Viewpoint: India’s MFI Rules Need More Thought, or Else They Can Go Wrong
Monday, May 4, 2015
The microfinance industry has witnessed many changes since the 2010 crisis. Recently, the Reserve Bank of India (RBI) eased some lending norms for microfinance institutions (MFIs), which will mean enhanced access to credit for customers. Also, the government has proposed that the Mudra Bank (Micro Units Development Refinance Agency Bank) will regulate MFIs. Alok Prasad, chief executive officer, Microfinance Institutions Network (MFIN), a self-regulatory organization for non-banking finance company (NBFC) MFIs, talks about regulatory challenges in the industry and how the future of microfinance may evolve. Edited excerpts:
In its previous policy review, RBI eased lending norms for MFIs. Was the industry expecting such a development?
This is something the industry had sought from RBI. Fortunately, the central bank is fairly open in conversations, and likes constructive dialogue on regulatory and policy issues. The issue wasn’t just about raising the limit in terms of the loan amount or income ceilings. The matter had to be seen in the wider context of the operating framework mandated by RBI after the 2010 crisis. The crisis triggered a full review of the regulatory policies applicable to MFIs. The Malegam committee’s recommendations in 2011 became the basis of the framework that RBI put down for MFIs. In December 2011, it came out with a detailed set of regulations and also created a new category called NBFC-MFIs. So, dating back to 2010-11, and taking everything together—the crisis, RBI’s and the microfinance industry’s response to it, and the industry’s progression till 2014-15—there was a need for a thorough review of the rules framed in 2011.
It must also be pointed out that the operating rules, for the most part, were based on 2009 data. Since then, the financial landscape, the industry and the macroeconomic environment have changed. While the industry welcomes the changes, this should be seen as work in progress.
This is the initial step. The macro-economic environment is changing very rapidly. The Mudra Bank (refinancing agency for micro units) initiative is going to be transformational. If done right, its impact on the industry and on how unfunded categories are able to get linked to the financial system will be big.
Earlier a person with Rs.50,000 loan could avail fresh loan. This limit has been increased to Rs.1 lakh. Will it not increase the risk of non-repayment?
In any business, you carry certain operating risks. In the lending business, you are subjected to a range of financial risks; it’s about how well you manage them. Whatever be the loan amount, the lender is exposing itself to the full range of credit risks. As a lender, one’s job is to ensure that the risks are well understood and that there is a framework to manage them. The nature of risks may change as loan amounts and customer segments change. But this does not necessarily imply that risks are greater as lending limits go up. It is for the lender to asses the different kinds of risks being taken as loan amounts go up and borrower segments expand.
As a part of running your business, you need to put in place appropriate processes and controls as are necessary to manage risks.