|Allowing MFIs to lend|
|Monday, 14 May 2012 00:00|
RBI jurisdiction good but rules need working on
Now that the Cabinet has cleared the Microfinance Bill which says only RBI will regulate Microfinance Institutions (MFIs), presumably this means MFIs can now heave a sigh of relief. Indeed, that’s why shares of SKS Microfinance rose 18% in early trades on Friday since, once the Bill gets passed, this means there will be no more laws of the Andhra Pradesh kind where state governments decide to frame rules for the working of MFIs. For the same reason, though, getting the Bill through Parliament isn’t going to be as easy as may be thought—several regional parties who feel MFIs were skinning borrowers may not like to give up what they consider their rights in favour of RBI.
Assuming the Bill does go through and becomes legislation, however, RBI needs to do a lot to fix the rules so as to ensure MFIs get enough place to be able to function. After the crisis in Andhra Pradesh, RBI had asked the Malegam Committee to examine issues and to come up with workable solutions. Malegam had come up with recommendations early last year that, at the end of the day, were shaped by the public perception following the Andhra episode. So, it suggested a cap on MFI margins, credit bureaus, restrictions on the number of MFIs that could lend to one person, ceilings on loans to individuals, restrictions on the amount of consumption loans that could be given, and so on.
RBI then came up with guidelines a year ago that diluted Malegam, but just a bit. Malegam suggested putting a cap of 24% on what MFIs could charge, RBI raised this to 26%; Malegam suggested a margin cap of 10-12% for different types of MFIs and RBI has adopted the upper end of the ceiling. Malegam wanted MFIs to have a loan-size cap of R25,000 and suggested that loans only be given to families with annual incomes of under R50,000. RBI doubled the individual loan ceiling as well as the overall indebtedness; as for the maximum incomes of households who can get MFI loans, this has been raised to a more meaningful R60,000 in rural areas and R1,20,000 in urban areas. While Malegam said staff costs varied between 5.9% and 14.3% of the outstanding loan portfolio, it assumed a 5% staff cost while doing its math. Even more problematic is the restriction that says at least 75% of the loan given has to be for income-generation—the only study the Malegam committee cites in its report says just a fourth of MFI loans are given for income-generation!
Once the MFI Bill is passed, RBI would do well to relook the guidelines. While wanting to protect small borrowers from rapacious interest rates is a good thing, it’s worthwhile to keep in mind the village moneylender is the alternative to MFIs and his interest rates are generally higher. Also, if MFI margins were as high as they’re made out to be, banks would have entered this space a long time ago instead of, as happens now, lending to MFIs who, in turn, lend to small borrowers.