Microfinance muddle

India’s microfinance movement— arguably the most comprehensive attempt ever at achieving ‘financial inclusion’ for India’s poor—is pacing ahead. That is despite regulatory imbroglio and amid intensifying debate over real and imagined conflicts between social and commercial objectives of microfinance.

By March-end 2007, microfinance institutions (MFIs)—under three main models of Self Help Groups-bank linkage programme, Gramin Bank/joint liability groups, and individual banking as in cooperatives— expanded their outreach to 50 million households and about 36.8 million borrowers, according to the ‘State of the Sector Report 2007’, commissioned by Access Development Services (an arm of Care-USA) and Ford Foundation, and released on October 9.

By the end of fiscal 2006-07, total loans outstanding under microfinance may have reached Rs 14,400 crore as against Rs 6,500 crore in the previous year, according to an estimate based on the data available in the same report. (While there are no official estimates of demand for micro-credit in India, a conservative figure is about Rs 1 lakh crore.) “Some of the leading MFIs have recorded high growth rates of 80 per cent per annum in terms of numbers of borrowers, reaching from 300,000 to one million clients each, and about 40 per cent in terms of loan portfolios,” says a recent review of the sector conducted by Micro-Credit Ratings International (M-CRIL).

Encouragingly, the microfinance outreach is also expanding from its southern stronghold to underserved states like Uttar Pradesh, Madhya Pradesh, Rajasthan, Jharkhand, Orissa and Assam. “We are now present in over 200 districts of 14 states, including 133 districts that are among the poorest in India,” says Vikram Akula, CEO of Hyderabadbased SKS Microfinance.

Despite the progress, there are several issues retarding the industry’s growth. The lack of a comprehensive, clear and uniform regulatory system is the biggest of them all. Speaking at the October 9 microfinance conference held in New Delhi, Finance Minister P. Chidambaram admitted that “it is not yet clear what the government should do, what it should not do.” And it shows.

The Microfinancial Sector (Development and Regulation) Bill 2007, which is hanging fire, proposes to “regulate” only the MFIs that are in the form of NGOs (registered as societies or trusts) and cooperatives, excluding from its ambit NBFCs, the largest and fastest growing MFIs, as well as the Section 25 companies. If implemented in its present form, the legislation will exclude from its remit 78.7 per cent of the total number of MFI clients in India.

Bafflingly, the bill will authorise NGO MFIs—whose legal form is considered least amenable to regulation— to collect “thrift” (savings) from clients even as the NBFCs (these are corporate bodies directly regulated by the RBI) continue to be denied the power of collecting savings from clients. “It’s an attempt to create a two-tier regulatory regime in the microfinance sector—one for not-for-profit entities, another for for-profit entities, a confusing approach towards regulation. What we need is a uniform regulatory system for all MFIs,” says SKS’ Akula.

The government has been “very wary” of allowing for-profit companies to deal with the savings of the poor, believe many people in the microfinance industry. The RBI also disallows NBFC MFIs from becoming banks’ ‘business correspondents’ (BC) that can raise savings and conduct other financial services in rural areas. (On the lending side, the ‘business correspondent’ model looks quite unviable because BCs are not allowed to charge the clients and so can’t recover their own costs of extending credit services.)

The denial of power to MFIs to collect saving deposits has starved the sector of a source of funds that will be cheaper than raising debt at commercial rates of 10-14 per cent, says Sanjay Sinha, Managing Director, M-CRIL. “The share of client savings in sources of funds for MFIs has declined considerably from 25 per cent in 2003 to 11.2 per cent in 2005 and 8.4 per cent now,” he adds. Cheaper funds will, of course, mean more affordable micro finance loans and more borrowers. It’s a simple equation the regulators need to get.