WHY DO WE OPPOSE THE MICRO FINANCE DEVELOPMENT AND REGULATION B
Thomas
Franco's Questions and Answers on
Micro
Financial Sector Development and Regulation Bill 2007
The
Bill has been tabled in the Parliament by the Finance Minister and it
is likely to go to the Parliamentary Standing Committee on Finance.
There is wide spread opposition to the Bill. Let us look at the
reasons.
1.
Who prepared the Bill?
Though
the Finance Ministry is responsible, it is people who support the
World Bank policies including some in the Planning Commission, some
in the Agriculture Ministry and the Finance Ministry. Some NGOs who
speak the language of the World Bank, led by Sa-Dhan, a network of
several micro finance institutions (MFIs), promoters of MFIs and
financiers of MFIs, has openly stated that they were privy to the
Bill. The World Bank and multinationals see micro finance as an
industry which should mobilise the savings of the poor and lend to
them without any ceiling on interest rate and the operations should
be sustainable without any subsidy. The supporters of this concept
have drafted the Bill.
2. Why there is no need for this
Bill?
In
India, non government organisations (NGOs) have promoted micro
finance through Self Help Groups [SHGs], which provide a mutual
support structure even while ensuring a mutual sharing of resources.
There are presently more than 50 lakh SHGs in the country, (one
estimate places the number at 150 lakh!) each with its own bank
account. The banking sector led by the nationalised banks, regional
rural banks and cooperative banks have provided maximum finance to
the micro borrowers. The MFIs, which emerged subsequently, are
postured as the ingenious innovation in the sector, but have hitherto
provided only 10% of the finance. Already there are RBI instructions
and micro finance organisations (MFOs) are governed by laws relating
to societies, cooperatives, trusts, etc and there is no need for one
more law.
3.
Why World Bank is interested in this Bill?
Contrary
to common belief, micro finance existed prior to the Bangladesh
Grameen Bank. Organisations such as SEWA (1970s) and FWWB (1980s) in
India, the Bank Rakyat in Indonesia (1970s), BANCOSAL in Bolivia have
a large clientele of small borrowers, both individual and collective.
While BRI in Indonesia is owned by the Government, BANCOSAL in
Bolivia is promoted by Government and the Government has invested in
the Bangladesh Grameen Bank. In each of these countries and many
others the governments have realised the potential of extending
outreach to rural remote and marginalized populations through the
means of micro finance.
The
World Bank was quick to take note of these experiences and
incorporate micro finance as a major strategy for development aid,
serving its own expediencies of turning investments in the
development sector into a profitable proposition, while posturing it
as a tool for development and poverty reduction (with a little twist
in language from eradication to reduction) and defer at least for a
while, the evidences of the backlash of globalization, by appearing
to empower the poor through loans. The model’s viability has
been so proven that the World Bank now terms it as an industry,
capable of reaping profit and financially sustainable and located in
the market driven model that the World Bank seeks to perpetuate.
Models are now showcased as BEST PRACTICES and the reality of heavy
interest rates and service charges squeezed from the poor and
marginalized “client” to oil the wheels of this lucrative
micro finance industry are the sordid fine print that is invariably
ignored. In India, therefore, it is stories of the successes of micro
finance institutions (MFIs) that are showcased, never mind the
unwarranted 36% interest rates (that too, at flat rate) and use of
coercive methods for recovery that MFIs have employed, which led to
the suicide by 200 women in Andhra Pradesh.
4. Why MFIs support this Bill?
Micro
Finance Institutions (MFIs) which are registered as non banking
financial companies (NBFCs) and as section 25 companies (S25Cs), have
actually harassed poor women and now found a way to keep themselves
outside the ambit of the Bill. So, they are the major supporters of
the Bill.
5.
What did we expect?
A
Bill to regulate micro finance, many of us thought, will clearly
state the obligations of the government, ensure fair, equitous and
ethical practices by MFIs, cap interest rates and ensure their
democratic functioning. Further one was expecting the Bill to pave
the way for a programme framework to ensure inclusion of the poorest
that are left out. The preamble reveals in the very first
instance the lack of any such intent. It does not talk of removal of
poverty, the obligations and the role of the government. It only
seeks to “provide for promotion, development and orderly
growth of the micro financial sector in rural and urban areas, to
provide universal access to integrated financial services…”
and further goes on to assume that prosperity will result
therefrom. It also speaks of “governing the ungoverned”,
but then moves to mention those who are already governed by one
or the other law, and leaves out once again the MFIs who are the only
bodies unregulated! A recent instance where ICICI Bank stopped drawal
of funds by Sparks, Spandana and a few other large MFIs due to
non-adherence to norms laid down [Economic Times, 9th
February 2007] pointed to the need for RBI intervention and to the
fact that these MFIs are, in fact, controlled and managed by those
who have been erstwhile functionaries of the RBI and the Nabard.
