Legitimacy for Microfinance in India: It’s Been a Long Time Coming…

> Posted by Siddhartha Chowdri
The Indian Parliament is bogged down with critical legislation on foreign direct investment, anti-corruption and food security. The Micro Finance Institutions Bill is low on the priority list, behind at least 30 other bills. Many microfinance industry players were concerned that uncertainty around the norms for MFIs would continue indefinitely.
Officials at the Reserve Bank of India (RBI) decided not to keep waiting for Parliament to pass a bill on microfinance (the first of which was introduced in 2007). On December 2, 2011 the RBI created a new category of non-banking financial company (NBFC) called the NBFC-MFI.
This bold step goes a long way towards giving the microfinance industry in India the legitimacy it has sought for more than a decade. Much of the credit for the RBI’s expediency in moving this forward should go to the team at MFIN and Sa-Dhan for their relentless efforts and representations to the RBI.
The requirements for an NBFC to qualify as an NBFC-MFI are in large part defined by the Malegam Committee report circulated in January 2010.  However, there remain some significant concerns that one hopes will be addressed as these regulations and guidelines evolve:

  • The NBFC-MFI is only a microcredit institution. Financially excluded clients will have to look to other types of institutions (or individuals) to fulfil their other critical financial service needs.
  • As per the Malegam recommendations,  85 percent of a qualifying institution’s portfolio will be very narrowly defined in terms of both target market and product features. This means that anybody whose household income is even slightly above the threshold (about US$3.35 per day in rural India and US$7.70 per day in urban India) or needs loans of larger sizes or shorter terms will be excluded by NBFC-MFIs. There are currently no other institutions that serve these clients, and they will have to turn to informal financial sources.
  • NGO and non-profit MFIs are not covered by this, and although they currently have a smaller share of the microcredit market, there are many more NGOs than NBFCs currently involved in microfinance.
  • It is not clear whether these guidelines prevent other states from passing their own more restrictive legislation as did Andhra Pradesh.
  • Given the pricing and margin caps on the industry, institutions will have a difficult time remaining sustainable and at the same time reaching out to more challenging communities and geographies.

Some eminent analysts of the industry think that these guidelines are largely sufficient.  In my view, without more comprehensive legislation or set of rules we will never be able to address the above issues. Whether further legislation and regulation will come from the central government or the RBI, only time will tell.
So let’s all sing along with Sam Cooke:
“There’s been times that I thought I wouldn’t last for long
But now I think I’m able to carry on
 It’s been a long, long time coming
But I know a change is gonna come
Oh, yes it will”
Image credit: Ultraphon
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Malegam Recommendations Prompt RBI Changes, But Not as Drastic as Feared