Akrishta Ritu Ankit Shrivastava Ansuman Rath Chandrashekhar Mishra Dhiraj Bhagat

(03) (07) (09) (13) (17)

Harihar Dubey (20) Sunil S. Gandewar (52)

Tripti Agarwal

(54)

Vibhuti Bahuguna (56)

Regulation of microfinance: very technical and complex issue

Interest of Different stakeholders National and societal context

maintaining soundness of financial sectors

protecting savings

expanding access to financing

VULNERABLE BORROWERS

TO PROVIDE SPECIAL FACILITIES OR DISPENSATIO N

NEED FOR REGULATION

ADVERSE EFFECT ON SHG-BANK LINKAGE

75% OF THE FINANCE COMES FROM BANKS AND FIs

IMPORTANT PLANK IN FINANCIAL INCLUSION

Clause
1 Interest rate to be mentioned in bold & loan securitization null & void Maintaining the accounts & producing them on requirement & submission of monthly statements

Implication
Clarity of loan conditions No extra burden on loan taker Done in a particular format Audit at regular interval brings credibility

Risk/ benefits
On MFI industry which earlier gave huge loan on basis of security Increased cost of MFI Fear of cancellation of registration

Registration of MFI under new ordinance by registration authority. Given a time of 30 days & for renewal of registration 60 days before expiry.
Complaints regarding violation of law can be filed & penalty awarded to MFI Fats track courts (3 months)

Operations allowed once they register Verifications & audits carried out by them
Customers too can fill in the complaint

Have to follow every clause for functioning

MFI industry have to be more vigilant Customers will get total value for money Benefit on part of both the customers as well as MFI industry Benefits to both MFI industry as well as customers

Dispute settlement faster & less cumbersome For ease in analysis standardized format to be followed for data entry

Proper format to enter the data followed Power to make changes, giving

Role of state government very MFI at the mercy of

A company which provides financial services to low-income borrowers loans of small amounts for short-terms, on unsecured basis for income-generating activities repayment schedules more frequent than those normally stipulated by commercial banks

Not less than 90% of its total assets are in the nature of qualifying assets.
Annual income <= 50000 Outstanding indebtedness <= 25000 Tenure : 12 mnths (Rs. 15000) and 24 mnths for others 75% loan for IGP

QUALIFYING ASSET

The income it derives from other services is in accordance with the regulation specified in that behalf.

MFIs may need organisational restructuring to comply with the NBFC-MFI criteria
The higher minimum capital requirement may lead to some consolidation in the industry, reducing the total number of NBFC-MFIs. Restrictions on the total loan size of Rs. 25000 may not fulfil the entire financing requirement of individual borrowers, thus forcing them to look at alternate avenues for funding Lower growth prospects

Following conditions could reduce the operational difficulties for entities operating in AP NBFC-MFIs should be exempted from the provisions of the MoneyLenders Acts, specially as interest margin caps and increased regulation has been introduced. Simpler operating procedures than those specified in the AP Micro Finance Institutions

Margin cap of 10% (over cost of funds) for MFIs with asset base of greater than Rs 100 Crore

12% cap for MFIs with asset base of less than Rs. 100 Crore
A cap of 24% on lending yield Processing fee, not exceeding 1% of the gross loan amount
All these factors will affect the ROE of MFI

Loan card for each member in local language Adequate regulations for insurance premium computation & collection

Security deposits already collected should be returned. There should be a standard form of loan agreement.
Though all these factors will create brand image of MFI in borrowers. In order to bring all these in operation MFI has to do some training program which will incur cost.

Lending to individual borrower Sanctioning and Disbursement at central location

Member of only one SHG/JLG

>2 MFI can not lend to same borrower Moratorium period

Lending guidelines
Stricter eligibility criteria for borrowers could bring down the MFI sectors growth rate

Delay in lending process But op. eff. Will be increased

Provide Information about history of borrower

Credit information Bureaus

One or more can be established All MFI will be member of one of it

Multiple lending and over lending

Sa-Dhan has at the national level an Ethical Grievance Redressal Committee

Coercive methods of recovery

No recovery at public places. It should be done at group level It should be discouraged by MFI Establish Proper grievance Redressal procedure

Peer pressure as an Collateral is of no use

Low recovery rate

All the above measures will help MFI to have some standard recovery procedure which will help it in achieving better recovery rates and also in building brand

MFIs can only function effectively in a proper business environment.

