Transcript Map of Microfinance

Regulation of Microfinance
Institutions in India
Agenda
•
•
•
•
Microfinance sector - overview
Analysis of the existing regulatory regime
Global experience regulating Microfinance Institutions
Assessment of pending regulatory recommendations
– Malegam Committee Recommendations
– Microfinance Financial Sector Bill 2010
• MFI response to new RBI Regulation
Microfinance Sector
• Two models – Self Help Group (SHG) model and
Microfinance Institution (MFI) model
• Microfinance Institutions (MFIs) serve 27 million clients
and have 183 billion crore loans outstanding in India
• Services have been geographically disproportionate
– Services have expanded greatly in the Southern region, though
services are limited in the Northern and Western regions
– Poorest districts still generally do not have services
• Lack of product diversity
Andhra Pradesh Crisis, 2010
• Clients and politicians accuse microfinance institutions of
coercive collection practices, usurious interest rates, and
use of selling practices that result in over-indebtedness
• Microfinance clients stopped repaying loans in late 2010 in
Andhra Pradesh (AP)
• AP state government issued an ordinance that severely
limits the operations of MFIs
• Microfinance institutions all over India have had trouble
accessing adequate financing as a result
• RBI enlisted the Malegam Committee to generate
regulatory recommendations to address issues of the
sector
Agenda
•
•
•
•
Microfinance sector - overview
Analysis of the existing regulatory regime
Global experience regulating Microfinance Institutions
Assessment of pending regulatory recommendations
– Malegam Committee Recommendations
– Microfinance Financial Sector Bill 2010
• MFI response to new RBI Regulation
Existing Regulatory Structure
Legal forms of MFIs
Category
Type of MFI
(Approximate
Number)
Registration
Not for
Profit
NGO MFIs
(Societies &Trusts)
(500)
Registered under Societies Registration Act,
1860 and / or Indian Trust Act 1882
Section 25
Companies
(10)
Section 25 of Companies Act, 1956
Cooperatives
Registered under State Cooperative Societies
Act or Mutually
Aided Cooperative Societies Act (MACS) or
Multi- State Coop. Societies Act, 2002
Mutual
Benefit
(100)
For- Profit
NBFC
(50)
Companies Act, 1956 & registered with RBI
For-profit MFIs account for over 80% of total client outreach of all the MFIs
Existing Regulation
• NBFCs (for-profit)
– Regulation primarily prudential, not specific to microfinance
– Can collect deposits if achieve investment grade rating (no MFI has
accomplished this)
• Other Microfinance institutions
– No regulation beyond registration, which is often done at state level
• State regulation
– There is little clarity regarding central vs. state jurisdiction
– Some MFIs are subject to state laws such as Moneylending Act
– A few states have passed ordinances restricting some microfinance
practices
Existing Regulation
• Priority Sector Lending
– Microfinance institutions qualify for priority sector funds
• Funding Restrictions
– NBFCs cannot access External Commercial Borrowing
– Minimum Equity investment is US $500,000 which can only account for
51% of company
Existing Regulation
Opportunities for Improvement
• Lack of clarity on state and central jurisdiction
• No consumer protection regulation
• No regulation for credit reference services and
information sharing
• Unduly restrictive standards for deposit
collection
• Restrictions in accessing funding from various
sources
• Overall lack of monitoring and supervision
Agenda
• Microfinance sector - overview
• Analysis of the existing regulatory regime
• Global experience regulating Microfinance
Institutions
• Assessment of pending regulatory recommendations
– Malegam Committee Recommendations
– Microfinance Financial Sector Bill 2010
• MFI response to new RBI Regulation
Prudential Regulation
Country
MFI Structure
Credit Reference Service
Bolivia
Microfinance executed
primarily by private
financial funds (PFF),
two specialized banks,
and some credit unions
o
Banks
o
Credit
Cooperatives
o
Microfinance
Deposit-taking
Institutions
o
moneylenders
groups
Credit Bureau exists, does not contain
information from unregulated
institutions
Bank of Uganda (central bank) initiated
Credit Bureau
30% Maximum shareholding
Microfinance Banks
(MFB), Rural Banks,
Credit Cooperatives
and NGOs dominate
microfinance sector
Credit Information Service Act (2008)
requires all financial information to be
submitted, though no functioning credit
bureau exists
Thrifts: Minimum 40%
owned by Filipino citizens,
100% owned by Filipino
citizens for all others
Uganda
Philippines
Ownership
Structure
Capital Adequacy
Country
Bolivia
Ethiopia
Risk Weighted Capital Adequacy Ratio for
Type of Institution
-8% for Private Financial Fund
-From 10% for Open Savings and Loan Coop
to 20% (CAC) Category 1 to 4
12% for Micro Financing Institutions
Ghana
-6% Rural Bank
-10% Deposit-taking NBFI
Indonesia
8% BPR
Nepal
5% Cooperative Society with a
and 10% Limited Banking License
15% Institutions providing MF services
under MFI Ordinance
Pakistan
Uganda
15% Micro Deposit-Taking Institution and
20%
Remarks
Net equity as percent of risk-weighted total
assets and contingencies
Minimum capital adequacy ratio; applicable to reregistered MFIs
Primary and secondary capital to adjusted
asset base
Supplementary and core capital to riskweighted asset
Primary capital and supplementary capital,
with the latter not being larger than the
former
For core capital and total capital,
respectively
Equity (paid-up capital, share premium,
reserves and unappropriated profits) to riskweighted
assets.
