NO SMALL MATTER

For years Parvati Devi, a vegetable seller in Varanasi, depended on a local money lender to be in business, often paying extortionist interest rates. “If I took Rs 1,000 from him, I had to pay him Rs 100 as interest for a single day,” says Devi.

But all that changed after she came in touch with Utkarsh Micro Finance Pvt. Ltd, a microfinance institution (MFI) that operates in Varanasi. “I now pay only a small amount as interest and I am saving a lot more now,” says Devi.

MFIs have been considered a godsend for millions of poor people without proper access to loans at reasonable interest rates. For they lend easy money, often without much documentation, at around a 25-35 per cent interest rate, which is far less than the extremely high rates charged by local money lenders.

While banks charge anywhere between 13 and 16 per cent interest on loans, most villagers find it much more easy to access loans given by microfinance institutions — even though they charge a higher rate of interest — because they do not involve complicated paperwork.

But of late, MFIs have come under a cloud. “We received hundreds of complaints against MFI agents harassing borrowers who failed to repay the loans. There have been a few suicides also, mostly abetted by the MFIs themselves,” alleges Sujata Sharma, project director, district rural development authority (DRDA), Warangal, Andhra Pradesh.

Take the case of Amjad, an auto driver from Warangal district. Amjad committed suicide allegedly because he was continually harassed by an MFI after he failed to repay the loan on time.

The plethora of complaints against MFIs finally prompted the state government to promulgate the Andhra Pradesh Microfinance Institutions Ordinance, 2010, on October 15. The ordinance makes it mandatory for MFIs to register themselves with district agencies such as the DRDA, besides providing details about the interest rates being charged. It also sets certain restrictions on loan recovery practices which these MFIs are expected to adhere to.

According to Sharma, ever since the ordinance came into force, cases of harassment have declined. The state government now wants to pass a law putting a cap on the interest rates charged by microfinance companies. It has also asked the Centre to come out with a comprehensive law to regulate MFIs in the country.

Right now MFIs register themselves under various laws of the government. While not-for-profit MFIs register under the Societies Registration Act, 1860, Indian Trust Act, 1882, and Companies Act, 1956, for-profit MFIs register themselves as non-banking financial companies (NBFCs) with the Reserve Bank of India (RBI).

MFIs too want a uniform law that will keep the interests of all stakeholders in mind. “In the absence of a central law, MFIs could end up as victims of political intervention. And that’s not good for anybody,” says Abhisheka Kumar, head, finance and accounts, Utkarsh Micro Finance Pvt. Ltd, Varanasi.

K. Sree Kumar, chief executive, Intellectual Capital Advisory Services Pvt. Ltd (Intellecap), a Hyderabad-based social business advisory firm, agrees, “As a broad principle, I would say that every business needs regulation. However, the law should be simpler than the current Andhra Pradesh ordinance.”

The central government had in fact, introduced a bill called Micro Financial Sector (Development and Regulation) Bill in March 2007, which was aimed at the “promotion, development and orderly growth of the microfinance sector in rural and urban areas”. It envisaged a mechanism for the registration of MFIs, the setting up of a microfinance development council and a microfinance ombudsman. But the bill was shelved following concerns that the sector was still too nascent to be regulated.

But today, when the MFI industry is estimated to be worth around Rs 22,000 crore, and has 30 million users, it can no longer be dismissed as “nascent”. In fact, there is now talk that the government may reintroduce the 2007 bill.

However, the bill has its problems, say critics. “It regulates only one category of MFIs — non governmental organisations (NGOs). It does not officially apply to the category of NBFC microfinance institutions. It is not clear if local governments will recognise the difference if it becomes a law,” says Kumar of Intellecap.

According to the RBI, though NBFC MFIs cover over 80 per cent of the microfinance business, they constitute a small percentage of the total number of MFIs in the country.

If the bill — or a newer version of it — is indeed mooted, the government will also have to deal with the demand that there should be a cap on the interest rates charged by the MFIs. “This would help in decreasing the harassment,” says Sharma.

Women’s organisations working in rural areas also say that fixing an interest rate ceiling would go a long way in preventing the harassment of poor villagers. “There should be a cap on the interest rates and recovery should be only through civil procedure,” says V. Rukmini Rao, founder, Gramya Resource Centre for Women, a Secunderabad-based NGO.

Needless to say, MFIs are opposed to this proposal. Kumar of Utkarsh points out that the rate of interest charged by Indian MFIs is actually the lowest in the world. “The banks lend us money at 12-15 per cent and the average operating cost is around 12 per cent, making Indian MFIs the most cost efficient. I don’t think a cap on interest rates is feasible because MFIs have varied cost structures. So a single pill for all is not going to be beneficial,” he says.

The government may hold the same view. Union financial services secretary R. Gopalan recently clarified that right now the government had no plans to cap the interest rates charged by MFIs.

Meanwhile, on October 28, the RBI set up a sub-committee to review the definition of “microfinance” and MFIs and examine the “prevalent practices of MFIs with regard to interest rates and lending and recovery practices to identify trends that impinge on borrowers’ interests”.

It’s not that the MFIs have been completely insensitive to the concerns expressed over their mode of operation. They have formed the Micro Finance Institution Network (MFIN), a self-regulatory body with its own code of conduct. The MFIN is also in the process of establishing a credit bureau that will track credit defaulters and also bring more transparency to the sector.

While that is a laudable move, it cannot be a replacement for a clear legal initiative to regulate the microfinance industry. And the sooner that happens, the better.