High interest rate and lack of clarity on end use of funds was the primary reason behind the regulator asking banks not to classify loans to non-banking finance companies (NBFCs) for on-lending against gold jewellery as priority sector lending. On Wednesday, the Reserve Bank of India (RBI) had asked banks to not classify loans extended to NBFCs which were lent by NBFCs against gold as priority sector loans. Gold loan companies are lending the money at a very high rate to customers. The money may not be going to priority sector borrowers. We do not know whether the gold loan companies are using the money, which they borrowed from banks, for borrowers who come under priority sector,” K C Chakrabarty, Deputy Governor of the Reserve Bank of India, said on Friday. According to norms, banks have to extend 40 per cent of their loans to the priority sector. NBFCs, however, do not have such mandate. Chakrabarty, however, clarified that banks could continue to lend to the NBFCs which are in the gold loan business.”
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Sunday, February 6, 2011
The way forward for microfinance
Social sciences literature now recognises social, human, and cultural capital, in addition to economic and physical capital. Even though independent, different types of capital possess attributes of interdependency and reciprocity. Simply, this means that even social capital can be transmuted into economic capital. And, women groups repaying loans to microfinance institutions through frequent instalments in a group setting exemplify social capital at work. The underlying idea, as Robert Putnam found in the Italian rotating credit associations, is that membership in associations (or SHGs) generates trust and norms of reciprocity. Typically, SHGs are small groups possessing ‘thick trust’ (trust based on personal knowledge of other actors in the group) that makes responses of group members predictable and enforcement of loan repayment relatively easy; therefore, attracting financial institutions to lend. Accordingly, in social capital — relationships of trust embedded in social networks — the poor have a non-monetised resource that metamorphoses into loans and the attractiveness of the SHG model is founded on inclusiveness, the unique democratic accessibility of social capital, because all other forms of capital exclude the poor, ignorant, and unpropertied. Furthermore, researchers agree that social capital is a multidimensional construct having several forms and two forms of social capital — bonding (that links people together with others like them) and bridging (social ties that cut across differences such as caste, class or religion) — distinguished by Avis Vidal, are generally accepted. Bonding social capital promotes exclusive identities, gives precedence to the group over community and generates specific reciprocity; in contrast, bridging social capital is outward looking, promotes acquaintances with different and distant people and leads to generalised reciprocity. Importantly, as the work of Xav Briggs has shown, the outcomes associated with the two forms of social capital are different. Bonding capital helps the poor to get by or cope with particular challenges (social support), as opposed to bridging capital that helps to change the opportunity set and get ahead in life (social leverage). Presently, lending activities of MFIs are primarily confined to lend and enforce collections drawing down on the social ties found in supportive groups. Recently, Dr Rangarajan, chairman of the PM’s Economic Advisory Council, also referred to the “flawed business model” in which the MFIs primarily leverage on the existing social ties to engage in multiple lending, that too for consumption. Additionally, insights available from a recent MIT study (Abhijit Banerjee and others, 2009) in 104 slums of Hyderabad show the importance of context while designing interventions for the poor. The MIT study found that pre-existing conditions of households matter. In response to MFI loans, households with existing businesses increase spending on durable goods (e.g., investment). Households with high propensity to start businesses, finding loan amounts to be inadequate to start businesses reduce spending on temptation goods (e.g., tobacco, alcohol). And, households with low propensity to start businesses increase spending on nondurables spending (e.g., food, marriage, illness). Therefore, the challenge, in addition to broadening and deepening ties, is to design specific interventions that are based on the existing business activities of households and their propensity to engage in income-generating activities. The fact that the bonding and bridging capital interact and mediation by intermediary structures is possible provides a useful way to access outside resources (build bridging capital) to transform social ties to economic capital. Drawing from practice stories elsewhere, MFIs can work as intermediary organisations to design deep contextual interventions. Households having pre-existing businesses will require social ties that provide more than mere emotional support and everyday favours. More useful are bridging contacts that can help them to get a crucial new idea or news of an impending market