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Four major risks facing microfinance in India

Indian microfinance is extremely complex. There are different legal forms active in the markets i.e. Banks (commercial, Cooperative Banks, RRBs, SFBs etc), NBFCs, NBFC MFIs etc

Four major risks facing microfinance in India

According to the Bharat Microfinance Report, microfinance "through MFIs" is servicing 43 million accounts. About 85% of the accounts serviced with 83% gross loan portfolio are being serviced through NBFC MFIs.

NBFCs and NBFC MFIs are directly regulated by RBI for microfinance operations where the quantum of overall lending to the borrower, the number of providers for each borrower, rate of interest, additional charges are stipulated by RBI. In simpler term, a borrower can be a member of one Self Help Group or Joint Liability Group; the borrower can borrow up to Rs 1,25,000 from 2 NBFC MFIs as a member of Self Help Group or Joint Liability Group or in his individual capacity.

The rate of interest is also calculated as per quarterly calculations of RBI; processing fees and loan protection insurance premium can be charged from the borrowers. Stipulations are through "Qualifying Asset" norm of RBI for the microfinance sector. In the microfinance sector, NBFC/NBFC MFIs and u/s 8 companies are qualified, by virtue of the definition of "credit institutions" of Credit Information Company (Regulation) Act to upload the borrower level data on Credit Information Bureau. Till this point, the industry seems very appropriate and apt.

Reality of the sector and predominant challenges

The devil is in the details. Indian microfinance is extremely complex. There are different legal forms active in the markets i.e. Banks (commercial, Cooperative Banks, RRBs, SFBs etc), NBFCs, NBFC MFIs, U/S 8 companies, societies, trusts, cooperatives etc. NBFC and NBFC MFIs are "For Profit" segment and U/S 8 companies, societies, trusts, cooperatives are "Not-For-Profit" segment.

There are diverse models, Self Help Groups, Joint Liability Groups, Individual, Limited Liability JLGs, etc. There is no uniform regulation for the microfinance sector, NBFC and NBFC MFIs are directly regulated for microfinance operations; u/s 8 companies are finance companies operate with the special dispensation of not to register with RBI; Societies, Trusts, Cooperatives Societies are guided by different acts as per their registration, however, follows all the norms meant for NBFC MFIs to access bank finance, especially Priority Sector Lending; banks are regulated but do not come under the direct regulation for microfinance operation i.e. do not have to follow the guidelines for NBFC and NBFC MFIs. Despite agencies with different legal forms having financial operations, only NBFCs NBFC MFIs and Banks (cooperative banks are not submitting microfinance portfolio) are entitled to upload borrower level data on CIBs. Point to be noted over here all these institutions are working in the same geographies and the poor people can be a member of all of these groups.

Microfinance includes all the initiatives taken by different agencies irrespective of legal forms and models. MFIs and SHGs were there however recently banks are showing interest and mostly operates by Business Correspondence model partnering with MFIs. Other entrants are the P2P NBFCs. Unfortunately, due to the non-inclusive nature of CICR Act, and despite notification from RBI, around 15% of the SHG member level data is being uploaded on CIBs (personal communication), building up of exhaustive data set is a daunting task. Still, in order to understand the market, an effort is being made by pulling together the data from different sources on market share. The available data is on different time frame but has proximity; the data of Not For Profit MFIs is of March 2019; the SHG data is of October 2019 and rest August 2019. There is a challenge to understand the outreach, CIBs have the data on active accounts and in order to remove this challenge the loan outstanding has been taken for a better idea. Considering the overall portfolio (NBFC, NBFC MFIs, BC of Banks and NFP MFIs) the microfinance sector is having 43.5% of the sector; it would be more if we add on the data of cooperative societies. Still, there is data mix up, as data of around 15% of the SHG's portfolio is in bank segment however it may not be that big an amount. Discounting that fact, the industry may be arbitrarily looking like the pie chart.

