Given the lack of a clear national microfinance policy guiding its overall strategy and implementation, the MFI Development & Regulation Bill is indeed a hugely incomplete legislation. Let’s hope that the Parliamentary Committee takes note of these aspects and ensures that these are properly redressed, before the MFIDR Bill is passed
The Micro-finance Institution Development and Regulation Bill (MFIDRB), 2012 was introduced in the Parliament 2012 and is currently being examined by the Parliamentary Standing Committee on Finance (PSCF). In a series of articles, we look at the MFIDRB (2012) and try to briefly answer the following questions…
In this first article, we look at the substantive aspects related to the MFIDRB (2012). There are five major reasons for (having) a bill like the MFIDRB (2012), which is currently under the consideration of the Parliamentary Standing Committee on Finance:
What will the MFIDRB (2012) be able to achieve in its current form? In my opinion,
That said, should the MFIDRB (2012) protect all MFIs from “State-level” usury laws? Clearly, as all of you would agree, only those MFIs that operate within the ambit of the law must be (so) protected. MFIs that engage in multiple, successive, and/or ghost lending and/or use coercive recovery practices must (surely) not be legitimized. Likewise, those institutions that have improper governance and fraudulent systems must not be protected.
What is worrying here is that the MFIDRB (2012) does not appear to have the ability to distinguish MFIs that operate legally from those MFIs that:
a) Engage in multiple, over and ghost lending;
b) Have bad governance;
c) Use coercive recovery methods;
d) Adopt abusive practices;
e) Engage in frauds;
f) Use the decentralized agent model which has many weaknesses;
g) Lack proper systems including MIS, internal control, internal audits etc;
h) Engage in connected lending;
i) Have inappropriate compensation for the bosses; and so on.
Further, the aspects of regulation and supervision of MFIs (in terms of the real and specific provisions) are not known, as much of it is to be outlined at a later date. This is a very dangerous aspect and a bill like MFIDRB (2012) cannot be loosely structured (as is presently the case).
Also, the mechanisms for client protection and grievance redressal (including self-regulation) are not adequate. Self regulation has never worked in micro-finance as the past experiences have REPEATEDLY shown—be it Krishna 2006 AP crisis, Kolar 2009 Crisis, 2010 AP crisis and thereafter. In fact, Self Regulatory Organisations (SROs) - like Sa-Dhan and MFIN—lack accountability and their track record shows that they are very ineffective bodies, many of whose members were themselves involved in such abusive MFI practices. And given that many of these member MFIs who committed frauds (like Sahayata Micro-Finance’s former MD, Ajay Verma) themselves sat on the boards of MFIN and/or Sa-Dhan, how can one expect the SROs or associations to act against other errant member MFIs (or the black sheep). As the experience of many countries has shown, self regulation in micro-finance cannot and will not work. This needs strong emphasis.
Also, permitting collection of thrift by the MFIs would be a recipe for disaster. Rather than that, if MFIs want to offer savings, they would need to enhance their systems and governance and then apply to the Reserve Bank of India (RBI) to become full-fledged banks. Given the burgeoning frauds and also the increasing use of the decentralized agent model (that caused the AP crisis in the first place), under no circumstances should collection of thrift be permitted. If MFIs are allowed to offer savings, I am sure that frauds and failures will become even more frequent and the hard earned money of the poor would be lost. Therefore, savings or thrift should not be permitted by the MFIDRB (2012) as MFIs do not have the internal control and/or internal audit systems required to safely manage peoples’ savings. And, the lessons from the 2010 AP crisis clearly articulate that.
So, in the light of the above and also given the lack of a clear national microfinance policy guiding its overall strategy and implementation, the MFIDRB (2012) is indeed a hugely incomplete legislation. I hope that the PSCF takes note of these aspects and ensures that these are properly redressed, before the Bill (MFIDRB) is passed. Otherwise, the MFIDRB (2012) will be like a recipe for a disaster (waiting to happen)!
Thus, overall, the Micro-Finance Institution Development and Regulation Bill (MFIDRB), 2012 has several problems (as noted above) which the Parliamentary Standing Committee must note. And to be effective, the MFIDRB (2012) will need to have the following:
And having seen the 2010 AP and other crisis situations in microfinance in India from very close quarters, I strongly believe that the following regulatory/supervisory arrangement would perhaps be most appropriate in the Indian context:
The MFDC (Micro-Finance Development Council) currently proposed in the MFIDRB (2012) will have huge conflicts of interest (because lenders and DFIs are to be on its board as also the MFIs). The MFDC will also be ineffective because it would have lot of authority without any responsibility or accountability and also because there would be a dual power structure – the MFDC and the RBI, which is to be the regulator and supervisor as per the MFIDRB (2012).
In conclusion, THE MFIDRB (2012) is very loosely structured and hence, it lacks the ability to prevent events like the 2010 AP crisis, for which it was originally proposed. And the 2010 AP crisis was caused by irresponsible growth of NBFC MFIs in their search for unduly high profits, sale of their shares at a premium, personal enrichment and the like and the MFIDRB (2012) has nothing in it to prevent the recurrence of a 2010 AP like crisis situation
To summarise, India is a great country for enacting many legislations but the implementation record of the same is rather poor in most cases. I hope that the same does not happen with the MFIDRB (2012). We certainly need the MFIDRB (2012) to provide legitimacy to the microfinance sector. However, we cannot stop with that. Rather than being a paper tiger, the MFIDRB (2012) should have the teeth and mechanisms to ensure orderly growth of the microfinance sector and prevent situations like the 2010 AP crisis. I do sincerely hope that the Hon Parliamentary Standing Committee on Finance (PSCF) pays sufficient attention to these critical issues. One further point—I have flagged critical issues and the objective here is not to undermine the capacity of the RBI or the good work being planned. The objective, solely, is to assist in the development of enabling and effective regulatory and supervisory mechanisms that can work on the ground toward the benefit of large numbers of low-income people, who continue to lack access to quality financial services at the grassroots.
(Ramesh S Arunachalam has over two decades of strong grass-roots and institutional experience in rural finance, MSME development, agriculture and rural livelihood systems, rural and urban development and urban poverty alleviation across Asia, Africa, North America and Europe. He has worked with national and state governments and multilateral agencies. His book—Indian Microfinance, The Way Forward—is the first authentic compendium on the history of microfinance in India and its possible future.)
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