downturn or provide political and managerial access. The value of such bridging networks lies in the fact that they are not passive bridges, but are active links relaying important information and are also capable of endorsing (vouching for) the poor having limited access to money and other scarce resources. For households with little propensity to do business, the MFIs intervention will include training and other support to help the households — including those with no formal schooling or language skills — to acquire and practise ‘public life skills’ to earn more than subsistence wages that only help them to cope with daily life. Research by Michael Woolcock and others is increasingly pointing to the contribution of such linking social ties to help the poor to expand their opportunity set, for example, getting jobs through external contacts. Finally, for households with high inclination to engage in income-generating activities, getting ahead in life will require training and other support, such as leveraging funds from the government and locating funding sources to meet their complete fixed and working capital needs. All in all, social capital is about relationships; therefore, freely accessible to the poor and the common availability differentiates social capital from other forms of capital. The MFIs have mainly limited themselves to using the existing bonding capital in groups to lend and recover. However, the simple but crucial support/leverage distinction and the fact that the two forms of capital interact and mediation by intermediary structures is possible have the potential to give competitive advantage to the poor by broadening and deepening their social networks and the MFIs can purposefully facilitate the development of meaningful bridging ties by working as intermediary organisations to help the poor to get ahead in life and move beyond the support networks that only help them to stay where they are and only cope with calamities of life. - Sameer Sharma, IAS
RBI fines 2 Gujarat-based banks
The Reserve Bank today imposed a penalty of Rs 1 lakh each on two Gujarat-based banks for irregularities in reporting of cash transactions. The RBI said the two banks -- Ghoghamba Vibhag Nagrik Sahakari Bank and Janata Co-operative Bank -- had violated the guidelines for reporting of cash transactions of over Rs 10 lakh.
Not surprised if RBI increases rates by 25%: Rangarajan
With a spike in food inflation, C Rangarajan, Chairman of Economic Council to the Prime Minister, today said he would not be surprised if RBI hikes the rate by 25 basis points to contain it. Replying to a question about whether he expected another hike in the rates due to the increase in food inflation, Rangarajan said, "I will not be surprised if the RBI raises the rate by 25 basis points". Driven by high prices of fruits, milk, meat, eggs, India's food inflation crossed 17% for the week-ended January 22. Rangarjan, who was speaking on the sidelines of a book release function organised by Southern India Mills Association, said RBI would continue to act as long as there was a need to contain the rapid escalation in food prices.
SKS threatens exit from Andhra
SKS Microfinance may consider pulling out of Andhra Pradesh if the state government does not revoke its recent restrictive legislation on microfinance institutions by April 1. “Until RBI (Reserve Bank of India) steps in and does something on the AP Act, we are going to see some uncertainty. The committee (Malegam panel, which recently gave a report on the issue to RBI) has given seven reasons why the state government should not have its Act. The committee has also said April 1 is when it would like to see these recommendations in place,” said Vikram Akula, chairman of SKS Microfinance.
Foreign bankers hope RBI plan won’t up tax burden
Although appreciative of the Reserve Bank of India’s stance that foreign banks should operate in India as wholly-owned subsidiary (WOS) rather than as a branch of the parent, foreign bankers are hoping the conversion would not mean too much of a tax liability.
Moreover, the RBI's proposal that the WOS become a listed entity over time, resulting in a dilution of the parent bank's holding, has not gone down too well with the fraternity. A dilution of the parent bank's stake would mean it would have to give up total control and also some share of the profits. A local listing, foreign banks fear, would restrict their ability to capitalise on the parent bank’s balance sheet. Some foreign banks are dispapointed that the RBI may restrict the entry of new players as also the expansion plans of existing foreign banks once their assets in India exceed 15% of the assets of the banking system. “We would suggest that the RBI consider increasing this limit given that the opportunity in the country is tremendous,’’ said the CEO of a foreign bank. There are 34 foreign banks operating in India as branches, accounting for 7.65% of total banking assets as on March 31, 2010, up from 9.03% a year ago. If credit equivalent of off-balance sheet assets are included, their share was 10.52%. The share of top five foreign banks alone was 7.12%. Currently, top five foreign banks account for more than 70% of total balance sheet assets of foreign banks in India.
