50% of microfinance institutions could convert to banks: regulatory body CEO

About half of Microfinance Institutions Network’s 49 members could follow in the footsteps of Kolkata-based Bandhan and convert themselves into banks in the next couple of years, according to a top official.

While Bandhan was granted “in-principle” approval by the central bank in April 2014 to set up a bank in the private sector, members of Microfinance Institutions Network (MFIN) could metamorphose into “small banks” once the central bank finalises guidelines in this regard.

MFIN is the self-regulatory organisation of MFIs, which are registered with the Reserve Bank of India as non-deposit taking non-banking finance companies (NBFCs), to ensure responsible lending and client protection.

Alok Prasad, CEO, MFIN, said about half of the members could graduate to become banks.

Such a move will give them an opportunity to also provide liability (deposit) products and money transfer services in addition to the existing business of providing short duration collateral-free loans for small amounts and third-party products such as micro-insurance to the poor.

MFIN members include, among others, Satin Credit Care Network, Utkarsh Micro Finance, Suryoday Micro Finance, Bhartiya Samruddhi Finance, Equitas Micro Finance, Grameen Financial Services, Janalakshmi Financial Services, SKS Microfinance, and Ujjivan Financial Services.

Pointing out that the ‘non-bank’ tag is perceived as being negative, Prasad said by converting into a bank, the MFIs could shed this perception and build trust with their customers as they will be more closely regulated by the RBI.

According to the RBI’s draft guidelines for licensing small banks, the objective of setting up such banks is to further financial inclusion.

These banks will provide savings vehicles to underserved and un-served sections of the population; credit to small business units, small farmers, micro and small industries, and other unorganised sector entities, in their limited areas of operations, through high-technology low-cost operations.

Unlike the established commercial banks, which prefer big-ticket corporate lending and undertake financial inclusion only due to directives from the Government and the RBI, Prasad said the business model of MFIs is tailored to ensure access to financial services, especially credit, needed by vulnerable groups such as weaker sections and low-income groups.

Meanwhile, MFIN plans to expand its membership to include not just MFIs but also entities associated with the financial inclusion space such as telecom service providers, business correspondents and credit information bureaus.

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