India’s Microfinance Bill and Financial Inclusion
The draft Microfinance Bill placed by the Ministry of Finance on its website on 6 July 2011 represents a major step forward in the government’s engagement with the microfinance sector. In the first main paragraph of its circular of 3 May 2011 the Reserve Bank of India made a clear statement of the decision to regulate the microfinance sector as a separate category. However the circular itself focused on the priority sector status of bank loans to MFIs and did not indicate how the decision on separate regulation was to be implemented in practice. A reading of the draft Microfinance Bill clears this uncertainty to a large extent and creates the expectation that a promotional framework for microfinance as a tool of financial inclusion can now be put in place. However, the bill does raise the following questions:
- The power to set rules on the conduct of business between MFIs and their clients would result in the regulator micro-managing a business relationship
- The power to delegate any aspect of development or regulation means that the main supervisory function would be delegated.
What follows first a brief presentation of some the key provisions of the bill that are of greatest interest to those engaged in the practice and provision of microfinance services:
It is apparent from the table that the bill proposes the adoption of many good practices. Nevertheless, a couple of comments:
First, the micro-management of the business relationship between MFIs and clients recommended by the Malegam Committee and evident in most of the “business conduct” provisions of the bill risks leaving the regulation of the microfinance sector open to changing political winds almost in the way that the sudden promulgation of the Andhra Pradesh legislation brought microfinance in the state to a halt. It could be argued that the RBI is a highly respected, careful and knowledgeable institution and, therefore, it will only make changes that are practical, reasonable and necessary and will resist pressures to effect changes purely in response to political winds. M-CRIL expects that this will be the case.
Second, is the provision of delegating powers likely to result in the main supervisory function being performed by NABARD? Or is it simply that the RBI does not want to (i) perform the development functions incorporated in the bill, and (ii) supervise large numbers of small NGOs that it is not equipped to reach or understand.
If the RBI takes direct responsibility for supervising NBFCs (which are the largest MFIs) and delegates the supervision of NGOs to NABARD, this provision is reasonable and positive but greater clarity on the matter would be enlightening and more specific drafting, useful.
M-CRIL welcomes the draft bill as a means of transforming the microfinance sector into a beacon of hope for the financial and economic inclusion of millions of low income families across the country.
India’s Ministry of Finance released the much awaited draft microfinance bill which is to be introduced in the country’s parliament shortly. This post is the next in a short series of commentary on the bill by a variety of experts from the region on what the bill means for India and the global microfinance industry.
Fine tuning financial inclusion and MF Bill
Recently Finance Minister said that the primary expectation of the nation from banks, including NABARD, in the next decade was to eradicate financial exclusion. He stated that the biggest challenge was to deepen and broaden the inclusive nature of growth which is the central focus of the Government’s agenda. Here are some useful tips for way forward for the task
1. SHG-Bank linkage, MFIs ,Kisan Credit Card (KCC) BCs remain attractive vehicles for financial inclusion in the rural financial landscape. While no doubt these models facilitate financial inclusion, one should not fail to observe the inherent phenomenon like continuous drop out and inactive/inoperative accounts in these conduits are causing serious concern and amply demonstrating the unceremonious exclusion of once ceremoniously included poor. .The drop out was reported by 43% of the SHG The drop out rate was 8.2% of members.(Srinivasan’s report on Indian MF sector) This event also incurs cost. and wastages. In the context of FI being the central focus of Government’s agenda the sordid happenings like drop outs, group mortality, defunct in MF arena is unjust and unfair remaining neglected. ‘Deepening’ requires not only the nascent inclusion but also sustaining the presence of already included, The exclusion of already included merit immediate attention of policy makers and apex institution like NABARD/RBI for making these models into viable one with intensive MIS on this matter for sustaining the inclusion.
2.Role of RIDF & NABARD
The Finance Minister further said that agriculture sector should enhance production and focus should be on improving the situation in Eastern India and dry lands. These region requires adequate infrastructure development to absorb the credit productively. The continuous presence of low Credit/Deposit ration (CD Ratio) of the banking system over a period of time in this region comparatively with others in India indicates inadequate infrastructure facilities(roads, bridges, transport, Market yards. Power, warehouse, communication etc., ) for effective broadening the financial outreach. Dr Rengarajan’ committee report on Financial Inclusion highlighted the fact that ‘ In the absence of this ( physical assets)Financial Inclusion cannot work’.(Page 106) It is therefore suggested that RIDF(Rural Infrastructure Development Fund ) need to be arranged in tune with the demand arising from Potential Linked Credit Plan and District Credit Plan by NABARD as it would facilitate reduction in infrastructure gap on one hand and increase financial inclusion with enhancement of productivity of micro credit on the other
3.MF Bill some inconsistencies
3.1 There is ambiguity in the terms ‘Institution’ and ‘micro’ . The institution should not confine to credit services only. The ‘micro’ need to be defined more ethically with non monetary consideration besides monetary term from development perspectives.