Friday, February 4, 2011
India's microfinance sector can expect healthy growth if RBI the sole regulator for the sector
India's microfinance sector can expect healthy growth if the Reserve Bank of India (RBI) becomes the sole regulator for the sector, SKS Microfinance chairman Vikram Akula said on Thursday. The fast-growing Indian microfinance sector suffered a setback in October when Andhra Pradesh, which had the largest microfinance market in the country, approved legislation to regulate the industry following complaints about high interest rates, aggressive recovery practices and overextended borrowers. "The Banking Act supercedes anything else in the country," and it would be a matter of time before the RBI became the single regulator of for-profit microfinance companies resulting in "measured, yet healthy growth," Akula told reporters. Growth in the sector would be significantly affected if Andhra Pradesh does not recognise the RBI as the sole regulator, he said, adding the company may have to downsize its operations in the state. The RBI panel earlier this month recommended an interest rate cap of 24.7 percent, limited to two the number of microfinance firms that can lend to the same borrower, and also called for a customer protection code for microfinance companies. The creation of a separate classification of MFI-NBFCs (microfinance institution - non-banking finance companies) and access to priority sector lending to companies that fall under this category were two of the recommendations that Akula highlighted as being positive to the sector. The RBI formed a panel in late October in response to the Andhra Pradesh rules, which severely curtailed microfinance activities in the state, curbed collections and hurt new business.
Set up risk mitigation system: RBI to Fx dealer banks
Revising the guidelines for foreign exchange business, the Reserve Bank of India (RBI) today asked banks dealing in forex to set up a comprehensive risk management procedure for trading as well as non-trading activities. "Banks should have a comprehensive and adequate risk management procedure covering both trading and non-trading activities...Such a procedure will assist in limiting and monitoring risk taking activities," the RBI said in revised guidelines for 'Internal Control Over Foreign Exchange Business'. The central bank has also advised the Authorised Dealer (AD) banks to tape conversations in the dealing rooms. "The tapes may be preserved for at least two months and where a dispute has been raised, until the issue is resolved. Access to the equipment and tapes should be subject to strict control," it said. The RBI has also asked the banks to set the limits for inter-bank business as well as transactions in overseas markets. "The limits when exceeded should be promptly reported to appropriate senior management and got approved," it said, adding the procedure would help in exercising control over the forex business and contain risks. Asking the banks to strengthen concurrent audit mechanism, the RBI said that minor irregularities in forex trading should be rectified immediately and the serious ones should be reported to the controlling authorities for action. The RBI has also asked the ADs to segregate their operations into dealing room, risk management, and settlement and reconciliation of accounts. The AD banks, RBI said, should ensure that brokers should not take over the functions of dealers. "Complaints relating to malpractices by brokers should be promptly brought to the notice of the Foreign Exchange Dealers Associations of India, Mumbai," it said. The internal control guidelines were initially framed by the RBI in 1981 and were revised in 1996. The RBI said they are being revised again in view of rapid changes in the global and domestic forex markets and developments in the field of information technology, and introduction of forex derivatives trading.
RBI Governor appears before PAC on 2G issue
The Reserve Bank of India (RBI) Governor D Subbarao, who was Finance Secretary when the 2G spectrum allocations were made, today appeared before Parliament's Public Accounts Committee (PAC) and shared "accurate information" on the controversial issue. Subbarao, as Finance Secretary, had raised questions over the entry fee for mobile operators ahead of the 2G spectrum allocations that led to the resignation of Telecom Minister A Raja and his subsequent arrest by the CBI. "The current RBI Governor was the Finance Secretary and he shared accurate information regarding his communications with the Department of Telecommunications (DoT)," PAC Chairman Murli Manohar Joshi told reporters here. He said the Committee members held "significant discussions" on the issue but ruled out submission of an interim report on the matter during the Budget Session of Parliament. He said the Finance Ministry, Telecom Regulatory Authority of India and DoT were interconnected and hold consultations before taking any significant decisions. “We have received very important and pointed information from him,” said PAC chairman Murli Manohar Joshi after the meeting.
