Ramesh S Aruanchalam
Rural Finance Practitioner
The expectations with regard to the forthcomming report of the RBI Board sub-committee - looking into the micro-finance industry and its working – are rapidly rising with even the Hon Finance Minister of India stating that he is also waiting for the RBI report in order to finalise the regaulatory structure for MFIs in India.
Talking at the Hindustan Times Leadership Summit on Friday, The Hon Minister said, “The Union government will finalize a regulatory architecture for microfinance institutions after a central bank-appointed committee submits its report in January. Despite the crisis the microfinance industry is facing in Andhra Pradesh in the wake of an ordinance aimed at prescribing stricter norms for the sector, it would be prudent to wait for the Reserve Bank of India (RBI) report.” Mr Mukherjee further said “the government’s aim was to establish a framework for the microfinance industry where the interest rate on loans would not be exorbitant and coercion would not be part of the recovery process.”
And never before has a committee assumed such significance, especialy from the perspective of the Micro-Finance Industry in India. Whether it is the Hon Finance Minsiter of India or The Orissa State Government or the Ministry of Finance, they have categorically said that, they are waiting for the RBI report and will look at it before deciding on the nature of regulation for MFIs in India.
So, what exactly are some of the expectations from this RBI report for various stakeholders? Here is what I hope will happen…in terms of the specific issues that the report will touch upon…and this has been compiled by talking to a wide range of stakeholders in India...
First and foremost, the RBI report is expected to provide substantive details on the cost of micro-finance delivery and the justification (or lack of it) for the supposedly higher interest rates for this ‘door step banking’ . And while doing so, I hope it demystefies the ‘higher interest rate argument’ as a myth and puts the interest rate arguments in proper perspective. It would also be useful if the report provides a range of interest rates according to an MFI’s life cycle and identifies a suitable band where in interest rates are affordable for the client and yet sustainable for the MFI – all the while stressing that MFI operations need to become progressively efficient and benefits of this efficiency passed on to the end user client
Second, various stakeholders are hoping that it will provide information with regard to the actual lending and collection practices of MFIs. Here, the sub-committee must offer its opinion and clarify whether, the so called lending and collection practices are legally correct, ethically sound and morally approipriate – especially, given that MFIs are dealing with a very vulnerable set of clientele and selling a product that is (perhaps) the most attractive on the face of this planet. An additonal requirement here is that the RBI report will have to comment on extent to which MFIs have indulged in multiple lending (using shared JLG and clients) and also engaged in coercive recovery practices and also how widespread are these phenomenon in various parts of AP and India. In the process, the report must also define and operationalise relevant indicators for future use so that the above issues (of multiple lending and coercive practices) can be dealt with by clear cut regulatory/supervisory requirements (including mandatory financial literacy programs by MFIs to counter multiple lending led growth etc)
Third, the report is also expected to look into the Corporate Governance aspects of MFIs including prevalence of related party transacations, transparency on MFI ownership, opaquity (if any) in executive decision making at MFIs, board functioning etc and all other such Governance related matters and identify weakness and systemic laspses that would need redressal from a governance perspective. It will also have to recommend suitable changes to the (pending) RBI circular on corporate governance and also ensure that it is implemented by the NBFC MFIs.
Fourth, stakeholders are also anticipating that the committee look into the current state of the systems in MFIs – MIS, HR, Finance and Accounting and other required systems – and comment on their strengths and adequacy (from the perspective of the burgeoning growth in the last few years) and suggest minimum requirements for functioning as an MFI, gaining access to priority sector bank funds and tapping the secondary and primary markets.
Fifth, the committee is also expected to look at the Corporate Governance and Compensation relationship for the MFIs, especially, keeping in mind the lessons from the global financial crisis and current controversies with regard to MFI compensation in India.
Sixth, the report is expected to comment on whether self-regulation in micro-finance has worked and whether it can work – from the perspective of the 2005/6 AP crisis and the Sa-Dhan code of conduct, the Kolar crisis and MFIN code of conduct and the present day crisis etc.
Seventh and last but not the least, the RBI report should also look at the need for a credit bureau and examine whether a credit bureau maintained by the MFI Association is indeed a workable and practical idea from the perspective of conflict of interest and related issues
While the above are not by any means an exhaustive set of issues that need to be examined by the RBI sub-committee, they certainly represent a crucial set of aspects that the committee could use as a starter’s set…I will post further on this, as and when more issues are identified...
Have a Good Weekend and I will make part 2 of yesterdays post tomorrow…
Tomorrow: The Key to Getting Micro-Finance in India Back on Track Lies with Establishing the Right Incentives for Various Stakeholders…Part II