The verdict of the much-awaited Malegam committee on micro-finance institutions (MFIs) is out, but the industry is not happy. Strapped for cash after being accused of coercion, the MFIs are now faced with the daunting task of raising as much as Rs 6,000 crore in the next six months to provide for possible bad loans in Andhra Pradesh, which recently cleared a Bill to regulate MFIs. Vijay Mahajan, founder of Basix and chairman of the microfinance representative body Microfinance Institutions Network, explains why the report falls short of the industry’s requirements in an interview with Namrata Acharya. Excerpts:
What is your assessment of the Malegam committee report?
In terms of its broad framework, the report is on track. The micro-finance sector needed this framework for promoting financial inclusion. The report says the interest of the borrowers (in terms of affordability) and the interest of the lender (in terms of sustainability) should be balanced. In that sense, one could expect nothing more. However, the report confines itself to credit services and not savings.
So do you mean the committee should have allowed MFIs to collect public deposits?
Yes, the committee should have considered the conditions under which non-banking finance companies (NBFCs) could accept savings. MFI is not just micro-credit. It is about inclusive financial services. Poor borrowers not only need credit, they also need services like money transfer, insurance and savings.
But MFIs that were NBFCs were never allowed to accept deposits and the report was against the backdrop of a crisis in the sector. In that sense how far is that demand justified?
The Andhra Pradesh Act practically spelt the death knell for MFIs in the state. In that context, is the report of any help?
The Andhra Pradesh Act was a big catastrophe. Nearly Rs 7,500 crore is stuck on the ground. That has not been alleviated. The report has not touched on the point, except in the last paragraph, where it has offered one motherhood statement to the effect that while recognising the need to protect borrowers it is also necessary to recognise that the recovery culture is adversely affected and the free flow of funds in the system is interrupted.
But the Reserve Bank of India (RBI) has allowed banks to restructure MFI loans, and the report has also recognised the need for MFIs for financial inclusion, so isn’t that a major step towards putting MFIs in a well-regulated framework?
Yes, banks have been allowed to restructure loans and the Malegam committee report has also put in place a medium-term regulatory framework. But this is like someone planting oranges for people dying of hunger, and assuring them that the fruit will be tasty. In the near term, what is the future for those MFIs that have a major chunk of their portfolios stuck in Andhra Pradesh? In addition, on the recommendation of the report, there is a fear of MFIs being decapitalised, since the Malegam committee has enhanced provision requirements. This means that on Rs 7,500 crore that is stuck in Andhra Pradesh, Rs 5,000 crore to Rs 6,000 crore has to be provided for by June or July. The RBI allows three years for complete provisioning, but the Malegam committee says it has to be done within 180 days. It has also raised the capital adequacy ratio to 15 per cent. Thus, the sector has to raise Rs 5,000 crore in the next six months. No one is willing to give a Rs 50 crore loan, so how will MFIs raise such a huge sum in such a short time?
So, rather than providing MFIs a breather, the report is a double-blow.
Yes. The report has closed its eyes to the situation in Andhra Pradesh. Unless, the Andhra Pradesh crisis is resolved, the report will accelerate the slow death of the microfinance sector. For MFIs outside Andhra Pradesh, the report is not too bad, though.
Will the report precipitate consolidation in the MFI industry since smaller MFIs might find it difficult to survive?
It would be a forced consolidation. Interest rates of 24 per cent work for bigger MFIs, but not the smaller ones.
So what is the bigger threat now? The Malegam committee report or the Act?
It looks like the Act will remain in force. So before one can disburse loans in the state, one has to take the government’s permission. It is ridiculous to impose such restrictions. On the other hand, the Malegam committee has severely constrained MFI operations. Some provisions are so severe that some MFIs will be facing death by April.
The RBI is yet to accept the recommendations, so do you expect any flexibility?
This is a RBI board sub-committee, that too headed by a person like Y H Malegam. The chances of the report not being accepted are low.
Have you written to the RBI on this?
We have written to the RBI explaining, point by point, the shortcomings of the report.
The report also talks about the creation of Domestic Social Capital Funds. It also says MFIs should be encouraged to issue preference capital which carries a coupon rate of 10 to 12 per cent and this can be considered Tier II capital. So will that be of any help?
I recommend that Mr Kumar Mangalam Birla put some money in it first to kick-start the process. For raising preference capital, the math doesn’t work. The pre-tax cost is 13 to 15 per cent. That is even more than a bank. The problem is that the Malegam committee has not done the basic math. I challenge Mr Birla to raise as much as Rs 4,000 crore in this short period.
What is your view on the report’s assessment on the rate of interest?
The report says the interest rate calculated on the mean of the outstanding loan portfolio for bigger MFIs in 36 per cent. That is incorrect. In fact, a few paragraphs later the report says if the rates are to be calculated on the gross portfolio, including the securitised portfolio, the interest rate is reduced. This is a glaring mistake, and shows that they have not done their basic math.
Do you admit that it was the absence of self-regulation that led to the present crisis? Is it an exploitative mechanism?
There is nothing to admit, since whatever interest rates the MFIs charged were legal. But there is no doubt there were some aberrations. Some MFIs in their quest for private equity funds have gone in for multiple lending that led to over-indebtedness in the sector. They kept charging interest rates as high as 30 per cent, even when the customer base was one or two million. All that has backfired.
Do you see banks at fault, since it was their absence that drew poor borrowers to MFIs?
Banks are the culprits. It has been 40 years since banks in India were nationalised but 40 per cent of Indians do not have access to basic banking services.
How relevant is the micro finance Bill?
It is meaningless. It only talks about a small part of the MFIs. In fact, NGOs should not be allowed to work as MFIs. When you are in a financial sector, there has to be some discipline.
So your final assessment on the Malegam report?
The Malegam committee report is a lost opportunity, which comes once in ten years.