RBI to tighten oversight norms for portfolio management
The multi-crore fraud at the Gurgaon branch of Citibank has prompted the banking regulator to review existing norms for the portfolio management services (PMS) of banks. With the Reserve Bank of India’s (RBI’s) inspection report on the Citibank fraud ready, banking industry sources said RBI would compile a comprehensive report on the loopholes in PMS guidelines. The report, which is being prepared by the department of banking supervision, will be discussed by the board for financial supervision and the guidelines revised based on feedback. According to RBI norms, no bank can offer PMS without specific permission. However, bank-sponsored non-banking financial services companies are allowed to offer discretionary PMS. PMS offered by banks are classified into four categories: Referral services, investment advisory, non-discretionary and discretionary. Sources said present norms do not clearly distinguish between investment advisory and non-discretionary PMS. The regulator will address the issue while revising the norms. It will also look into the way discretionary PMS are provided by banks. According to sources, the central bank may also bring in norms to govern relationship managers, something current guidelines do not. “Some countries do have norms for relationship managers, and the central bank feels the need to have some kind of code of conduct for them,” said a source. Sources also said that until fresh guidelines are formed, RBI may go slow on issuing fresh permission to banks for PMS. Some government-owned banks, which were planning to offer PMS, are now awaiting RBI’s revised norms before starting operations. Present norms do not allow funds to be accepted by portfolio managers for less than one year. In addition, portfolio funds cannot be deployed in the overnight, inter-bank term deposit & bill rediscounting markets or lent to corporate bodies. Banks must maintain client-wise records of funds accepted and investments made. Portfolio clients are entitled to a statement of account.
Kerala HC paves way for India’s first Islamic bank
The Kerala high court on Thursday 8 dismissed a petition challenging the state government's plans to co-promote an Islamic 8 finance institution. The move could pave the way for introduction of Islamic finance products by existing lenders and also reduce regulatory objections for an Islamic Bank. On Thursday, a division bench comprising Chief Justice J Chalameswar and Justice P R Ramachandra Menon dismissed petitions objecting to the creation of an Islamic financial institution and said the proposed body was to work in accordance with financial laws of the country even while it complied with sharia rules. The move has much broader implications considering Islamic finance has not taken off due to a stand taken by RBI that such a form of banking is not possible given present regulation. This stance was taken by an internal working group of RBI whose report was never made public. In the past, Islamic scholars had made representations to RBI to allow such products. Subsequent representation to allow Islamic finance products was stalled as the government was awaiting the verdict of the Kerala High Court. The key difference between Islamic and conventional banking is that while the conventional form offers interest on deposits mobilized, Islamic finance works on the principles of investment and sharing of profits. Islamic banking products are offered by leading banks in the West who also use Shariah compliant products to mobilize funds from the Middle East. Exisiting lenders like State Bank of India too have considered the feasibility of launching Islamic finance products through its international banking operations. However, these products have not taken off because of lack of regulatory clarity. Some bankers feel that considering that India has the second largest Muslim population in the world, there will be large potential for Islamic banking products.
UK Sinha appointed Sebi chairman
A 1976 BATCH IAS OFFICER OF BIHAR CADRE, UK SINHA IS CURRENTLY THE CHAIRMAN AND MANAGING DIRECTOR UTI AMC. HE ALSO HEADS THE MUTUAL FUND INDUSTRY BODY AMFI. Market watchdog's eighth chief's three-year term to start on February 18. The government on Thursday appointed UTI AMC chief U K Sinha as the chairman of capital markets regulator, Securities and Exchange Board of India (Sebi). A 1976 batch IAS officer of Bihar cadre, Sinha replaces C B Bhave who retires on February 17, 2011. Sinha has been appointed as Sebi chief for a period of three years from February 18, 2011, said a notification issued by the government on Thursday. He will be the eighth chief of Sebi.
