work on community finance.

A banker based in Hyderabad and working with the IndusInd Bank has stated that once this rule comes into play personal loans will get grouped as microfinance, further stating that with an upper limit of 5 lakh the originally intended beneficiaries might not be there.

Normally the MFIs provide small loans to the economically disadvantaged people at approximate interest rates of 26 percent. If the increased limit is accepted then it will help the MFIs lend to a greater group of borrowers.

Yeshwant Thorat who has previously served as the National Board for Agriculture and Rural Development chairman states that the increased limit is not in tune with reality. He has also questioned its justifiability from the context of social equality.

This step has left the MFIs looking for an answer. A senior official with SKS Microfinance feels that this could be part of governmental planning to make microfinance inclusive of SME funding as well.

The law ministry, according to some finance ministry officials, may have played a critical role in this regard. It appears that the finance ministry had only prescribed some limits but the law ministry was unwilling to authenticate the bill sans any upper limit.

Right now, the MFIs have a couple of options. They can take up the matter with the Union Ministers for Law and Finance but this would only serve to postpone the bill. Otherwise they could fix the credit limit at 50 thousand and then let it go up to INR 1-1.25 lakhs in case of special situations. In that case too the ministry might need to revert to the government for revising the amount.

The new and old versions of the bill have some other differences as well. Previously it had been decided that the state microfinance committees would be informing the center in case of lots of defaults and bad debts.

These committees were supposed to be placed at the state capital or in the capital of a nearby state but this could have made it harder for the poor to get access to them. These were also supposed to act only in advisory capacities.

The committees have now been empowered to inform any and every violation to the RBI. The bill has also advised for the establishing of district level committees that will be led by a collector or at least an additional collector equivalent officer. These meetings will be held at 3 month intervals. They are to be attended by representatives from the following entities:

  • Local lead bank
  • Regional MFIs
  • MFI Clients

However, these measures have not been deemed to be sufficient. The Principal Secretary (Rural Development) of Andhra Pradesh, Reddy Subramanyam, has stated that the states should be playing a bigger role with regards to regulating the MFIs.

Ramesh Arunachalam, who is a practitioner of rural finance and is also writing a book on the microfinance problems in Andhra has stated that lenders such as the banks and SIDBI are controlling the committees being set up to monitor the MFIs. He predicts that there could be a conflict of interest in future.

The previous bill had asked for the bigger MFIs to be given systematic importance – they were supposed to adhere to RBI directives in addition to the normal MFI related regulations. This suggestion has been done away for now.

Last Updated On 13-06-2012