India’s central bank has objected to a government proposal to allow microlenders to collect small deposits from poor borrowers.
The Reserve Bank of India (RBI) has said it is concerned about the safety of the money deposited with microlenders, said two finance ministry officials, who asked not to be identified. RBI informed the government about the concern in its feedback to the ministry on the draft microfinance Bill, in which the proposal to allow deposits was included.
“RBI has opposed the inclusion of thrift in the Bill, saying it will not allow thrift to anyone other than NBFCs (non-banking financial companies),” said one of the officials. An email sent to RBI seeking comment remained unanswered.
Currently, microfinance institutions (MFIs) are barred from collecting deposits from the public. Even among NBFCs, only a few are allowed by RBI to collect public money.
The draft Microfinance Institutions (Development and Regulation) Bill proposes to allow MFIs to collect deposits from members of self-help groups (SHGs) or individuals who are availing financial services provided by such firms. An SHG is a group of women that collects small savings and lends within the group.
MFIs provide small loans to the poor at interest rates of 24-36%, nearly double the rate at which they get the money from banks.
The government had included the collection of small savings (or thrift, as it is termed in Indian finance lingo) as one of the financial services that can be brought under the definition of “microfinance services”, along with providing microcredit, remittance of funds, providing pension or insurance services, or any other specified services.
Andhra Pradesh, which accounts for more than a quarter of India’s Rs.20,000 crore microlending sector, promulgated a controversial law in October 2010 to control MFIs after a series of suicides were reported in the state because of alleged coercive practices used by some lenders to recover money.
The law, which prohibited MFIs from collecting weekly instalments from borrowers, doing doorstep business, and giving a second loan to the same borrower without government approval, resulted in collection rates of MFIs dropping to 5-10% in the state and forced them to stop giving new loans. Banks, too, stopped giving loans to MFIs because of the uncertainty.
The finance ministry, however, is not rigid about the inclusion of the thrift clause in the proposed Bill. According to the ministry official cited above, the ministry had included thrift as an enabling provision and had left it entirely up to RBI to decide whether it wants to allow MFIs to collect deposits.
“The definition of microfinance services nowhere says that thrift is allowed to every player. As part of our discussion with RBI, we have told them that if you have concerns over thrift, then you can address it as part of the regulations that will be framed,” the official said.
The government had included this provision as “it will be difficult to later get an amendment”, the official said.
The draft microfinance Bill, which is currently in the discussion stage, seeks to put MFIs outside the purview of state-level legislation by stating that MFIs registered with RBI won’t be treated as moneylenders. Once the Bill becomes a law, it will keep MFIs outside the purview of state legislation such as the Andhra Pradesh law.
The Bill also proposes to make RBI the sole regulator of MFIs.
“RBI already has guidelines in place for an entity that wants to get into the deposit-taking space. They can get registered as a bank or as a deposit taking NBFC,” said Robin Roy, an associate director at consultant PricewaterhouseCoopers. “If MFIs are allowed to collect savings, there could be a multiplicity of regulatory structures and, therefore, there is a strong case not to reinvent the wheel.”
The draft Bill was placed by the finance ministry on its website on 6 July. The ministry is currently in the process of collating feedback from various stakeholders. It hasn’t decided if any changes have to be made to the draft before it is sent to the finance minister for approval.
The Bill has to be approved by the Union cabinet and Parliament before it becomes a law.
Senior officials in the microlending sector said RBI should allow NBFC-MFIs with tighter regulations for this specific category of firms.
“RBI has the power to permit NBFCs to collect term deposits on a case-to-case basis. Looking at MFIs, what we strongly urge RBI is to permit strong, well-run NBFCs to take term deposits. They can also look at much tighter regulations for these institutions,” said Alok Prasad, chief executive of Micro Finance Institutions Network, an industry lobby of microlenders.
Roy, however, said allowing MFIs to collect deposits under a separate dispensation does not necessarily help the system. “The MFIs’ strategic objective of helping in the dispersion of microcredit to those sections where banks have not been able to reach out effectively should continue to be encouraged without creating too many new regulatory or compliance structures,” he said.
Earlier this year, the central bank had issued regulations to govern MFIs operating as NBFCs, based on the recommendations of an expert panel headed by Y.H. Malegam. The new rules capped the interest rate MFIs can charge at 26% and made a minimum two-year tenure mandatory for all loans above Rs.15,000.
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