CARRYING THE TORCH OF TRANSFORMATION
Dr.C.Rangarajan, who served as governor of the Reserve Bank of India from 1992 to 1997, was also a distinguished academic, having held faculty positions at University of Pennsylvania and Indian Institute of ManagementAhmedabad. During his tenure at RBI, first as deputy governor and then governor, Rangarajan was responsible for initiating several reforms such as harnessing information technology to streamline banking sector operations. His contribution in helping India manage the fallout of the 1991 financial crisis is notable. It was due to his efforts that the automatic monetisation of the government’s deficit was terminated, which enabled the central bank to absorb the huge losses incurred through various non-resident schemes. Upon completion of his tenure at RBI, Rangarajan was appointed chairman of the Prime Minister’s economic advisory committee.
Sushma Nath appointed as Finance Sec
With barely a month to go for Budget 2011- 12, the government appointed Sushma Nath as the new Finance Secretary and gave her an extension for two months till May 31 this year. Nath, now the Expenditure Secretary, succeeds Ashok Chawla who retired on January 31. She will continue to hold the charge of Expenditure Secretary as well. Nath was to retire on March 31. Meanwhile, R Gopalan, who has been appointed as Secretary, Department of Economic Affairs, will hold charge till April 30 this year. Both Nath and Gopalan are expected to be the main architects of the Budget which will be presented by Finance Minister Pranab Mukherjee on February 28.
Thursday, February 3, 2011
Technology use yet to reflect in better services: Chakrabarty
Even as banks adopted technology in the decade gone by, the envisaged benefits were yet to reach the customers, the Reserve Bank of India (RBI) said on Wednesday. “Adoption of technology has changed the face of the sector, which can be seen in the various transformational developments of the recent past. The benefits of technology are, however, not commensurate with the developments,” RBI Deputy Governor K C Chakrabarty said in the annual report for the banking ombudsman scheme for 2009-10. According to the report, due to an increase in customer awareness, the number of complaints under the ombudsmen scheme rose 15 per cent to 79, 266 during 2009-10, as against 69,117 in the previous year. “The speed, cost, convenience and efficiency of banking services have not improved by using technology. A part of the problem is that banks are still trying out fledgling delivery models rather than putting in place a cost-effective, decentralised and realistic delivery model,” Chakrabarty said. “Thus, fixing a problem when it happens becomes the weakest link in providing efficient customer service,” he added. The ombudsman report shows an increase in the number of complaints from metropolitan and rural areas during 2009-10. Complaints received from the former constituted 34 per cent of the total, followed by rural areas (32 per cent), urban areas (20 per cent) and semi-urban areas (14 per cent). “Unfortunately, information technology has not been properly implemented, leading to a rise in the number of complaints. This is due to lack of IT strategy, vision, business process re-engineering and business model, on the banks’ part,” he said. According to RBI, banks are required to bring cost-effective technology with an appropriate delivery model to improve the speed, efficiency and quality of service. Banks would also have to ensure that customers were treated fairly as technology had this unique characteristic of bringing in equality, RBI said
Shri Karuppasamy takes charge as New Executive Director at Reserve Bank of India
Shri S. Karuppasamy, assumed charge as Executive Director of the Reserve Bank of India today. As Executive Director, Shri Karuppasamy will look after Department of Expenditure and Budgetary Control, Department of Information Technology, Legal Department and Urban Banks Department. Shri Karuppasamy was Regional Director of the Reserve Bank’s Kolkata office prior to taking charge as Executive Director. Shri Karuppasamy has also headed two Central Office departments, namely, Department of Banking Supervision and Urban Banks Department. Joining the Reserve Bank of India in 1975, Shri Karuppasamy has worked in various departments in different capacities. These include, Issue Department, Department of Economic Analysis and Policy, Banking Department, Agricultural Credit Department, Rural Planning and Credit Department, Department of Banking Operations and Development and Urban Banks Department. He has also worked in various regional offices of the Reserve Bank. He has been a Member Faculty in College of Agricultural Banking, Pune and has also been the Principal of the Reserve Bank’s Staff Training College, Chennai. Shri Karuppasamy has also been associated with working groups in certain areas, such as, High Power Committee on Urban Cooperative Banks, Rating Framework for Urban Cooperative Banks, Cross Border Supervision and Integrated System of Alert. Shri Karuppasamy is a post graduate in Economics, is a Certified Associate of Indian Institute of Bankers, has a Post Graduate Diploma in Bank Management (NIBM) and is a Pragya. As Regional Director, Shri Karuppasamy was an RBI Nominee Director on the Board of Indian Bank.
