The much awaited Y. H. Malegam committee report to study the issues and concerns in the MFI sector was submitted to the Reserve Bank of India on Wednesday. It has evoked extreme reactions with some dismissing the recommendations as "Stalinist micromanagement'' and an attempt at killing innovation and competitive edge in a sector that was built to provide an edge over banks and provide handholding to poor borrowers. Others feel the recommendations will lead to long-awaited streamlining of the sector and that its recommendations need to be viewed in the light of the fact that it was set up by the RBI in response to a crisis. However, the link node in the reactions is the view that there is indeed a lot of emphasis on regulations and compliance.
"The positive aspect of the report is that it has recognised the legitimate role of MFIs (microfinance institutions) and in particular the NBFC-MFIs (Non Banking Finance Company- MFIs) which has a 12 year old demand. However, in the process it has done such detailed sub-regulations that complying to all of them will be a Herculean task,'' says Vijay Mahajan, founder of BASIX and a senior and respected voice in the sector. In fact, he goes on to say in its immediate reaction to the report that, "it may lead to a situation where legitimate actors may find it difficult to continue and may want to exit the sector given the huge compliance load now.''
However, others in the industry feel it is not that bad and there are positives that cannot be overlooked. "I feel the recommendations will lead to streamlining of the sector given that it now has put responsibility of the four main pillars - the RBI, banks lending to MFIs, the MFIs themselves and on the associations (like Sa-Dhan and MFIN) apart from calling for client protection,'' says Vijayalakshmi Das, chief executive officer, Ananya Finance for Inclusive Growth and former CEO of Friends of Women's World Banking in India. However, she does concede that it does impose restrictions that ``may not make the sector seem attractive anymore to the private equity investors and especially to those seeking pure profits.''
In his response to the report, Sanjay Sinha, the Managing Director of Micro-Credit Ratings International Limited (M-CRIL) - an entity that does ratings of microfinance institutions -, says: ``this is a narrow interpretation of its terms of reference and the committee could have taken a much broader view of the issues at hand when dealing with lending to the poor. Instead, it seems have indulged in crisis management.''
While readers could get details of the report from the RBI website:
http://www.rbi.org.in/scripts/PublicationReportDetails.aspx?UrlPage=&ID=608 here are some recommendations:
- The Sub-Committee has recommended that bank lending to NBFCs which qualify as NBFC-MFIs will be entitled to "priority lending" status. With regard to the interest chargeable to the borrower, the Sub-Committee has recommended an average "margin cap" of 10 per cent for MFIs having a loan portfolio of Rs. 100 crore and of 12 per cent for smaller MFIs and a cap of 24 per cent for interest on individual loans.
- It has also proposed that, in the interest of transparency, an MFI can levy only three charges, namely, (a) processing fee (b) interest and (c) insurance charge.
- There are limits of an annual family income of Rs.50,000 and an individual ceiling on loans to a single borrower of Rs.25,000.
- A borrower can be a member of only one Self-Help Group (SHG) or a Joint Liability Group (JLG).
- Not more than two MFIs can lend to a single borrower.
- NBFC-MFIs should be exempted from the State Money Lending Acts and also that if the recommendations of the Sub-Committee are accepted, the need for the Andhra Pradesh Micro Finance Institutions (Regulation of Money Lending) Act will not survive. This recommendation is important in the context of the recent developments in Andhra Pradesh.
As BT readers would know fears of interest cap were already expected with some suggesting that any cap could run the risk of directing MFIs to focus attention on high population density areas and urban locations instead of venturing into far flung areas where the cost of operations are high.
The Malegam committee was set up by the RBI in October last year following the developments in Andhra Pradesh, the hub of microfinance in India, where there were reports of suicides by small borrowers allegedly due to coercive loan recovery practices adopted by some MFIs. In fact, following this, the government of Andhra Pradesh also passed a legislation making it mandatory for MFIs to specify their area of operations, interest rates and make more disclosures including furnishing a list of borrowers every month, make collections and loan disbursements at specified locations and to opt for monthly recovery as weekly loan recoveries earlier.
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