Evolution of Microfinance sector in India
While a large number of thrift & credit societies existed in the organised sector employees, microfinance sector ‘to serve the poor and out of formal credit sector’ mainly came into being in India in late seventies & eighties, mainly supported by donors through grants.
The Govt. was a late entrant to the sector. One of the first Govt. supported program in India was NABARD’s SHG Bank Linkage programme which was started in 1992. Banks included nationalised banks, cooperative banks and RRBs. The programme mainly worked through development of SHGs. Most popular model still continues to be where SHGs have been promoted by NGOs/ Govt. agencies and are financed by Banks. Banking institutions have also been allowed to use the services of SHGs/NGOs/MFIs (not being NBFC) to facilitate their activities for lending under the sector.
MFIs have been working in the sector, for sometime now, however these organisations have gained momentum only in the recent past.
Legal & Regulatory Framework
NGOs many of whom also undertake MFI related activities, are registered as a Trust or a Society and hence are subject to a very rudimentary from of regulatory framework. RBI has permitted S.25 companies not to register as a NBFC as long as the entity does not accept ‘public deposits’. Even funds garnered through IPO route does not make a company NBFC, since ‘a share’ is not ‘a public deposit’. RBI also allows MFIs to access External Commercial Borrowings of upto $5 million per year.
Most MFIs are not NBFC and thus not subject to stringent regulatory provisions applicable to NBFCs. Although NBFC disclosure & regulatory framework was never devised with an eye to protect the borrower, but more to protect the shareholders and depositors. In fact central Govt. introduced a bill [Micro Financial Sector (Development and Regulation) Bill, 2007] on Microfinance sector in Lok Sabha in 2007 without much progress. Maybe the current imbroglio in the MFI sector would hasten the process.
AP Ordinance
After the recent spate of suicides reported in Andhra, AP Govt brought in an ordinance [Andhra Pradesh Microfinance Institutions (regulation of money lending) Ordinance 2010] to regulate the activities of various MFIs and to ensure that no person would use coercive methods in collection of loans. The Ordinance requires that all MFIs working in the state shall register within 30 days at district level specifying the villages /towns they are operating or propose to operate in. It also limits that interest cannot be more than the principal amount. It may be noted while Andhra already has a legislation entitled ‘Usurious Loans Act 1918’, prohibiting charging of any excessive interest rates. However it has been observed that the concerned act has been used very rarely, although this Act with certain variations has been in place in many states.
It may be noted that already MFIs are planning to challenge the legality of the above ordinance in the courts on the grounds that they are not NBFCs and hence the ordinance cannot apply to them (as reported in some sections of the press).
Conclusions
§ Huge demand exists for making credit accessible to the last person.
§ Presence of a number of MFIs with ‘maximisation of profits / targets’ has allowed multi loans being given without proper assessment of borrower’s repayment capacities.
§ In many cases, SHGs which formed the social group for assessment of a borrower’s situation are missing or are not effective.
§ While expansion of MFIs should be welcomed as they will find innovative ways to reach as many as possible, however presence of proper Legal and Regulatory framework is the other side of the coin for balanced development of the sector.
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