The world over microfinance had grown, in a large measure, due to benign neglect on part of central banks. Regulations were introduced only when the sector attracted a substantial number of clients. India is no different. RBI first allowed informal self-help groups to open savings accounts in banks and bank lending to these groups in 1991-92. In 2000, it permitted all types of institutions to offer microcredit and bank loans extended to these institutions for on-lending were treated as part of the priority sector lending. Beyond these, RBI was unwilling to bring in any regulations on the plea that as long as these are not deposit taking institutions there is no need to regulate them. That was the stand of various RBI-appointed committees too, including the Vyas Committee of 2004.
RBI started taking increasing interest in the sector since the crisis in Krishna district of Andhra Pradesh in 2006, and the events leading to the AP Microfinance Ordinance in 2010, which culminated in the constitution of the Malegam Committee. On its recommendations, RBI came out with detailed guidelines for microfinance institutions (not the microfinance sector) in 2011. These guidelines introduced a new category of NBFCs, viz NBFC-MFIs, and set norms for income criteria for clients of MFIs, repayment period, borrower loan limits, interest rate norms and caps, limits on number of lenders to a borrower and a host of other norms and criteria. The microfinance industry welcomed these guidelines as they brought in a modicum of order to the sector and prescribed a framework within which institutions could operate.
These happy times continued till 2015-16. By then a couple of private sector banks started increasing their exposure to microfinance through separate verticals and a big MFI became a universal bank. That was followed by the entry of small finance banks (eight of which were MFIs) into the microfinance space. MFIs discovered to their dismay that while they had to adhere to a set of regulations, it was a free-for-all for non-MFIs (banks, SFBs and NBFCs). The microfinance sector started petitioning the central bank on the absence of level-playing field for MFIs as compared to non-MFIs. The main issue was that non-MFIs need not adhere to the norm of number of lenders (two in the case of NBFC-MFIs) and per-borrower loan limits. It prompted non-MFIs to target borrowers identified and nurtured by MFIs with higher loan amounts, leading to high levels of borrower indebtedness. MFIs were left high and dry as their hands were tied, while others enjoyed freedom of operation without fetters. In addition, the interest rate cap (2.75 times the base rate declared quarterly by RBI) was squeezing the margins of small and medium MFIs, as none of them get loans from the biggest banks.
The recent Consultative Document by RBI literally frees MFIs from the shackles imposed by the 2011 regulations and gives them a level-playing field, which was hitherto available only to non-MFIs. The centrality of this document is the need for lenders to adhere to the norms of lending based on borrower household indebtedness. This would imply lending institutions investing more time and energy on assessing the borrower households’ finances. While technology would be a great help, MFIs would be better placed to do this as their client connect is closer and deeper.
Another important feature for MFIs is that by doing away with the 50% income generation loans criteria and the repayment period norms, RBI is facilitating credit flow into lifecycle needs like housing, water-sanitation, education, health, renewable energy, etc, which are now as important as income generation.
On the interest rate front, initially some upward correction could be there by medium and small MFIs based on their borrowing rates. But over the long run rates of bigger institutions—banks as well as MFIs—would come down if they adhere to the transparent pricing norms as indicated in the document.
The document enhances the role for the regulator as the adoption of Board-approved policies to determine the norms of household indebtedness and to fix a transparent rate of interest by each institution and their implementation need a rigorous supervisory oversight. Further, self-regulatory organisations (SROs) will have to reframe the existing code of conduct in tune with the new guidelines and ensure adherence to these norms.
The author is executive director, Sa-Dhan, SRO of microfinance sector. Views are personal