Microfinance Institutions Network (MFIN) and Maharashtra Economic Development Council (MEDC) organised the MFIN- MEDC Financial Empowerment Colloquium in Mumbai last fortnight. The conference was conceptualised with the intent to bring together a wide spectrum of financial inclusion and microfinance sector stakeholders to discuss and debate current and emerging issues in microfinance. As the discussions drew to a close, MFIN CEO Alok Prasad spoke to Business Editor Jagdish Rattanani. Excerpts:
What is the theme that played out at the conference today?
What has come out is the following: Micro finance institutions are integral to the national financial architecture for delivery of financial service products to the BoP, poor and disadvantaged.
This is a sector that also needs to be appropriately, repeat appropriately regulated and the proper regulation is a national regulation, not at the state level and with the micro finance bill in Parliament, there is a need for Committee on Finance to take on board views of stakeholders and on that basis it is critical that a national legislation becomes law at the earliest.
What are the top three points you see in the law?
The top three top points already in the bill from our perspective are: First, defining micro finance in a manner which is more comprehensive as compared to current situation where micro finance and micro credit are used in an interchanging manner. We all know that micro finance is not only about credits, its about a range of financial products and services for the poor. It is micro savings, micro pensions, micro insurance, remittances – the whole works.
The other part which we are happy about is the current limit terms of micro finance in the context of micro credit is taken as Rs. 50,000 which the bill says could be as high as Rs. 5 lakh, which I think is great news. It also seeks to create a framework whereby the interests of various stakeholders are adequately represented. So it provides for an advisory council at the national, state and district level. That too is big news. The sub text all through the bill is about client protection and doing the right thing by the client.
What are the points for consideration emanating from your meeting in Mumbai?
More than anything else, the need to ensure that the bill in its final form is ultimately in a form and shape where the interests of all stakeholders are taken on board so that its a balanced document. It does so and maybe it can do so more strongly is to ensure that MFIs become more mainstream and therefore more integral to the national financial architecture.
You’ll have to agree it is the MFIs that have themselves harmed the cause, given the bad reputation that the industry today has… and the associations could not do enough to control that.
I would beg to differ. This is a relatively new industry, one which is evolving and which happened to be at a point in time growing extremely rapidly and in the industry some mistakes took place by some players, I repeat some players, as a part of the very rapid growth and those mistakes got blown out of proportion and the entire industry got painted black. That is the reality.
If mistakes don’t happen, we would be Gods. Mistakes do happen and I openly admit that some mistakes did take place. Were they conscious decisions of the top management? The answer is a ‘No”. Mistakes were more a result of a certain loss of control on the ground because of very rapid growth in limited geographies and in a limited way. I think a lot of seasoned industry players and practitioners actually resent that and feel very strongly about that. Given the fact that the industry was growing extremely rapidly and starting 2006- 2007 onwards the industry was growing at a 70% compounded annual growth rate, so its literally to use an analogy, driving a Ferrari down a country road and some things will break somewhere, which is what happened.
In April, we began work on a dedicated credit bureau for the industry to deal with multiple lending and overleveraging of customers.
We collaborated and funded micro finance transparency and said we will work with everybody in India and ensure that there is complete pricing transparency here. By Feb- March 2011, we had the entire data on pricing of Indian micro finance companies on the web. Pretty early we said yes we recognise there are issues we need to deal with proactively, we began dealing with them but of course its true that meanwhile the crisis hit us.
So the Andhra Pradesh law is a reality. Its not going to go away just yet.
No, right now, I only hope better sense prevails on the AP government and they choose to repeal the law as the national law comes into place.
What are the signals from other States.. a lot of them were also studying the AP example.
They were… It is true but I think everybody today recognises the fact that a national law has been tabled in Parliament and therefore the national law needs to be respected and should prevail eventually.
Can you give me an overview of the industry as it stands today. It was virtually at a standstill in the wake of the AP crisis. Where are we now?
There is a very clear Andhra- non Andhra divide which is a reality today. As of 31 March 2012, outside AP, the industry grew by 5 per cent. At a national level, the industry actually saw a degrowth of about 30 per cent.
That is because AP was a dominant chunk of the industry.
We had a 22 per cent growth in disbursements outside Andhra. Number of clients covered was almost flat. Most importantly, outside AP, repayment rates ruled steady at 99 per cent levels. In the last quarter, bank funding also began to pick up. Investor interest is definitely picking up. IFC Washington made a large investment in Bandhan, which is now the largest MFI in the country. There were another five or six smaller transactions, which shows investor interest. But in AP, things are at a complete standstill.
Mohammed Yunus didn’t have very good things to say about the industry in India…
Mohammed Yunus, you are right… but lets see things in perspective. He has been the father figure of the micro finance movement and it must have hurt him.. almost an emotional blow to see and hear what was happening in India. And yes, it is true that ideologically he has been in favour of a not- for- profit approach as opposed to the fact of where this industry was heading in India.
Would it be nice to shed the cloak of social lending and make it clear to everyone that this is, after all, a business?
In my personal view, there is nothing wrong in reasonable profits. Profiteering is something else. I would stand up and say please do not profiteer at the cost of the poor. To put it in perspective, the total demand for microfinance credit in the country has been estimated at anywhere between $ 150 to 250 billion. Lets say take a lower level of $ 100 billion.
And the RBI says you must have 15 per cent capital against that kind of lending – – which means $ 15 billion.
Now you tell me, from which charity in the world will you find $ 15 billion of capital? Does it exist? It has to be commercial capital. It has to be coming from commercial capital markets and thats the way it will work.
Regulations now cap your returns…
Today there is a lending rate cap at 26 per cent and margin cap at 1 per cent, which of course creates a double whammy situation which we are discussing with the RBI. We want one cap, not two.
But isn’t 12 per cent juicy enough?
Look, 12 per cent is adequate.
But cost of funds is 16- 17- 18 per cent. Even at 16 per cent, if you add the margin cap of 12%, we have 28 per cent but you’ve capped it at 26 per cent.
Where does that leave the industry?
The industry is now at the crossroads. We are going through a good process of evolution. The industry is poised to grow and serve clients better.
