Update on Microfinance Regulation

As those interested in the sector already know, the Microfinance Bill has been in the offing for a while now. In March 2008, the Finance Minister tabled the bill in the Lok Sabha, which was then referred to the Lok Sabha Standing Committee on Finance. There were many objections to this bill, even within the government, with the Ministry of Women and Child Development and also the Ministry of Rural Development and as such, in December, the bill was further referred to Group of Ministers headed by Sharad Pawar, Minister for Agriculture. It looks eminently likely that this Bill will be introduced in the Lok Sabha in the Budget Session which will begin in the 3rd week of February.

You can see the bill, along with clause by clause comments here, in its entirety here.

One of the primary criticisms of the bill has been that it excludes Non Banking Finance Companies (NBFCs) from its purview. Microfinance is provided through two channels in this country: through SHG-Bank Linkage and directly through MFIs. Of the MFI channel, NBFCs account for about 70% of total loans distributed and for 70% of total MFI membership (M-CRIL, 2007). Thus, excluding NBFCs is pretty much like excluding most people who are using microfinance in this country.

In related news, the Committee for Financial Inclusion, headed by Mr. Rangarajan, Chairman of the Economic Advisory Board, recommended just yesterday that a special category called NBFC MFIs must be created so that these companies can be appropriately regulated. There are a few other important recommendations pertaining to MFIs like reducing the foreign equity requirement to $1lakh from $5Lakh, move regulation of NBFC MFIs over to NABARD and also to give them tax concessions of 40% of their profits if they work in excluded districts as identified by NABARD.

The questions of the moment for me is: how is this going to be incorporated into the bill, if at all? The committee seems to have made this inclusion easier by recommending that NABARD be the regulator for NBFC MFIs. NABARD is the named regulator in the proposed bill as well.

IF (well I may jumping the gun here a little bit) NBFCs are included in the bill, this may mean that they can collect savings – which would be huge for the Indian microfinance sector. We have already spoken earlier in this blog on the importance of savings as a product. Furthermore as Prabhu Ghate points out, Indian MFIs have one of the highest financial expense ration (cost of funs/total cost of funds). In Bangaladesh , interest rates are lower precisely because almost a third of their funding comes from member savings. Here’s another reason why policymakers should allow MFIs to collect savings: it may lower interest rates that MFIs charge.