Microfinance practitioners insist their embattled industry should not be regulated by state governments. State governments, they say, do not know how to regulate financial organisations. Keeping microfinance institutions (MFI) under the purview of the state government, they add, will leave microlenders vulnerable to political pressures. It is a set of arguments that has been accepted by an expert committee that wrote the draft microfinance Bill. The draft Bill, put up by the finance ministry, promises to override state laws. It also proposes that state advisory councils be set up to, among other things, monitor MFIs' field-level conduct and give a feedback to the central government. Further, it says that if the RBI feels an MFI's actions are hurting clients, it can issue orders to stop the functioning of the organisation. It is not clear, however, if these measures can protect the MFIs' poor and vulnerable borrowers. For instance, while the draft Bill gives sweeping powers to the RBI, it is far from clear if the apex bank has the capacity to supervise and monitor MFIs. Says microfinance expert Ramesh Arunachalam, "During 2008-10, the five largest MFIs - SKS, Spandana, Share, Basix and Asmitha - added a gross loan portfolio of 78.55 crore per month." The department of non-bank supervision, he says, should supervise every NBFC that has a loan portfolio of over 100 crore. However, despite each of these five MFIs adding almost 78% of that threshold value every month, their growth went unscrutinised, resulting in the collective default Andhra Pradesh saw last year. Similarly, while the draft Bill empowers the RBI to derecognise an MFI that violates borrower rights, this provision of punitive action was available to the RBI even as a regulator of NBFCs. But it was never used even when the reports of suicides among MFI borrowers and corporate misgovernance began trickling in. One reason for this relative inaction is that microfinance is still a small piece of the country's financial system. Last year, just before the Andhra Pradesh Ordinance was promulgated, the industry stood at just 27,000 crore. Today, it stands at about 15,000 crore - a minuscule portfolio when compared to the banks. And the RBI seems to be allotting proportionately limited mindspace to the industry. Further, the work of microlending and collecting is done - in multiple, small transactions - in bastis and villages. These are not transactions the RBI is geared to track. What about the state advisory councils that the Bill proposes? Can they safeguard the interests of the borrowers? No. These are problematic as well. Take their composition: two nominees from the state(s) covered by the council, one nominee from the convener bank of the state-level bankers' committee, one representative of the MFIs operating in the state(s) and one member nominated by the RBI. Who is speaking on behalf of the borrowers? Further, it is not clear how these councils will track events in the field. The borrowers are poor. Some of them will live in isolated hamlets. It is unfair to expect them to travel to the state capital (or the adjoining state's capital) for registering their grievances. This is also an architecture that fails to spell out how investigations will be carried out, nor is it clear how swiftly corrective steps can be taken under this structure. The Bill also says that the "Reserve Bank may, with the previous approval of the central government delegate, any of its powers conferred under this Act to the National Bank in respect of any microfinance institution or a class of microfinance institutions". This might be Nabard. Which is another problematic suggestion. Its self-help group programme competes with MFIs. According to IIM professor M S Sriram, "The current problems of MFIs have not occurred on account of their registration, capital structure or governance structure. They are on account of practices at the client end." The state government is the only institution with both the investigative and grievance-redressal mechanisms in place at the local level. Yet, it has no role. Remember, even the state advisory councils relay their comments to the Centre, not the state government. What is needed is a system where the RBI lays down prudential norms for the sector. But the state governments should have a role in monitoring the industry's conduct with its borrowers.
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