In the aftermath of Andhra Pradesh microfinance crisis, erupted in 2010, RBI appointed a committee under the chairmanship of Shri Y H Malegam to study issues and concerns of the Microfinance Sector. Non Banking Finance Companies (NBFCs) were then dominant in the Andhra Pradesh MF sector. Irresponsible lending and recovery methods of a few of them had triggered the crisis.
Based on the recommendations of the committee, RBI created a separate category of NBFC-MFIs, and issued a comprehensive regulatory framework exclusively for NBFC-MFIs in December 2011. This framework is in vogue since then, with some revisions in some of the provisions taking place intermittently.
A lot has happened, in the recent past, in the NBFC-MFI Sector. A major NBFC-MFI (Bandhan) became a full-fledged bank, eight of them got converted themselves into Small Finance Banks (SFBs) and few were merged with mainstream banks (e.g. Bharat Finance with Indusind Bank). As a result, by September 2020, the share of NBFC-MFIs in the total micro-credit portfolio in the country shrank to around 30%. Mainstream banks (private and public sector) along with SFBs hold around 72% of this portfolio.
In view of above, RBI vide its June 14, 2021 press release has issued a 30 page “Consultative Document on Regulation of Microfinance” (henceforth “Document”) seeking comments from public at large. The document (on page 16) has also spelt out a few specific “points for discussions” for this purpose.
This needs to be welcomed as the MF industry in our country is registering an impressive CAGR, in terms of number of borrowers and outstanding loan portfolio. More and more poor citizens, both from rural and urban areas are seeking micro loans, and are likely to increase exponentially, particularly in view of the financial distress Corona pandemic has inflicted on them.
This small note extends some critical observations and feedback / suggestions in two parts; the first part covers “general feedback” and the second one is confined to the above-mentioned set of “points for discussions”
Part- I : General Feedback / Suggestions
The document has provided a “snapshot” of the MF sector by giving a set of statistics. This is quite helpful. However, all the numbers are reproduced from the quarterly report published by Sa-Dhan, a self-regulatory organization of MFIs in the country. Not to cast any doubts about the authenticity of data collated by Sa-Dhan, it is felt that RBI should be tracking all the relevant numbers in the MF sector in the country itself for two reasons; (a) Sa-Dhan represents only one of the micro-loans providers i.e. NBFC-MFIs and (b) country’s central bank and regulator should treat this sector with all seriousness as it is encompassing tens of crores of our Bottom of Pyramid Population. Further, it would have been helpful, had RBI provided a kind of trend-analysis of the entire MF sector, instead of providing a snapshot of a few parameters as on September 30, 2020.
It will be desirable to bring specific objectives of the proposed “Regulatory Frame for Micro Finance” upfront at the beginning, may be in the form of a preamble. It will be akin to “Statement of Purpose” incorporated in any enactment. The correctness of the provisions in the “regulatory instruments’ ‘, may be a master circular to be issued by RBI, will be decided in view of the extent to which they facilitate fulfilling “objectives” spelt out in the preamble.
For example, the Document has enlisted objectives of micro-finance, inter alia, increase in income levels, improve overall living standards etc. (para 1.1 on page 2). There is a need to evolve monitoring mechanisms by the regulator, to satisfy itself whether infusion of micro-credit over a period is actually resulting in sustained achievement of the objectives of micro-finance.
The Document has not dwelled adequately on one of the most sensitive issues, warranting regulatory intervention, i.e. recovery methods. As we know, the social and political fallouts of undesirable recovery methods have costed dearly to the entire industry and nation, in the past
In view of the financial illiteracy and being under perennial financial distress, poor borrowers are not in a position to apply their rational minds while entering into financial relationships with the micro-lenders. They are not in a position to exercise discretion while saying “yes” to the amount of loan, rate of interest, repayment schedules, amount of EMIs etc. Many times their consent to the terms of the loan, which they are unable to fulfil, is the root cause of subsequent tensions in lender-borrower relationships. On the other hand, the corporate lenders are in a much stronger position in every respect vis-à-vis their poor borrowers. Hence, there is a need to fix the onus on the micro-lenders, if it turns out that the borrower has over-borrowed beyond his repaying capacity.
The document in quite a few places has suggested that the respective Boards of Regulated Entities (that is micro lenders) shall lay down appropriate policy framework to deal with important aspects of RE’s microfinance activities; for example repayment (para 2.3.5 on page 13), assessment of over indebtedness (para 2.3..3.3 on page 13) and assessing income levels (para 2.3.2 on page 12). As per the Company’s Act, the Board of each registered company will be held responsible for the conduct of the company and hence will have to lay down necessary policy framework. The question is providing benchmarks, providing monitorable performance parameters against which the decisions of the RE’s Board can be assessed. And such benchmarks can only be spelt out centrally by the regulator, no other agency.
Crores of poor people are caught is a vicious cycle of lack of income generating avenues; uneven income streams; unexpected events demands reasonably big amounts (like medical emergencies, extreme climate events etc); compelled to seek external finances even for consumption smoothing; availing loan, though eases out cash-flow distress in immediate future, servicing the debt further stresses the family cash-flows; avoiding default in order to save the blemishes on credit track record leads to seek loan from some other micro-lenders etc. One intervention, as has been pointed out by many, is to ensure that a higher proportion of loans availed by the family will be deployed for newer income generating activities. That is a win-win area for lenders, for borrowers and for the country. This is possible only when the micro-lenders shift from a minimalist approach of pumping micro-credits to a “credit plus” approach. This approach involves extending services by the micro lenders like realistic appraisal for their micro-projects, guiding in establishing market linkages, bookkeeping etc. to the micro-borrowers. This can be done even by charging reasonable fees to the beneficiary borrowers. Micro-lenders are less likely to engage in such credit-plus activities, as they are non-remunerative. RBI, as a regulator, should step in to nudge them, even by providing incentives if required.
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