Ngo MFIs
NGO mFIs: There are a large number of NGOs that have undertaken the task of financial intermediation. Majority of these NGOs are registered as Trust or Society. Many NGOs have also helped SHGs to organise themselves into federations and these federations are registered as Trusts or Societies. Many of these federations are performing non-financial and financial functions like social and capacity building activities, facilitate training of SHGs, undertake internal audit, promote new groups, and some of these federations are engaged in financial intermediation. The NGO mFIs vary significantly in their size, philosophy and approach. Therefore these NGOs are structurally not the right type of institutions for undertaking financial intermediation activities, as the byelaws of these institutions are generally restrictive in allowing any commercial operations. These organisations by their charter are non-profit organisations and as a result face several problems in borrowing funds from higher financial institutions. The NGO mFIs, which are large in number, are still outside the purview of any financial regulation. These are the institutions for which policy and regulatory framework would need to be established.
Non-Profit Companies as MFIs:
Non-Profit Companies as mFIs: Many NGOs felt that combining financial intermediation with their core competency activity of social intermediation is not the right path. It was felt that a financial institution including a company set up for this purpose better does banking function. Further, if mFIs are to demonstrate that banking with the poor is indeed profitable and sustainable, it has to function as a distinct institution so that cross subsidisation can be avoided. On account of these factors, NGO mFIs are of late setting up a separate Non-Profit Companies for their micro finance operations.
The mFI is prohibited from paying any dividend to its members. In terms of Reserve Bank of India’s Notification dated 13 January 2000, relevant provisions of RBI Act, 1934 as applicable to NBFCs will not apply for NBFCs (i) licensed under Section 25 of Companies Act, 1956, (ii) providing credit not exceeding Rs. 50,000 ($1112) for a business enterprise and Rs. 1,25,000 ($2778) for meeting the cost of a dwelling unit to any poor person, and, (iii) not accepting public deposits.
Mutual Benefit MFIs:
The State Cooperative Acts did not provide for an enabling framework for emergence of business enterprises owned, managed and controlled by the members for their own development. Several State Governments therefore enacted the Mutually Aided Co-operative Societies (MACS) Act for enabling promotion of self-reliant and vibrant co-operative Societies based on thrift and self-help. MACS enjoy the advantages of operational freedom and virtually no interference from government because of the provision in the Act that societies under the Act cannot accept share capital or loan from the State Government. Many of the SHG federations, promoted by NGOs and development agencies of the State Government, have been registered as MACS. Reserve Bank of India, even though they may be providing financial service to its members, does not regulate MACS.
For Profit mFIs:
Non Banking Financial Companies (NBFC) are companies registered under Companies Act, 1956 and regulated by Reserve Bank of India. Earlier, NBFCs were not regulated by RBI but in 1997 it was made obligatory for NBFCs to apply to RBI for a certificate of registration and for this certificate NBFCs were to have minimum Net Owned funds of Rs 25 lakhs and this amount has been gradually increased. RBI introduced a new regulatory framework for those NBFCs who want to accept public deposits. All the NBFCs accepting public deposits are subjected to capital adequacy requirements and prudential norms.
There are only a few mFIs in the country that are registered as NBFCs. Many mFIs view NBFCs more preferred legal form and are aspiring to be NBFCs but they are finding it difficult to meet the requirements stipulated by RBI. The number of NBFCs having exclusive focus on mF is negligible.
Capital Requirements:
NGO-mFIs, non-profit companies mFIs, and mutual benefit mFIs are regulated by the specific act in which they are registered and not by the Reserve Bank of India. These are therefore not subjected to minimum capital requirements, prudential norms etc. NGO mFIs to become NBFCs are required to have a minimum entry capital requirement of Rs. 20 million ($ 0.5 million). As regards prudential norms, NBFCs are required to achieve capital adequacy of 12% and to maintain liquid assets of 15% on public deposits.
Foreign Investment
Foreign investment by way of equity is permitted in NBFC mFIs subject to a minimum investment of $500,000. In view of the minimum level of investment, only two NBFCs are reported to have been able to raise the foreign investment. However, a large number of NGOs in the development - empowerment are receiving foreign fund by way of grants. At present, over Rs.40, 000 million ($ 889 million) every year flows into India to NGOs for a whole range of activities including micro finance. In a way, foreign donors have facilitated the entry of NGOs into micro finance operations through their grant assistance.
Deposit Mobilisation
Not for profit mFIs are barred, by the Reserve Bank of India, from mobilising any type of savings. Mutual benefit mFIs can accept savings from their members. Only rated NBFC mFIs rated by approved credit rating agencies are permitted to accept deposits. The quantum of deposits that could be raised is linked to their net owned funds.
Borrowings
Initially, bulk of the funds required by mFIs for onlending to their clients were met by apex institutions like National Bank for Agriculture and Rural Development, Small Industries Development Bank Of India, and, Rashtiya Mahila Kosh. In order to widen the range of lending institutions to mFIs, the Reserve Bank of India has roped in Commercial Banks and Regional Rural Banks to extend credit facilities to mFIs since February 2000.
Both public and private banks in the commercial sector have extended sizeable loans to mFIs at interest rate ranging from 8 to 11 per cent per annum. Banks have been given operational freedom to prescribe their own lending norms keeping in view the ground realities. The intention is to augment flow of micro credit through the conduit of mFIs. In regard to external commercial borrowings (ECB) by mFIs, not-for-profit mFIs are not permitted to raise ECB. The current policy effective from 31 January 2004, allows only corporates registered under the Companies Act to access ECB for permitted end use in order to enable them to become globally competitive players.
Interest Rates:
The interest rates are deregulated not only for private mFIs but also for formal baking sector. In the context of softening of interest rates in the formal banking sector, the comparatively higher interest rate (12 to 24 per cent per annum) charged by the mFIs has become a contentious issue. The high interest rate collected by the mFIs from their poor clients is perceived as exploitative. It is argued that raising interest rates too high could undermine the social and economic impact on poor clients. Since most mFIs have lower business volumes, their transaction costs are far higher than that of the formal banking channels. The high cost structure of mFIs would affect their sustainability in the long run.
Collateral requirements:
All the legal forms of mFIs have the freedom to waive physical collateral requirements from their clients. The credit policy guidelines of the RBI allow even the formal banks not to insist on any type of collateral and margin requirement for loans upto Rs 50,000 ($1100).
Regulation & Supervision
India has a large number of mFIs varying significantly in size, outreach and credit delivery methodologies. Presently, there is no regulatory mechanism in place for mFIs except for those that are registered as NBFCs. As a result, mFIs are not required to follow standard rule and it has allowed many mFIs to be innovative in its approach particularly in designing new products and processes. But the flip side is that the management and governance of mFIs generally remains weak, as there is no compulsion to adopt widely accepted systems, procedures and standards. Because the sector is unregulated, not much is known about their internal health.
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Extracts from an article written and presented at the APRACA Seminar at Manila on Regulation of mFIs in July 2004 by K.Muralidhara Rao, General Manager, NABARD, Mumbai. The views expressed are personal and attempts to capture the present thinking of regulating institutions.
