Microfinance Institutions Bill: Yet To See Light Of Day

Microfinance has been an important aspect of developing economies in general. In India too, it was a revolution of sort, as it provided much-needed financing options to the deserving underserved. It is hardly any wonder then, that this sector was awarded a priority sector window in banks.

For all its importance, the sector has remained in the news for the wrong reasons. One was the higher interest rates charged by the microfinance institutions (from 24%-36%), the second factor was farmer suicides in Andhra Pradesh, which allegedly occurred due to the inability to repay microfinance loans. These factors affected the sector overall. Listed player SKS Microfinance eroded almost over 90% of its market capitalisation. Thus, it is clear that the sector’s journey has been a highly volatile one.

Such issues have necessitated government involvement. Further, with the RBI staving off an active role in governing microfinance institutions (MFIs), the onus of providing solutions was on the government.

The government introduced the Micro Financial Sector (Development and Regulation) Bill in 2007, but it lapsed then. At this point of time too, as we fast approach the last day of the winter session (December 20, 2013) of Parliament, no decision is expected. The term of the current Lok Sabha comes to end in May 2014, and the Bill may lapse again.

Clearly, lack of consensus has held up the proposed law. The Reserve Bank of India (RBI) is not comfortable with the proposed regulatory structure for micro lenders as suggested in the Bill, and the Ministry of Rural Development believes that it is designed to protect micro lenders and will seriously hamper the country’s self-help group (SHG) movement.

Highlights of the Microfinance Institutions (Development and Regulation) Bill

• The Bill seeks to provide a statutory framework to regulate and develop the micro finance industry.
• The Reserve Bank of India (RBI) shall regulate the micro finance sector; it may set an upper limit on the lending rate and margins of microfinance institutions (MFIs).
• MFIs are defined as organisations providing micro credit facilities upto Rs 5 lakh, thrift collection services, pension or insurance services and remittance services.
• The Bill provides for a Micro Finance Development Fund managed by the RBI. The proceeds from this fund can be used for loans, refinance or investment to MFIs.
• The Bill requires the RBI to create a grievance redressal mechanism.

Where MFIs Stand

MFIs are witnessing difficult times. Around Rs 6000 crore worth of loans given by micro lenders are stuck in the southern states. MFIs claim that they are unable to recover the money because of a state law dating back to 2010. This has not only affected the MFIs, but also the banks, who are lenders to MFIs. A report suggests that banks may have to write off around Rs 7200 crore lent to MFIs.

We are of the opinion that if the bill lapses again, MFIs would find it difficult to sustain their business activities. Listed entities like SKS Microfinance may be among the biggest sufferers. Though the scrip has witnessed an up-move in the past 6 months, providing returns of around 70%, it is yet to reach the earlier highs it touched after its IPO issue in the year 2010.

While this is the impact on a micro basis, the lack of funding at the lower levels would hurt the economy in general, as most of the funding going into the rural areas plays a large part in driving growth.