Budget may have roadmap for new private banks
India is considering allowing new private sector banks, including those by industrial houses, and a roadmap for the same could be announced in the Union Budget to be presented later this month. While the formal and final guidelines regarding who should be allowed to set up new banks and what should be the terms and conditions would be announced by the Reserve Bank of India (RBI), a roadmap could be announced in the Budget speech on February 28 by Finance Minister Pranab Mukherjee, sources said. mong other options, RBI was considering the grant of licences to small banks for the initial few years, which could be upgraded to full-fledged banking licences after it was satisfied with their performance and the fulfillment of certain criteria, sources said. The guidelines would dwell upon issues like the minimum capital for new banks, the promoters’ contribution, minimum and maximum caps on the holding of promoters and others, foreign shareholding, business model and whether industrial houses and NBFCs (non-banking financial companies) could be allowed to run banks. Among others, a number of corporate houses, including Anil Ambani-led Reliance group, the Aditya Birla group and the Religare group, have expressed interest in obtaining banking licences. A number of NBFCs and micro-finance institutions are also said to be interested. RBI has said new licences were required since vast segments of population, especially underprivileged, still have no access to banking services.
Pvt banks should participate in inclusive banking: AIBOC
The All India Bank Officers' Confederation (AIBOC) has demanded that all banks including the new generation private sector banks and foreign banks need to participate in the inclusive banking process. It also called for upgradation of pension as and when salary revision takes place, medical facilities to the pensioners as in the case of chairman and managing directors (CMDs), provision of five-day week for the banking industry and regulated working hours for the bank officers. Addressing media persons here, G D Nadaf, general secretary, AIBOC said, “Presently, the working hours of bank officers are not regulated. We demand that their duty hours should be specified. Our confederation is opposed to mergers and acquisition in the banking industry and we demand more number of branches of public sector banks and also a commensurate addition in manpower.” The two-day business session of AIBOC began on January 30. The conference is expected to be attended by over 1500 delegates and observers from all over the country. The General Council of AIBOC will deliberate on the issues confronting the labour movement, threat to trade union rights and de-unionization. The AIBOC has alleged that continuous efforts are being made to dilute labour welfare measures as part of the globalization process of the economy and attacks are mounted on the trade unions in order to create a trade union free environment and throttle the voice of the workers
Paypal RBI Issue–Paypal Violated FEMA Act - RBI
RBI has issued a circular regarding the ongoing Paypal/RBI issue, and the following sentence sums the entire story. “It was observed that a few OPGSPs (Online Payment Gateway Service Providers ) have not only facilitated conclusion of the transactions but also allowed exporters to retain the export proceeds abroad without repatriation resulting in violation of the provisions of FEMA, 1999. Acknowledging however the importance of the services provided by the OPGSPs to the exporters, particularly in facilitating small value export transactions, it has been considered necessary to issue a set of guidelines to cover such e-commerce arrangements.”