3.2 Regarding Classification of qualifying assts’ as priority sector, I consider that treatment of bank financing to NBFC – MFIs as ‘indirect finance’ in general is not ideal one and making them eligible as ‘priority sector advance’ status to such finance (85% of total asset) is also irrational. Because in the first, it keeps the principal funder or supplier –the banks away from the ultimate poor borrowers and eventually they are kept dark on the happenings of their micro credit -so called ‘qualifying asset’ at client level .embedded with the declared ‘characteristics’. This is much against the norms of ‘supervised credit’ followed by the banks under this sector advances at field level. Second the detailed guidelines for ‘priority sector advance’ , meticulously designed by RBI, with the focus on development of agriculture, small scale industry and services sectors at large in rural area with an exclusive sub sector ‘weaker section advances ’ for the upliftment of poor , cannot be adopted justifiably by NBFC- MFI .Earlier, Priority sector (P.S)advances guidelines( issued by RBI for the banks) have been meticulously drafted for each one of the schemes under the above sectors taking cognizance of the economics of the activity concerned and accordingly the norms and procedures for loan amount, margin, interest, collateral, eligibility, moratorium, repayment schedule for all the micro credit products have been worked out. For certain schemes like crop loans, livestock, coverage of insurance is mandatory .Besides, both outlay for this sector and the schemes to be covered are to based on the service area credit plan for the banks. I am afraid all these credit discipline rules are truly followed by the so called NBFC-MFIs in practice.. Even the recommended norms for repayment , pattern ( weekly. fortnightly Monthly, )/ moratorium period do not rationally coincide with income generation of the activity financed( e.g. under P.S , repayment for crop loan only during harvest period, initial repayment holiday for many types of livestock loan, ) There are therefore lot of inconsistencies from development perspectives in practice..
4.Imperative for effective monitoring
In fine, the concept of ‘Priority sector advances’ and ‘Microfinance’ as conceived by Apex bank /policy makers in India, have immense development potential values and have more positive role in the battle against poverty. But many times for the sake of regulation of the institutions albeit necessary, there appears to be a lot of compromises on development perspectives. Reckoning the loan to NBFC-MFI as priority sector advances is one coming under this purview. In this regard we have enough lessons from RRB functioning in India in terms of its contribution towards the welfare of the rural poor .It is not clear whether this priority status MFI loans would become part of total PS credit included in District Credit Plan for the banking system as a whole for the district. Further I wonder whether the performance of these MFI’s under this classification priority sector status is monitored effectively in the various coordination forums at block/district/.state level (BLBC/DCC/SLBC) created for the bankers and development agencies by RBI under lead bank scheme. Once these NBFC-MFIs are brought under regulatory frame work , then these institutions need to participate in the above mentioned coordination forums for exchange of financial information and coordination with other financial players . We have already enough development and coordination mechanism in rural financial landscape and stratgey is needed how to effectively utilise these exsisting mechanism for efficient implemntation of MF Bill at grass root level to achieve the desired gaol . However qualitative inputs and directions are presented in the Bill , the effective supervision on implementation at grass root level is called for. Greater onus lies with NABARD in this regard
5. Client protection- Grievance re-dressal Mechanism
Since Reserve Bank of India made a clear statement of the decision to regulate the microfinance sector as a separate category, there is a logical necessity to treat the MFI’s customers as separate category with the clear distinction from others for purpose of re-dressal of their grievances relating to access of both financial and non financial services .Unlike the customers of other FIs, MFI customer are disadvantaged and poor demanding both financial and non financial services for their up-liftment. Besides financial services related issues, if the poor client brings grievances relating to access to non financial services like power, transport, marketing, farm inputs, required for their IG activities (financed by MFIs) , does this mechanism consider this grievances also?
What I emphasize here is that ‘client protection’ should ensure provision of all MF services besides micro credit and other non financial supporting services (single or severally) holistically to the clients according to their need so that qualitative positive impact on poverty reduction is ensured more transparently and monitored both from regulatory and development perspectives as well instead of mere adhering some mandated out reach target, conduct codes and claiming some credit rating quantitatively at institutional level .