The Microfinance Institutions (Development and Regulation) Bill will breathe life into the ailing sector, according to business leaders representing three different institutions.
The microfinance industry is hampered by unclear regulations and there are no clear set of guidelines for operations of the sector.
“Over the last three decades, the MFIs have had to operate under rules and regulations either meant for NGOs that did not provide financial services, or for finance companies that did not serve the bottom of the pyramid,” said a statement issued by non-profit organisation Accion.
The new Bill, which is with the standing committee of Parliament headed by former Finance Minister Yashwant Sinha, will probably be introduced in the Budget session of Parliament, according to the CEO of a leading microfinance institution.
“While specifying the RBI as the regulator, the Bill provides a role for state governments, district administrations and microfinance practitioners,” said Vijay Mahajan, Founder and Chairman, BASIX Group.
CONCERNS REMAIN
The business leaders, however, pointed out that the Bill is silent on recovery of loans aggregating Rs 6,000 crore that the Andhra Pradesh Government had waived off in 2010.
The AP Government had put stringent conditions on microfinance institutions (MFIs) for recovering the money owed to them by borrowers. The law came into force in late 2010 on the back of media reports which alleged that MFIs resorted to coercive recovery practices, which led over 200 people in the State to commit suicide.
MFIs business in Andhra Pradesh, which constituted about one-third of institutional micro-finance lending in the country, suddenly slumped after the State law came into force.
“The Microfinance Bill provides a strong legal framework covering all participants in the microfinance space, thereby increasing the confidence of all stakeholders,” said Kshama Fernandes, CEO, IFMR Capital.
LENDING RATES may not COME DOWN
The new Bill caps the lending rate at 26 per cent per annum. This is higher than banks average lending rate of 12-14 per cent.
The new capped lending rate is, however, lower than the lending rate charged earlier by MFIs, which was as high as 60 per cent per year.
“The lending rate is unlikely to come down further. If we can lend at 26 per cent, then that will be a big positive,” Ramesh Ramanathan, Chairman, Janalakshmi Social Services, said.
As MFIs get bank finance at 14 per cent interest, lending at a lower rate (less than 26 per cent) makes it unviable for them.
“India is the only country in the world, where MFIs are not allowed to raise even savings deposit from the borrowers,” Mahajan said. If MFIs are allowed to raise deposits then lending cost can be brought down to 16-17 per cent per annum, he added.
The fixed cost has been a cause of concern for most MFIs. “With inflation, fixed cost also tend to vary,” according to Mathew Titus, Executive Director, Sa-Dhan.