Some microfinance policy considerations for the Reserve Bank of India beyond the Malegam committee report - Sasidhar Thumuluri
The ongoing microfinance regulatory policy formulation exercise should not be a missed opportunity. The resulting framework should enable greater financial inclusion and lead to a more integrated financial system. Mr. Yezdi Malegam and his high profile committee will adorn a special place in the annals of Indian microfinance. The report produced by this Reserve Bank of India (RBI) board committee is touted as a major milestone and some even called it a savior of the sinking sector. It has received as many accolades as criticisms. The microfinance community at large welcomed some key recommendations that would go a long way in offering much needed legitimacy to microfinance institutions (MFIs) and subject the industry to higher levels of accountability and disclosure standards. Serious concerns were however raised almost in unison with respect to provisions that could pose practical challenges of enforcement, stifle competition, raise entry barriers and limit customer choice. RBI is currently seeking public opinion on the report and will hopefully take these reactions into account before declaring the rules of the game. The purpose of this article is to offer some thoughts over and beyond Malegam committee’s work as the RBI prepares to formulate the policy framework that would define the future course of the sector. Given the time constraint and circumstances under which the committee delivered the report it has done a commendable job but, understandably, it had a limited mandate or opportunity to look into the issue more comprehensively. RBI should nevertheless consider long term implications while formulating the policy that would enable greater financial inclusion and lead to a stronger well integrated financial system. Same applies to the finance ministry which is about to table new microfinance bill in the parliament. Following suggestions may be considered in addition to the Malegam committee report and other expert opinions:
1. Include a wide spectrum of basic financial services in microfinance definition:
Poor people require access to all kinds of financial services just like everybody else. Thus far the emphasis has been on frequent cash flow income generation loans primarily offered through group mechanisms. Money is fungible and these loans tend to be diverted for consumption and asset building many a times in the absence of suitable loan products. A good policy environment should enable financial institutions to design and deliver customized products that fit varied financial needs of the target market. Hence it is important to recognize this fact and keep in mind credit requirement for other vital needs such as housing, agriculture, education, health, water & sanitation etc., as well as the unmet need for savings, remittances and insurance services while ascertaining the boundaries of microfinance regulation in order to effectively address the challenge of financial inclusion. Mobile banking promises great potential in achieving scale efficiently. Safely leveraging the ever expanding mobile phone network in credit delivery, insurance distribution and money transfers may also be explored.
2. Allow the establishment of small finance banks:
Raghuram Rajan committee on financial sector reforms made this recommendation back in 2008. This has also been a long standing demand of certain leading players involved in financial inclusion initiatives. Local Area Banks were a step in the right direction but met with limited success apparently due to lack of regulator’s interest in pursuing the idea further. More than 10 MFIs in the country manage over Rs. 500 crores each in assets with equity base of anywhere between Rs. 50 crores and Rs. 2000 crores. By allowing limited service small banks with minimum capital requirement of Rs. 50 crores would not only accelerate the provision of much needed savings services to the unbanked clientele but also significantly and sustainably reduce cost of funds, and improve operating efficiency for MFIs, in turn reducing borrowing rates for end-clients. Moreover, since the Malegam committee has made it loud and clear that MFIs must be supervised more closely by the RBI, small microfinance banks in addition to the committee recommended NBFC-MFIs would make a decent portfolio for the Reserve Bank to merit a separate supervision wing with adequate resources to enforce policies more effectively rather than by just adding a new category under NBFC group which may or may not have dedicated resources necessary to regulate the sector. On the top if it, RBI regulated “banks” enjoy greater credibility and are less likely to be subjected to knee-jerk political actions.
3. Allow NBFC MFIs to offer business correspondence services for commercial banks:
MFIs together deliver credit and, to a limited extent, insurance successfully to over 20 million households in India today, of which NBFC MFIs make up for roughly 85%. Those MFIs that would not qualify to be small banks (per the above suggestion) may be allowed to offer core banking services on behalf of commercial banks via business correspondence model. Given high potential for outreach through an extensive network of field force these MFIs make perfect partners for taking banks to the last mile. This would not only enable non-bank MFIs to offer savings and other banking services to the unbanked but also help enhance banks’ oversight on MFI activities.
