M-Cril’s comments on the Recommendations of the RBI Sub‐Committee of the Central Board of Directors to Study Issues and Concerns in the MFI Sector.
Comments on the Recommendations of the Malegam Committee
Comments on the Recommendations of the Malegam Committee
The Malegam Committee was established in an environment of crisis in Indian microfinance, against the backdrop of the AP Microfinance Institutions Ordinance (now Act) instituted apparently as an emergency means of protecting microfinance clients. Seen in the context, of the political backlash against microfinance, the recommendations of the committee are broadly appropriate. In particular, the committee’s clear recommendation that the RBI create a specific category of NBFC MFIs and regulate them directly recognizes such institutions as an integral part of the financial system. It is, thereby, a measure that could have a far‐reaching beneficial impact in furthering financial inclusion in India. However, in some of its other proposals the committee’s focus on crisis management has perhaps diverted it from the opportunity to take a potentially broader view of financial inclusion. In that sense this is an opportunity missed. The following are some specific comments within this broad framework.
5 . Net Own Funds of Rs. 15 crores and the requirement that smaller NBFCs do not undertake microfinance beyond 10% of their assets – do not conform with the spirit of financial inclusion
There is clearly a conflict between this provision and the Committee’s intention that microfinance is undertaken by socially-minded professionals. Such a large amount of start-up capital is generally not available to this class of people. This provision effectively closes the door on new entrants with a social purpose and becomes an invitation to commercially minded large companies to enter the business. The net result would be a totally commercial approach to microfinance with no social or developmental intent. The removal of smaller NBFCs from the industry would both cause a setback to microfinance in both the less well-served areas of the country and would also reduce competition, strengthening the existing tendency to oligopoly. The recommendation does not conform with the spirit of financial inclusion. 6. Customer protection and recovery only at Centres, not at home or workplace – unnecessarily micro‐manages a business relationship This recommendation goes against the interests of both the MFI and the borrower. Doorstep collection is one of the key facilities that the MFI offers to low-income customers. To confine microfinance to collection centers is to negate this benefit for the customer. It will only hamper the business model and retard financial inclusion. The issue in collections is not the collection venue, it is over-indebtedness; the committee has made sensible suggestions on the implementation of codes of conduct, grievance redressal, and establishment of ombudsmen. It is important for customer protection that Industry Associations and the Bankers Forum play a more proactive role to ensure that MFIs are being socially responsible. Not visiting clients at odd hours is already part of the RBI guidelines for banks and NBFCs. Regulation and codes of conduct should focus on these consumer protection measures not micro‐management of the business relationship between borrower and MFI.rbi As an additional measure, MFIs could be required to conduct annual independent Customer Satisfaction Surveys through well-known social/qualitative research agencies with the report to be published on their websites and submitted to the RBI. 7. Loan tenure vis a vis loan amount – affects the business model This is again a case of micro‐management and affects the business relationship between the lender and borrower; what if a borrower needs a four-month loan? Most loans in the more developed urban microfinance market in Latin America have a four-month tenure. Regulation should focus on transparency of communication so that a conscious choice of loan size, loan tenure, and other loan conditions is made by the borrower. It should not mandate the business relationship. 8. 75% of loans for productive purposes It is a simple law of economics: money is fungible, it is impossible to monitor this condition. It should, therefore, be dropped. 9. Centralized loan sanction and disbursement No significant purpose is served by this condition. The key to good lending is to provide an adequate loan size based on good loan appraisals. The MFIs need to provide for individual lending, to train their staff to undertake good appraisals and introduce control systems that are designed to address the changed business conditions that this will result in. 10. Limitation on income from non‐credit business avenues – is unnecessary at present Microfinance should, first and foremost, be about financial inclusion, not just credit. NBFC MFIs should ideally be allowed to collect deposits (up to strict limits and under restrictive conditions suggested by M‐CRIL in its submission to the Committee). They should also be encouraged to expand the coverage of insurance services through this activity should not become a conduit for collecting substantial administrative charges. Insurance companies using MFIs as their distributors and/or agents could be required to ensure that the additional charges are not excessive but are commensurate with the service provided by the MFI for distribution. MFIs should also be encouraged to introduce other financial services such as remittances and payments to facilitate the lives of low-income families. As to non‐financial services, there has been much talk of MFIs becoming distributors of large companies; some trials have been conducted but there has been little success. In practice, financial services are sufficient to keep MFI staff occupied, the scope for learning additional marketing skills is quite limited. The limitation is unnecessary at the present time as non-financial services are unlikely to be provided by MFIs in any significant way. About Micro‐Credit Ratings International Limited, M‐CRIL M‐CRIL is the world leader in the rating of microfinance institutions (MFIs). By December 2010, M‐CRIL had undertaken around 700 financial and social ratings and assessments of some 400 institutions covering 32 countries of Asia, Africa, and Europe. M‐CRIL was the pioneer in the rating of MFIs in India; it has been engaged with Indian MFIs since 1998 when the Indian microfinance sector was in its infancy. As a result, M‐CRIL has rated practically every Indian MFI of a significant size several times over the past few years. Resulting from this, M‐CRIL’s knowledge of Indian microfinance is unparalleled by any research or assessment agency.
