Microfinance: Issues for policy makers

VarunBhandari Lok Capital

 AP Crisis and the ensuing blame game Historical narrative of our various experiments with financial inclusion Exposition of RBI Notifications/Regulations What sort of regulation does this sector need and are we getting it ? Emerging trends and business models

Parameters Legal structure

Minimum NOF Products Scope

Pricing

Draft MF Bill Includes various legal forms NBFC, Society, Trust, Section 25 Company etc. Any SI MFI needs to be registered under Companies Act Rs. 5 Lakhs Microfinance services to include providing micro credit, collection of thrift, remittance of funds, providing pension or insurance services; any other services as may be specified Talks very broadly about RBI having the right to specify pricing and its components; Nothing specific mentioned

RBI Notification Non-deposit taking NBFC(other than a company licensed under Section 25 of the Indian Companies Act, 1956) Rs. 5 Cr Focus on Credit only

Qualifying Assets

Doesn talk about this

26% interest rate cap; 12 % margin cap Processing Fee not included within these caps Insurance Premium to include administrative charges as per IRDA guidelines Income limit of 60K(rural), 120K(urban) 1st cycle loan limit of 35; 50K later Total borrower indebtedness of 50K Tenure of >24 months for loans >15K No collateral At least 75% loans for income generation Weekly, fortnightly, monthly repayment options

Parameters Oversight /Regulatory Regime

RBI Norms

Others

Draft MF Bill MF development council - Mix of RBI, NABARD, NHB, SIDBI, Bureaucrats, MFI State Advisory Councils - State Govt, RBI, MFI representative appointed by Central Govt, SLBC Convenor Bank RBI Prime regulator can devolve powers to NABARD CAR, Provisioning Income recognition, Accounting Standards Deployment of Funds M&A / Ownership Transfer Excess profit fund and its usage Micro finance institution registered with the Reserve Bank shall not be treated as moneylender for the purpose of any State enactments

RBI Notification Primarily RBI with some role for industry associations / SRO

Largely restricted to CAR, Provisioning, other relevant accounting norms etc.

No mention of the same; May not possess the constitutional authority for the same as its only a regulator

Better regulation leading to higher levels of client protection, grievance redressal, fair pricing, transparency of interest rates Reduces overall profitability for the industry potentially affecting investor appetite Where would growth capital come from? Reduces incentive for MFI to be innovative regarding products, underserved geographies, newer operating models which would potentially reduce/slow down transformative change in this space

Legitimacy for industry associations Smaller MFIs would need to look for funding or become Section 25, Trusts, etc Higher initial & incremental ticket size of loans to gain customers Greater reliance on informal sector to meet entire credit need Larger financial services cos may opt out of microcredit altogether, or experiment with different holding co. structures Overall the higher CRAR norms are prudent; would however lead to stress on the AP MFIs New provisioning norms would impact short term profitability and capital positions of MFIs The pricing caps (both interest and margin cap) would result in a capped RoE range of 10-15% MFIs would be less open to experiment with newer products, newer geographies and operating models as they cannot charge more Perverse scenario where capitalised MFIs have little incentive to take loans at lower interest rates from banks Difficult to operationally implement the margin caps as long term cost of borrowing is hard to predict unless you opt for long tenor loans MFIs would need to focus on individual lending since each member is allowed to be part of only one SHG yet can avail loans from 2 MFIs

 The Bill has a much broader definition of microfinanceit includes thrift, risk cover, pension and payment services under its definition. While none of these aspects is fleshed out in the Bill, these are issues that RBI can adequately take care under the NBFC-MFI regulation The other aspect that the Bill provides is that any institution with a capital of Rs. 5 lakh can register and operate as an MFI. These small organizations never posed a big problem. Moreover, since trusts and societies are governed under the respective provincial laws, the states are in the best position to look at these institutions, including examining the extension of the Moneylenders Act to such institutions Now that RBI has taken the initiative of defining this space, it might be best left to the central bank to continue refining the regulation than create confusion with multiple laws governing the same space

 A number of microfinance institutions (MFIs) are looking to move out and/or move up the value chain Few MFIs have approached Microfinance Institutions Network (MFIN) with a proposal to move out, as they plan to serve a new segment of borrowers in the Rs 50,000 to Rs 5 lakh bracket. This way, the MFIs would no longer be guarded by the RBI regulation governing the MFI sector, but at the same time be able to cater to a huge untapped market Between the micro and the small, there is a segment which can be described as mini. This segment small entrepreneurs, traders, kirana stores, artisans, fabricators, service providers, etc need loans in the range of Rs 50,000 to Rs 5 lakh. The mainstream banks are, for the most part, not catering to the funding needs of this category of borrowers Vistaar, a Bangalore-based NBFC, used to be an MFI till a few months earlier, terminated its microfinance operations recently to avoid the fallout of the RBI regulations. Equitas Microfinance is diversifying into businesses like home finance (disbursed Rs. 2 Cr so far, avg. ticket size Rs. 10 lakhs) and commercial vehicle finance (disbursed Rs. 30 Cr so far, avg. ticket size Rs. 2.5 lakhs)

 Business model diversification: Gold Loans, Individual Lending, Lending to Men Financing the next leg of growth Social Investors are not enough Deeper philosophical issues
How are the target clients of microfinance agencies different from typical urban customers? Is there a need for greater regulation & intervention by the government because they serve the poor?

 Regulatory Notifications MFI Bill put up for comments by the public in June, will be tabled in the winter session of Parliament in November RBIs acceptance of revised Malegam norms lent some support to the sector and bankers/investors have taken notice Securitisation guidelines issued by the RBI increased holding period for MFI loans before they can be securitised from 3 to 6 months, which has an adverse impact on fundraising for the sector; MFIN has taken this up with the RBI Andhra Pradesh Situation Collections have not registered any significant improvement and are still hovering around the 10% mark Litigation continues against the AP MFI act which has now been sent back to AP High Court from the Supreme Court on procedural grounds, however a decision has to be reached by 31st December The AP government has formed an apex credit institution comprising of womens SHGs with a seed capital of Rs 500cr. It will lend at an interest rate of 12%, which will be further reduced to 3% based on repayment history and ticket sizes, tenor, installments etc will be similar to features of a MFI loan. It will also mobilise compulsory savings from members. Corporate Debt Restructuring Issue of Promoter guarantees was conceded by the banks at the last minute thus allowing the debt restructuring to be passed through in the government mandated deadline of 30th September Basic common terms include a 1-2 year moratorium on repayments, 12% interest rate and 8 year payment schedules, part debt conversion to equity/preferred Banks have assumed the right to appoint up to three directors (including the non executive chairman) on the board to oversee management of these institutions. Future Financial avoided as the promoter guaranteed the loans Banks acquired 60% of Trident Microfin by converting part of the debt to equity and preference shares at par