4. Bring all sizable private microfinance activities under one umbrella:
Malegam committee apparently left out a large number of NGO MFIs and small NBFCs from the purview of its recommendations. If implemented the recommended framework would leave ample room for recurrence of situations like those led to the recent turmoil or create regulatory confusion at the least. It is important to define rules for all significant players through a common policy regime. At the same time it is also imperative to enable seamless transformation of small MFIs into large responsible entities. All privately owned MFIs that manage an asset base of more than Rs. 10 crores or serve more than 10,000 clients may not be allowed to operate as non-profits since it is in societal interest that financial business of sizable proportion be practiced under proper supervision, especially where majority clientele constitute vulnerable population. Beginning with a minimum capital requirement of Rs. 5 crores for newly transforming or start-up MFIs a timeline, say 3-5 years horizon, may be set for raising the capital base to Rs. 15 crores as recommended by the Malegam committee.
5. Promote public-private partnerships:
SHG-bank linkage program is a hugely successful government sponsored microcredit program that is aimed at making bank credit accessible to the poor. Public sector banks and state governments work together under NABARD’s support in making this subsidized credit program work. MFIs with their extensive outreach into the hinterlands could prove great partners in funding to and managing the credit risk of SHGs. At the behest of RBI and the central government, NABARD could consider lending directly to MFIs for on-lending to government sponsored SHGs that are unable to access bank credit. This will not only minimize the possibility of duplication of groups and multiple lending but also help build strong symbiotic relationship between state governments and MFIs, in turn avoiding some of the troubles that seem to have caused Andhra Pradesh government to act the way it did. Similar thought could be extended to other transactional services such as bill payments, government pensions, welfare payments etc., in a phased manner.
6. Extend tax breaks and special status to MFIs operating in remote and difficult terrains:
The objective of financial inclusion would only be fulfilled when basic financial services reach every corner of the country through legitimate means. Offering MFIs with tax breaks and special recognition for reaching out to remote and underserved areas could prove an effective strategy in deepening the financial access. Such recognition could mean having access to special credit lines from banks at below-market rates. Lower cost of funds and tax savings could in turn be useful in offsetting extra operating costs incurred in serving less accessible areas without significant negative impact on revenues and/or effective cost to the borrowers. This is the first time RBI has ever commissioned an intensive exercise on MFI regulation. Such opportunities do not come too often and should be best utilized. Policy frameworks of Philippines, Cambodia, Peru, Bolivia, Ghana, Kenya and Uganda could come handy as good reference points. These countries have been hailed for achieving some success in establishing progressive regulatory environments for microfinance. It is understood that implementation of some of the above suggestions would mean commitment of significant additional resources on the part of RBI and the government. The very task of making financial services available to roughly 50% of nation’s population that is unbanked is no simple matter either and an earnest investment in a robust regulatory oversight infrastructure sooner than later may not be a bad idea. - Sasidhar Thumuluri is a seasoned microfinance professional who keeps a close eye on the developments in India. He has studied the business of microfinance in over 30 countries and has a good grasp of its details. He is currently employed with Habitat for Humanity International in Washington DC and manages its global housing microfinance portfolio
Indian Banks form core team for microfinance loan restructuring
under the Indian Banks Association (IBA) bankers met recently to set up a core team of lenders to decide on the restructuring loans to micro-finance institutions (MFIs). The decision to restructure the MFI loans was taken after a few MFIs approached the banks for restructuring their loan portfolio. The Reserve Bank of India had also earlier permitted banks to restructure loans to MFI sectors even if they were not secured. In the first phase only 10 MFIs, including SKS Microfinance, Spandana Sphoorty, Asmita and Share Microfinance with operations in Andhra Pradesh, have been called for discussions. According to a banker, the restructuring of loans would be done on the basis of the “projected cash flows of the MFIs”, to be calculated and suggested by charted accountants. Banks can restructure a loan either by extending the time for repayment, by repayment holidays and by interest rates rebate.
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