Financial inclusion via exclusion?
Posted by Página do Microcrédito em 18 julho, 2007
The government is about to come out with a microfinance Bill which will be infructous from the very start. The Micro Financial Sector Development and Regulation Bill, about to emerge from the parliamentary standing committee on finance, seeks to do three things.
It seeks to allow microfinance institutions (MFIs) to offer the valuable financial service of providing an outlet for the savings of their poor clients, without which MFIs are not really carrying out microfinance at all, but only microcredit.
There is a widespread misconception that the poor are too poor to save, and that they need credit, not savings facilities and services. On the contrary, savings are probably a more widely felt need than credit, and already takes place through a variety of higher-cost saving mechanisms and institutions in the informal sector.
Second, the Bill seeks to introduce a measure of consumer protection by providing for the redressal of grievances though an ombudsman. Consumer protection issues came to the fore in Krishna district last year in the form of allegations of deceptive interest rates, over-lending, and coercive collection practices. Third, it seeks to promote the “orderly growth of the sector” by setting performance and accounting standards, creating a reporting system and data base, supporting research, promoting consumer education, disseminating information relating to fair practices, and laying down a code of conduct.
These are all very laudable aims and have by and large been welcomed by the microfinance community. However, by excluding MFIs registered as companies from the Act, and including only societies, trusts and cooperatives, the Bill is cutting out at one stroke about 80% of the sector in terms of total number of borrowers and portfolio outstanding. The Indian microfinance sector has seen a steady migration of NGO-MFIs in the last few years from the society and trust form of registration to the company form of incorporation, most of them becoming NBFCs, but a few of them preferring to retain their not-for-profit status as Section 25 companies under the Companies Act.
The transformation is taking place worldwide, for several reasons. First, companies have to meet more stringent disclosure, transparency and audit requirements, more suited to financial operations than those laid down for registered societies and trusts, which were designed for charitable, welfare or educational activities. Second, by providing for capital or equity in the form of shares, companies encourage a stronger sense of ownership on the part of promoters, leading usually to stronger governance and management.
An NGO has no “owner” of the net owned funds built up out of grants and operational surpluses. This combination of advantages gives banks and financial institutions lending to MFIs the essential comfort without which the sector will never attract the funds to expand fast enough to make a rapid dent on poverty and meet the challenge of financial inclusion.
The steady stream of transformations has been assisted by the advent of private investors, both social and commercial, who are willing to provide transforming as well as start-up MFIs not just the Rs 2 crore required as entry level capital, but the much greater investments required to give them the capital adequacy to support the more than Rs 3,000 crore of borrowing by MFIs that took place last year, and projected rapid growth in the near future.
The microfinance Bill ignores all this, on the mistaken ground that NBFCs are already regulated by the Reserve Bank. They are, and RBI regulations recognise nine categories of NBFCs including loan, leasing, hire-purchase and even a “residual” category of NBFCs like Sahara and Prudential. But microfinance is not one of them. Nor has any NBFC expressly doing microcredit (defined these days as loans smaller than Rs 50,000) managed to satisfy the stringent requirements that have been laid down to become eligible to mobilise savings.
Not only can they not accept public deposits, they can not even accept the savings of their own borrower-members who continue to rely on less convenient, riskier, lower yielding, and often socially less productive savings instruments (such as ornaments). There is an understandable reluctance to allow MFIs to mobilise public deposits, for sound prudential reasons. But the vast majority of MFI members are net borrowers of the MFI at any one time.
They borrow to finance their larger investment requirements, but simultaneously save small amounts regularly to finance their liquidity requirements, provide for emergencies, build up a cushion to tide over the lean season when agricultural wage employment is scarce, and aggregate savings into amounts large enough to make useful investments, repair the hut, send a daughter to high school, or a son to the big city to look for work.
Recognising this, the draft microfinance Bill allows NGO-MFIs that have attained a minimum size and standing, to mobilise “thrift” from their members through the group mechanism, after obtaining a certificate of registration from NABARD, the proposed regulatory authority. The argument adduced for keeping NBFCs outside the purview of the Bill is that NBFCs are already governed by comprehensive regulations framed by the RBI.
However the same argument (the need to avoid duality of regulation) is applicable to district, state and urban cooperative banks which are governed by the Banking Regulation Act in respect of banking activities, while conforming to the cooperative law in other respects. Like them, NBFCs would be governed by the microfinance Bill in respect of thrift activities without any dilution of their capital, reserve, or liquidity requirements as NBFCs, until they qualify under NBFC regulations to mobilise not just thrift from members but public savings.
In confusing the form of incorporation with the substantial nature of the institution, or form with function, the Act will also deprive 80% of borrowers (the proportion is set to grow) from the protection of the ombudsman, and the sector from the benefits of universal performance standards in respect of microfinance activities, and a much needed data base.