In this complexity of microfinance sector of India and unavailability of exhaustive data and regulatory framework, four situations have been emerging.

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  • Probable over lending

First, possible over-lending by the banks as they, though catering the same poor population, but do not have to follow the guidelines of RBI for NBFC and NBFC MFIs. The Not For Profit MFIs are also not under direct regulations still considering the capacity of them, they do not have resources for a bigger amount and cross the limit. The question here is if the borrowers in RBI stipulated income category and by considering their repayment capacity the lending to them has been restricted, then why the banks (also other Non-NBFC MFIs) are kept open for investment in the same category of the population with a larger amount, which is defeating the RBI's effort to protect the poor borrowers from overconsumption.

  • Data asymmetry

Second, because of the constraints emanating from Credit Information Company (Regulation) Act, only banks, NBFCs and NBFC MFIs are uploading data on CIBs, keeping societies, trusts, cooperative societies out. Eventually, there is no strong data on cooperative societies and which can eventually be huge in number. Personal discussion with CIBs revealed that only 15% of the SHG's member level data is uploaded by the banks on CIBs, despite clear instructions from RBI. So till now, the information provided by CIBs on the indebtedness is not full proof. The question here is once again, why RBI is not notifying all the institutions providing loans to the stipulated income group for uploading data on CIBs. RBI may raise the issue on the authenticity of the data as the other NFP MFIs are not regulated by them; in this situation, they can always work with the SROs for NBFC MFIs for ensuring the authenticity of the data.

  • Receding Not For Profit segment

Third, the genesis of the microfinance sector is through NFP MFIs also its easy to establish. They have their major presence in the deeper geographies. Despite their positive side, they are not getting support from the banks because they are not regulated by RBI. The fall out of this is first, the NFP MFIs in order to cater to the need of the clients, are sourcing expensive funds from NBFCs resonating to the provisioning of costly credit to the borrowers. Secondly, the income over expenditure of these institutions goes back to the system, somehow the not for profit objective of the microfinance industry is receding. Thirdly setting up of NBFC MFI needs a considerable amount of finance and the predominant supportive condition is not conducive for operations of NFP MFIs, many social-minded entrepreneurs are being prohibited, so this condition is prohibiting new entrants and facilitating monopoly. The question arises that why the government is not developing a regulatory framework for these institutions which are still out of direct regulation of RBI; MUDRA, RMK etc. can be facilitated as the regulator of these segment. For example, Uganda has established a regulatory framework for other financial institutions and brought all the financial inclusion under regulation.

Apart from these, the local political leaders are taking advantages of the non-inclusive nature of the policy framework. They are tweaking the information, misinforming the borrowers and influencing repayment in a substantially negative way. In recent times some of the areas of Assam, Tamil Nadu, Maharashtra, Uttar Pradesh and other this trend is ongoing and it is pernicious for the sector. As because there is no strong overarching policy architecture for microfinance industry the briefing to the other stakeholders and interested parties, on the industry, is not strong and incomplete.

From the above analysis, it is clear that the Indian microfinance sector is complex and it needs immediate attention of RBI to promulgate exhaustive policy framework primarily to protect the support for poor and financially marginalised people. In RBI, FIDD is promulgating Priority Sector Lending which is the main source of fund for the microfinance sector, DNBR is regulating the NBFCs and NBFC MFIs which is the largest segment in the microfinance sector, DBR is regulating the banks who are coming as a major disruption in the market probably in a negative way. RBI needs to fix this jigsaw puzzle and put them together and institutionalise committee, as soon as possible, to work on with a major objective to create an apt and inclusive policy framework for the whole microfinance segment.

(The author is Associate Director of Sa-Dhan. All views are personal)

Also read: What can India learn from Bangladesh's microfinance institutions?

Also read: RBI raises lending limit of microfinance institutions to Rs 1.25 lakh from Rs 1 lakh

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