No room for the microfinance sector

OUT OF FOCUS

At every conference of microfinance practitioners one gets to hear the same refrain. They moan the lack of financial instruments suitable for the not so wealthy.

For a financial sector which is spawning sophisticated mutual funds and derivatives, structured loans and securitised debts, it seems unfortunate that it cannot use the same intelligence to look at instruments suitable for the poor.

With increasing privatisation of the banking sector, even the RBI and finance ministry pressure for priority sector lending is decreasing and the numbers speak for themselves.

In fact, the numbers are alarming. Agricultural advances as a percentage of bank advances has fallen from 11 per cent in 1994 to about 7 per cent in 2002. Small loans, i.e of size Rs 25,000 and below, have fallen from 18 per cent in 1994 to a low of about 5 per cent.

In terms of the number of loan accounts, while in 1994 the banking sector had about 55 million direct agricultural borrowal accounts, in 2002 this dropped to 35 million and those which were of a loan size of Rs 25,000 and below dropped from 25 million to 20 million.

If these figures seem small in absolute terms, seen against the demand, they seem abysmal. There are an estimated 100 million potential borrowers "" of the 110 million farmers and 35 million non-farm enterprises. And the banking sector has touched only 37 million by 2002. Total demand for micro credit is about Rs 45,000 crore per annum while the bank lending figures added up to only Rs1000 crore in 2002.

So where does the solution lie? How do we bridge this gap? If the banks are unwilling to service this sector or find it commercially unviable to do so, the RBI can do little by moral suasion.

What seems necessary is a different framework, different rules and different players, which can together make this sector commercially sustainable. Luckily the answers are not difficult to find. Sa-Dhan, the association of microfinance organisations has looked at existing laws and made suggestions for a more enabling environment.

What is interesting is that against a total bank lending figure of Rs 1000 crore in 2002, microfinance institutions (MFI) in the informal sector have clocked up a total credit disbursement figure of Rs 500 crore in the same year. And this despite major constraints imposed by law, (i.e the nature of their structure) by RBI (which feels unable to monitor too many small MFIs) and banks (which consider MFIs to be rivals).

So what the microfinance sector is asking the government and the RBI are for three boons: enable the setting up of more MFIs, increase fund flows to this sector by way of equity, debt and deposits and build the capacity of MFIs to make them stronger.

In order to enable the setting up of more MFIs, the state governments have to allow NGOs registered as societies to provide for microfinance in their statement of objectives.

Companies registered under Section 25 of the Companies Act are exempt from registration as an Non Banking Finance Company (NBFC), but the registration of companies under Section 25 which have micro finance as their objective is extremely difficult. To overcome these registration hurdles, the way out could be to allow a different breed of NBFCs with entry level equity capital of Rs 25 lakh and 20 per cent capacity adequacy thereafter.

Not only by way of incorporation, but microfinance institutions are constrained even in the manner in which they can raise funds. In terms of equity, the Income Tax Act does not allow NGOs to promote MFIs because they are not allowed to invest in equity.

Foreign investment in equity norms insist on a minimum of $ 500,000 which is too large for small microfinance organisations to handle. The suggestion here has been to bring this down to $ 50,000.

The government's recent fiat on external commercial borrowing has also affected the meagre flow of funds that the MFIs were accessing by way of loans. And the income tax authorities do not allow tax breaks for provisioning for non performing assets, thus affecting internal accruals.

The suggestions to augment fund flows have been to encourage bilateral donors to lend to MFIs, allow external commercial borrowings with adequate safeguards and most importantly allow MFIs to raise deposits from members (in case of cooperatives) and or borrowers.

The fact that banks are unwilling to lend to MFIs is also because they are afraid that micro lending is administratively expensive and therefore might eat into the principal that is lent to the MFI.

The MFI association has therefore been arguing at every possible forum that for the micro loan borrowers, since availability is much more important than the price (their alternative being the village money lender), there should not be a cap on their lending rates.

If their lending rates are too high market forces will ensure that they are not in business. This freedom, the MFIs feel will also allow them to access bank funds.

This is not a brief for RBI to allow for mushrooming of MFIs. Despite a Harshad Mehta and a Ketan Parekh, the stock market is flourishing with increased vigilance by Sebi and the stock exchanges. This is a plea to ask for the same attention from the authorities to ensure that the100 million small borrower do not suffer because administratively the country is not geared to safeguard their interests.

keyasarkar@yahoo.co.in

(The columnist has been a journalist and has worked in the financial sector)