Strong capital base, technological backup must for healthy growth of MFIs: ASSOCHAM

New Delhi: Apex chamber ASSOCHAM today called for raising the minimum capital requirement for micro finance institutions (MFIs) to at least Rs 25 lakh backed with a strong technology intervention for adequate reporting, supervision and regulation. The Micro Finance Institutions (Development and Regulation) Bill 2011 which is awaiting Parliament’s approval pegs the minimum capital and extent of assets deployment at Rs 5 lakh initially. This should be raised so that weaker and smaller players are discouraged. The product model with capped annual percentage rate (APR) and margin proposed do not support viability unless funds are made available at affordable costs, said The Associated Chambers of Commerce and Industry of India (ASSOCHAM). It is important that the regulator defines expression ‘micro finance’ in monetary terms as it is linked to prevailing inflation. “This will provide a singular approach towards defining financial inclusion also which is a prime agenda of the government,” said secretary general D.S. Rawat. There is also a strong need to cover government-led programmes to ease out various overlaps between the state and central government schemes. The Bill covers thrift schemes only for self-help groups while it should also cover individuals to encourage savings among the micro-finance community with adequate safeguards. The proposed law is silent on percentage of profits to be set aside to form a fund for taking care of financial eventualities. There is a need to specify a percentage and also define the term ‘profit.’ The RBI should spell out minimum benchmarks for healthy growth of MFIs so that inflow of funds from banks can increase substantially. “In fact, the RBI can delegate regulatory powers with respect to any class of MFI to an independent agency like NABARD which has the knowledge and understanding of their development needs,” said Mr Rawat. Products offered by MFIs need to be based on proper research with clarity on APR as well as margin caps. The cap on interest and margin does not address the cost of funds. This remains an area of concern over which MFIs have no control. The role of credit rating agencies may be explored for transparency and good governance to assist pricing of resources for the sector, said Mr Rawat. The proposed Micro Finance Development Council to address grievances of various stakeholders should have representations from industry bodies like MFIs themselves or Sa-Dhan – the association of community development finance institutions – and independent practitioners. Micro finance loans serve as the last-mile bridge to low-income population estimated at 600 million which is excluded from traditional financial services system and seeks to fill the gap. Bigger financial institutions with huge funds do not find commercially feasible to lend to the poor as they cannot offer anything as collateral security. India is one of the largest micro finance loan market in the world with the sector having potential to grow at an annual average of 50 per cent, and attracting domestic and foreign investors hoping to practice profitable philanthropy. The financial needs of MFIs are estimated at 200 billion dollars in the long-term. The recent RBI intervention by constituting Malegaon Committee is a progressive step to regulate the sector and tackle issues like cost of raising funds, interest rates, loan ticket size, repayment options and high operating costs due to door-to-door step facilities.

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