If there is non-payment without collateral, it will the cash flow of the MFI will suffer

Extending loan without collateral

All NBFC-MFIs should have a minimum Net Worth of Rs.15 crores

This will hamper the emergence & growth of small MFIs who are operational in remote locations

The Reserve Bank should have the power to remove from office the CEO The power to deregister an MFI and prevent it from operating in the microfinance sector

The governance of the organization should remain with the organisation. RBI shouldn't interfere with the functions as this will lead to chaos within the organization

No MFI can function without obtaining certificate of registration from the Reserve Bank under this Act. All registered NBFC providing micro finance services shall also need to be registered under this Act. Will comply with guidelines of both NBFCs and MFIs of RBI under this Act

Risk: dual guidelines will increase the complexity of operations

Every MFI registered should create a reserve fund before any dividend is declared or surplus is utilized

Any appropriation of any sum should be as specified by RBI and should be reported to it The RBI may, in the interest of clients direct any MFI to invest the whole or part of such reserve fund in unencumbered securities, as per regulations.

Risk: MFI will have lesser control over the use of its reserve fund.

Directions by RBI Extent of deployment of assets and proportion of clients availing MFI services , necessary to classify any MFI. Ceiling on amount of financial assistance and the number of individual clients. Tenure of financial assistance given to clients and other terms such as purpose for which financial assistance can be given, margin caps and periodicity of repayment schedules. Levy of processing fees, interest, life insurance premium and other terms relating to financial assistance and the percentage of margin to be maintained by a MFI.

Risk

Lower flexibility in MFI operations as per the need of the client

Directions by RBI

Risk

Specify the maximum Annual Sustainability issue due to low ticket size Percentage Rate that can be charged by a and high volume transaction incur high MFI on the financial assistance granted to cost to MFI any client. Specify the locations where financial assistance may be sanctioned and disbursed by micro finance institutions Require micro finance institutions to become members of Credit Information Bureaus that may be set up for the Micro Finance Sector Hamper profitability and reach

Permanent exclusion of defaulters from the system and qualitative factors will not be considered

Specify the minimum net-worth of Increase the entry barrier for new and micro finance institutions considering small MFIs and only established players their size of operations and other relevant can sustain parameters Specify prudential norms relating to income recognition, accounting standards, provisioning for bad and doubtful debts, capital adequacy based on risk weights for assets and Due to the different clientele and capacity of MFI it is hard to fulfil stringent prudential norms

Financial Assistance/ Grants

Expenses of promoting MFIs

Microfinance Development Fund

Training & Capacity Building

Expenses related to regulation

Special Powers to the Central Government over RBI

Transparency & Resyrictions

Miscellaneou s Regulations Approval from the Parliament RBIs power to make regulations on its own

Provision of the act to override other laws

Grievances & Penalties

Delay in the proceedings Misuse of power by the Central Government and RBI Chances of conflict between RBI and central government Special law, which would over ride other previous laws Appointing Micro Finance Ombudsmen- Decentralised and Efficient working Restrictions on Joint Ventures and Mergers & Acquisitions Inspection of the books of accounts ensuring transparency

AP government took action without waiting for the RBI to act The RBI with the Malegam report in hand, is waiting for the microfinance Bill Product and process innovation will be discouraged due to restriction Competition will be reduced as well-capitalized institutions will be favored Too many regulations will defer the actual MFI mission of reaching the poorest of the poor and will limit the growth

Sector is different from normal bank portfolios because of the micro-lending methodology hence regulation restrict inclusion

Many MFIs are delivering on their mission of financial inclusion & regulation will constrict their ability to continue to do this.

Push self regulation in MFI Capacity Building or development and mentoring from banking

institutions

Establishment of independent regulatory authority like IRDA, TRAI etc. Saving mobilization should be encouraged to decrease dependability

from external source

Create MFI fund to support social intermediation Microloans are not conventionally collateralized and should not be over burdened with high provision

There should be balance between external and internal governance