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Corporate May 11, 2012

Why the Microfinance Bill is critical for SKS

By Firstbiz Staff

The Union Cabinet on Thursday approved a bill to regulate the micro finance industry and bring the micro lenders under the purview of the Reserve Bank.

"It (Micro Financial Sector Development and Regulation Bill, 2011,) has also been cleared," Finance Minister Pranab Mukherjee told reporters after the Cabinet meeting.

The Bill, which was drafted in the backdrop of problems faced by borrowers of MFIs in Andhra Pradesh and other states, would now be introduced in Parliament for consideration. The draft Bill, which was circulated for public comments in July last year, had proposed making RBI the regulator for the sector.

Microlenders have been accused of aggressive lending and recovery practices and high interest rates, which attracted calls for regulation. Reuters

Shares of SKS Microfinance , a non-banking finance company (NBFC) rallied as much as 19 percent to touch a high of Rs 105.70 today on the government clearing the proposal. SKS Microfinance CFO Dilli Raj said the government's move is "Hugely positive as it
will override the Andhra Pradesh MFI Act. Now we can resume lending and collection in Andhra Pradesh to recoup losses which were written off to the tune of Rs 1,150 crore."

Microlenders have been accused of aggressive lending and recovery practices and high interest rates, which attracted calls for regulation.

The once-thriving microfinance sector was devastated by a crackdown more than a year ago by the government of Andhra Pradesh, which was the industry hub and largest market. The state rules resulted in a drop off in loan collections and a drying up of funding for microlenders. The Andhra Pradesh government, for instance, had objected to the description of the MFIs as extended arms of the banks, considering the pure-play money lending activities of the MFIs.

Though the MFIs have been welcoming the bill since it is expected to allow them to expand their business, the Andhra Pradesh government had also raised an objection to the free hand given to the MFIs to collect thrift from the MFI customers.

Moreover, the bill catalyses financial inclusion. With close to 9.2 million borrowers in Andhra Pradesh as defaulters on the credit files, the Bill allows NBFCs the opportunity to go and infuse liquidity and bring the defaulters back in to the mainstream, explained Raj.

Even if the situation in Andhra Pradesh is grave, credit flow in other parts of the country will now be faster and relatively hassle-free. On Thursday, the company's board cleared the decision to shift its headquarters from Hyderabad to Mumabi due to the difficulty it faced in recovering loans in Andhra Pradesh. Borrowers refused to pay after MFIs in Andhra found themselves powerless in salvaging sticky loans. SKS suffered losses of 330 crore in the March 2012 quarter due to Andhra loan write-offs.

Not just SKS, the bill has now cleared the air for banks who were worried about the funds lent to micro-finance companies. "The entire micro finance industry owes the banks almost Rs 20,000 crore. This has clearly indicated certainty and allayed concerns about the potential future of the industry in the country," said Sa-Dhan, ED, Mathew Titus.

As per the draft, it would be mandatory for micro finance institutions (MFI) to be registered with the Reserve Bank and have a minimum net-owned funds of Rs 5 lakh. In addition, a Micro-Finance Development Council will be set up to advise the government on formulation of policies, schemes and other measures required in the interest of orderly growth and development of the sector with a view to promote financial inclusion.

The bill has gone soft on the issue of interest rates charged by the MFIs though the MFI sceptics were expecting the capping of the rates.

The council will comprise members not below the rank of Executive Director of NABARD, National Housing Bank, the RBI and SIDBI. Joint secretaries from the Ministry of Finance and the Ministry of Rural Development will also be its members.

With inputs from Agencies

by Firstbiz Staff

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