The panel will enable big NBFCs to carry on microfinance on a larger scale than the current microfinance players, without regulatory oversight. The objectives of the Malegam report are to protect the microfinance borrower, promote the SHG-bank linkage programme in preference to the MFI-JLG (Joint Liability Group) programme, ensure credit supply to the MFI-JLG programme, and protect the stake of banks and FIs in the microfinance sector. The broad objectives are diverse and finding a balanced solution is a difficult task. The Committee's observations are not without shortcomings. The committee recommends that for NBFCs to become NBFC-MFIs, 90 per cent of their total assets (excluding cash and cash equivalent) should be for microfinance activity. On the contrary, it permits other NBFCs to engage in microfinance up to a cap of 10 per cent of total assets without specific regulation. The big NBFCs have an asset size of over Rs 10,000 crore. Ten per cent of such a size is bigger than the assets of the fifth biggest MFI in microfinance. Big NBFCs can carry on microfinance on a scale larger than the current microfinance players without regulatory oversight. While the provision is obviously intended to encourage scale in microfinance it restricts the scope of product diversification of NBFC-MFIs. This lack of flexibility of NBFC-MFIs, compared with the freedom of regular NBFCs, will allow them to gradually take over the market while functioning in an unfettered manner. To prevent over-borrowing, the committee restricts the individual loan size to Rs 25,000. The aggregate outstanding loans of a borrower are restricted to Rs 25,000. The tenure of the loan is aligned with the borrower's cash flow. The committee mandates that 75 per cent of the loans by MFIs should be for income-generation purposes, and leaves the repayment frequency (weekly/fortnightly/ monthly) to the choice of the borrower. However, the limit of Rs 25,000 is too low to procure income-generating assets, or to protect the borrower from negative market or environmental shocks. In effect, the recommendation may drive borrowers to borrow from informal sources. The committee does not clearly define the scope of loans for income-generating purposes. On the repayment frequency, the committee's suggestions contrast with the JLG model, in which group decision prevails over that of the individual to ensure joint liability of repayment. The third objective targets the growth of MFI-JLG programme because the factors driving the growth are found to be unjust. The Committee recommends an interest rate cap to curb the growth. The interest rate cap is 24 per cent, subject to the net interest margin cap (difference between the amount charged to the borrower and the cost of funds to the MFI). The net interest margin cap is 10 per cent for the larger MFIs (loan portfolio exceeding Rs 100 crore) and 12 per cent for the smaller MFIs (loan portfolio up to Rs 100 crore). The margin cap applies at an aggregate level for the MFIs. The committee arrived at a normative cost structure to prescribe the margin cap with an overall interest cap. The interest cap does not compensate for the higher cost of operation in remote areas. The committee's view to restrict scope of securitisation for NBFC-MFIs will burden traditional sources of debt and equity funds. The committee allows only corporates with a minimum net worth of Rs. 15 crore to become NBFC-MFIs. The suggestion is intended to induce economies of scale and better monitoring and control. To protect the stake of banks and FIs, the committee recommends provisioning norms and capital adequacy norms. NBFC-MFI is required to maintain an aggregate provision for loan losses, which is the higher of 1 per cent of the outstanding portfolio or 50 per cent of the aggregate loan instalments which are overdue between 90 to 180 days and 100 per cent of the aggregate loan instalments which are overdue beyond 180 days. The capital adequacy ratio is 15 per cent and all of the net owned funds should be in the form of Tier I Capital. The provision is inconsistent with RBI Master Circular on Capital Adequacy. The de-recognition of the Tier II capital and other instruments of Tier I capital will prevent the broad basing of the capital structure of NBFC-MFI. The committee feels that the regulatory standards will meet the objectives and, therefore, allows priority sector lending status for bank lending to MFI. However, the committee fails to give specific direction to precipitate bank lending. A specific allocation of 10 per cent of 40 per cent limit of priority sector lending of banks through revision in RBI Circular on Lending to Priority Sector is realistic. On the funding source for NBFC-MFIs, the committee emphasises setting up a “Domestic Social Capital Fund” for “Social Investors”. The idea has limited relevance without clear guidelines for the fund to operate. Specific invitation to banks and government institutions to participate in the fund may ensure its success. The recommendations may be seen as a useful framework of guidelines to regulate NBFC-MFI, but one that needs to be strengthened to facilitate the growth of microfinance.
(The author is CFO, Mimo Finance, a New Delhi-based microfinance company.)
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