MFI Bill hope for future, but no immediate relief

For an industry which is likely to see half of its portfolio turning non-performing, the new Bill on micro finance institutions (MFIs) is seen more as an insulator from future shocks than a cure for the earlier ones.

While the Rs 20,000-crore microfinance sector could not expect more from the new Bill pertaining it, the fear of non-recovery over Rs 7,000 crore loans in Andhra Pradesh has watered down the expected takeaways.

The finance ministry yesterday released the draft of The Micro Finance Institutions (Development and Regulation) Bill for public comment.

“It is like laying a good highway, but at the end of the highway there is a ditch, and we need Rs 7,200 crore to fill it. The Bill will not solve any problem in Andhra Pradesh. It is not designed to solve the problem,” said Vijay Mahajan, founder of Basix and chairman of the Microfinance Institutions Network.

The MFI industry has been bleeding since October last year after the Andhra Pradesh government issued an ordinance that severely curbed their operations in the state.

The restriction in fresh lending and collections leaves Rs 7,200 crore currently stuck in the state.

The biggest relief is the Bill will nullify the Andhra Pradesh law, but it would be of little help to recover the dues. For the Bill to pass as an Act, and subsequently come into force, it will take around a year, by when the non-recovered loans in Andhra Pradesh would be two years’ old.

“This would mean little hope of recovery of dues from 9.2 million borrowers in Andhra Pradesh. This potentially could lead to a financial disaster, as the names of all the borrowers have been in the credit bureau,” said Mahajan.

According to industry sources, after the crisis in Andhra Pradesh, 10-12 small and mid-sized MFIs are on the brink of collapse, as their net worth turned negative.

Yet, the Bill is seen as a major step towards the long-term growth prospects of the sector, as it will not only take the institutions out of the Money Lending Act of states, but also empower the Reserve Bank of India to issue directions to MFIs on margin caps, tenure of loans, periodicity of repayment schedules, levy of processing fees, interest and life insurance premium, among others.

“The big relief that the Bill provides is the fact that it will overwrite the ordinance in Andhra Pradesh. No other state government will pass such a law in future,” said Chandra Shekhar Ghosh, managing director, Badhan, the country’s fourth-largest MFI.

Also, while eliminating the possibility of state level legislation, the Bill does involve formation of state advisory council, a five-member body, with two representatives of state governments. Among other things, it will gauge over-indebtedness and large scale defaults.

“There is some ambiguity in the Bill, like the state advisory council. There could be some subjective element in it. Also, it will take at least six months for the Bill to pass,” said

G Padmaja Reddy, managing director, Spandana Sphoorty Financial Ltd.