For core capital and total capital,
respectively
Minimum Capital Requirements
• Used to control number of qualifying institutions
• Can change over time, and within country
– Bolivia increases requirement as penetration
develops and existing institutions mature
– Pakistan minimum capital requirement changes
depending on district and province of operation
• No uniform standard amount
Interest Rate Caps
• Some countries implement interest rate caps aiming to protect
the poor from usurious charges
• Interest rate caps often reduce financial services for lowerincome and rural clients, increase MFI solvency risk, and
encourage less transparency
Jurisdiction
Date
West Africa
1990s
Nicaragua
2001
Nature of
Change
27% Ceiling
Reason for Change and
Implication
MFIs immediately pulled out of
rural areas, and increased
average loan size. Eventually
found ways to circumvent with
fees.
The Central Bank Growth decreased to 2%
publishes interest annually to 30% annually.
rate every month Several MFIs pulled out of rural
areas.
Consumer Protection
• Consumer protection requirements vary greatly across the globe,
coming most often in the form of legislation or institution selfregulation
• Documentation requirements
•
Plain-language, documentation in the local language, describe recourse rights and
processes, annual interest rate using a standard formula, all applicable fees,
computation methods, required insurance
• Facilitate customer complaint procedures (Example: Peru)
•
•
•
•
•
Financial regulatory authority mandated procedure for receiving, responding, and
resolving customer complaints
99% of 400,000 customer complaints were handled by financial regulatory authority
Implement financial literacy education programs
On-site and off-site monitoring
As a result, customer complaints are down 32% since 2004
Agenda
•
•
•
•
Microfinance sector - overview
Analysis of the existing regulatory regime
Global experience regulating Microfinance Institutions
Assessment of pending regulatory recommendations
– Malegam Committee Recommendations
– Microfinance Financial Sector Bill 2010
• MFI response to new RBI Regulation
Malegam Committee
Recommendations Overview
• Original report released in January 2011
• The recommendations address many of the major
issues of the sector:
– Identifying microfinance institutions and qualification for
priority sector lending
– Consumer over-indebtedness
– Credit Pricing
– Product Restrictions
– Documentation
• In May 2011 RBI “broadly accepted” the report, and
specified priority sector lending qualification
Passed Malegam Regulation
• Minimum 85% of loan portfolio:
– Is disbursed to a rural household with annual income not
exceeding Rs 60,000 or an urban household with annual
income not exceeding Rs 1,20,000
– Does not exceed Rs 35,000 for the first cycle and Rs 50,000
for subsequent cycles
– Does not result in greater than Rs 50,000 total indebtedness
for the borrower household
– Has a tenure not less than 24 months for loan amount in
excess of Rs 15,000 without prepayment penalty
– Is extended without collateral
– Is repayable by weekly, fortnightly, or monthly installments
at the choice of the borrower
Passed Malegam Regulation
• MFIs must adhere a margin cap of 12 percent and an interest
rate cap of 26 percent to qualify for priority sector lending
• Only three components are to be included in pricing of loans, (a)
a processing fee not exceeding 1% of the gross loan amount, (b)
the interest charge and (c) the insurance premium.
• A borrower is not required to be a member of a SHG/JLG to
receive a loan
• There should not be any penalty for delayed payment
• No Security Deposit/ Margin are to be taken.
• 75% of loans are for income generation
Micro Financial Sector Bill 2011
• Designation of RBI as the sole regulator for all microfinance
institutions,
– Power to regulate interest rate caps, margin caps, and prudential
norms
– All microfinance institutions must register with RBI
• Formation of a Micro Finance Development Council, which will
advise the central government on a variety of issues relating to
microfinance
• Formation of State Advisory Councils to oversee microfinance
at the state level
• Creation of Micro Finance Development Fund for investment,
training, capacity building, and other expenditures as
determined by RBI
Agenda
•
•
•
•
Microfinance sector - overview
Analysis of the existing regulatory regime
Global experience regulating Microfinance Institutions
Assessment of pending regulatory recommendations
– Malegam Committee Recommendations
– Microfinance Financial Sector Bill 2010
• MFI response to new RBI Regulation
CMF Survey
• CMF interviewed 32 MFIs in Andhra Pradesh in
Summer 2011
• Survey included MFIs which represent a variety of
lending models, sizes, and legal forms
• Overall, MFIs reacted positively to new regulation
Malegam Report Feedback
Opinion on Malegam Committee Report
9
8
8
7
6
5
4
4
Positive
Negative
Neutral
3
2
2
1
0
Positive
Negative
Neutral
Business Strategy
Changes in Business Strategy
57%, 8
60.00%
50.00%
43% , 6
40.00%
29%, 4
30.00%
20.00%
7%, 1
10.00%
7%, 1
0.00%
Closing down MFI
branches
Staff lay off
Enrolling as many
clients before
March 2011
Waited for RBI
regulation
No changes in
business strategy
Business Strategy
Will your business strategy change in the future to
meet the RBI regulations?
10
9
8
7
6
5
4
3
2
1
0
9
3
2
Yes
No
No response
Income Requirement
Will an income requirement cause borrowers to
misstate their income?
No, 5, 36%
Yes, 9, 64%
Investment
How will Venture Capitalists react?
10
9
9
8
7
6
5
4
3
2
2
2
1
1
0
Increase Investment
Normal Investment
Decrease Investment
No response
Interest Rate Cap
Is the 12% margin cap enough to sustain your
business?
N/A
1
7%
Yes, 3, 21%
No, 10, 72%