Responsible finance is not an output resulting from good intentions. It is an input in to business to ensure its relevance to customers and other stakeholders. This means that institutions should design their products, processes and staff training to think, plan and deliver responsible finance. The institutions should have an appropriate collective mindset and back it up with a set of practices that look at the customer as a valuable person who has to be nurtured and sustained. If the institution level initiative on responsible finance is effective and purposeful, then industry-level initiatives become easier to implement.

Today all stakeholders demand responsible finance from microfinance institutions (MFIs).  It is only fair and reasonable that they should expect the MFIs to be responsible to their customers. But let’s take a step back and examine what the stakeholders do to the MFIs—does their behavior qualify as responsible? Let me look at the other stakeholders in turn. Read the rest of this page »

The Government of India promised a new draft microfinance legislation, and it has delivered.  The consultative process adopted, the work done by the Malegam Committee, and the regulations issued by the Reserve Bank of India (RBI) and the participation of the lenders, practitioners and others have made the draft comprehensive and well-rounded.  The Andhra Pradesh statute, despite its debilitating impact on the sector, seems to have triggered this comprehensive response from the Union government.  The need to regulate the microfinance sector in customers’ interest and also the need to avoid a multitude of microfinance legislation in different states has led to this bill which keeps registered microfinance institutions (MFIs) out of the ambit of money lending laws.

The chief features of the bill are that every institution in microfinance should register with the regulator, transform into a company when they attain a significant size, be subject to a variety of prudential and operational guidelines that are introduced by the regulator, provide periodic information to the regulator and face penal action for violation of law or any rules framed. The bill provides flexibility of RBI to apply different measures, vary the same and delegate the powers to regulate to NABARD.

The grievance redressal procedures, mandatory enrollment to credit bureaus and code of conduct enforcement through industry associations will improve customer protection. The creation of national and state councils should provide wider sector participation in policy making.  The proposed microfinance fund that would not only provide grants but also bulk finance to MFIs is a very welcome proposition. Read the rest of this page »

The lean season¹  monetary policy statement has finally signaled Reserve Bank of India’s (RBI) intent to engage in the regulation of Microfinance Companies from a customer protection perspective.  These regulations would apply to 56 NBFCs (against a total of 264 MFIs that reported information to Sa-Shan²  last year).  But these 56 institutions account for an estimated 85% of clients and loan volumes.

Breaking down the regulation

This policy for MFIs is based on the considerable work done by the Malegam Committee and the sector wide consultations that followed. While the committee’s recommendations were positive in terms of intent and direction they were found wanting in pragmatism and enforceability. In a commendable effort, RBI had held wide consultations with several stakeholders and accommodated valid representations before finalizing its views. As a result the statement issued by the RBI starts with saying that it accepts the broad framework of regulations recommended by the Malegam Committee, implying that the practical aspects required rethink. Read the rest of this page »

In some districts of Karnataka State (India) there has been resistance to repay loans taken from MFIs (also refer to the WSJ article on repayment problems in that state). In Kolar the Muslim clergy have given the call, pronouncing the MFI loans as un-Islamic; in Mysore a ten day curfew that followed a communal clash created repayment problems, in Tumkur another local group asked the MFIs to pay some kind of protection money to carry on their business resulting in repayment disturbances The size of the affected portfolio is estimated to be between $12 and 15 million. For the large MFIs, the problem is very small, while some small MFIs have a large problem. The MFIs are confident that the problems will be resolved and that they would recover most of the loans. The affected portfolio is tiny: less than 0.5% of overall outstanding loans. So we shouldn’t think of this in terms of the sub-prime crisis. Nonetheless we should draw lessons from those events.

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We have had quite a bit of electronic chatter on interest rates. There seems to be no middle line: some say “cost does not matter, but access does” and others swear that they will not practice usury.

I have been party to many discussions and have always ended up on the side of the borrower. If microfinance is about prioritizing the poor, then pricing should consider their context. Sustainability of the poor should matter more than anything else.

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Is financial inclusion a business proposition or Corporate Social responsibility ? More than 1.68 million “No frills accounts” have been opened by banks in India in response to an initiative of the Reserve Bank of India. Impressive numbers. But the plans are limited. They concentrate more on opening the accounts than on what should follow (pdf). A study revealed that 28% of the new no frills accounts (pdf) had amounts saved in them and only about 15% had seen some transactions after the initial credit. Read the rest of this page »

For those familiar with the Indian microfinance scene the slower growth rates of SHG linkage (only 18% compared to 40%+ in the previous year) should be a good opportunity to think.  Is the slowdown (State of the Sector Report – Microfinance India 2008) just a pause or a stop? I wonder where the enthusiasm of the past years has gone.  Neither NGOs, nor donors or the policy establishment seem to be pushing the SHG model with same vigor as in the past years.  Read the rest of this page »