The
micro finance regulation, which was initially proposed as an
amendment to the Nabard Act 1981, was later repositioned as a new
bill to regulate micro finance. It is a DOUBLE WHAMMY in a number of
ways! What we are faced with is a bill that ignores the real issues,
while allowing the NBFC-MFIs and S25C-MFIs to be exempted from its
purview, and giving them opportunity to sit in the council of the
regulating authority as well as claim a share in the capacity
building support! Various other provisions too are cause for concern.
6. Why Nabard should not be the
regulator?
Nabard,
which is the major promoter of SHGs and MFIs, is designated as the
regulator without any assessment of its role or for that matter any
considerations to the conflict of interests that may so arise. The
regulatory authority should have powers to guide, monitor and
supervise all the related organisations in their work related to
micro finance. Nabard, with a one-man office in district, cannot play
the role of promoter, trainer, financier and regulator of micro
finance services.
7.
What about Interest rates?
The
bill is eloquent in its silence on interest rates, giving precedence
to profiteering over equity. Arguments of people’s willingness
to pay interest at high rates for timely credit and the need for
laizzes faire based on market trends belie the reality of limited
power of the poor to negotiate. One wonders why only the poor should
be left to the market, and corporates be privileged to negotiate
interest rates with banks. Based on the classification under credit
risk, the 95% repayment rates of SHGs classifies them as low risk
borrowers and thus entitled to lowering of interest rates of banks to
as low as 4%.
The
bill is silent on the issue of a cap on the interest rates to the
ultimate borrower and, in so doing, reveals itself as a tool of
vested capital interests. (At present RMK insists that the interest
rate to the ultimate borrower should not exceed 18%, and Andhra
Pradesh and Kerala governments have prevailed upon banking
institutions to accept a cap on interest rates and terms of lending
and recovery.
8.
Why we oppose ceiling on loans?
Fixing
of a ceiling of Rs 50,000 for micro finance does not have any
rationale. With a loan of Rs 50,000 how many can become prosperous?
9.
How the Bill preempts new organisations from coming up?
The
bill demarcates exclusions in favour of the MFIs by delimiting entry
into micro finance to organisations with 3 years of experience,
thereby preempting any new MFO from coming up in the field, but
allows new private sector organisations registered as NBFC with an
investment of Rs 25 lakhs to start operations without controls by the
proposed legislation. Reliance, Bharti and Muthoot Bankers, who have
already announced plans to enter into micro finance industry, will
thus have a field day.
10.
Does the Bill address the needs of the poorest?
There
is no provision created for the poorest of the poor who are left out
of SHGs because of their inability to save and repay loans in time.
The Kudumbashree program in Kerala has initiated such a scheme named
ASRAYA to address this issue, which could well inform the proposed
legislation. Guidelines are urgently needed to ensure inclusion of
the poorest.
11.
Why to bring in insurance regulators?
The
micro finance sector is linked to many micro insurance schemes
including health insurance which will once again be regulated only by
the Insurance Regulatory Authority and not by the new regulatory
authority as per the bill. It will be better to have all micro
financial services including micro insurance under the same umbrella.
12.
Can you see the design for outsourcing?
The
bill provides for appointment of micro finance facilitators [Section
2(f) (ii)] for banks which amounts to outsourcing of the field
officers’ work to the private sector without adequate
remuneration. There have been many cases against the ICICI Bank and
other new generation banks in which the courts have clearly ruled
that banks cannot use goondas to recover loan instalments. The
facilitator’s role may be diminished to such a role if not
clearly conceptualised.
13.
Voluntary organisations for profit or service?
The
bill says NGOs or MFOs will have to keep 15% of their profit as a
reserve fund [Section 14(a)], whereas NGOs are non profit
organisations and not legally bound to generate profit. A
contradiction of intent seems evident here. The service motto will
get diminished by the profit motto.
14.
Why give arbitrary powers to the regulator?
The
power to exempt some organisations (Section 32) can be used
arbitrarily by the regulatory authority. This will lead to corruption
and favouritism.
15.
Surprising exclusion of RMK from the council!
The
Rashtriya Mahila Kosh (RMK), which was created for the sole purpose
of providing micro finance, does not find a place in the development
council. In fact RMK was created by the Government of India
exclusively for this purpose and should be given a more prominent
role with adequate finance and staff.
16.
Why collecting thrift should not be allowed?
The
Bill permits anybody with Rs 5 lakh capital to accept thrift which is
dangerous. Any unscrupulous organisations can get into this and run
away with the deposits of the poor. At present the savings of the SHG
members are deposited in the bank for a short time and then rotated
as loan and the income earned is shared by the members. The savings
rotated is often more than the loan from banks. It is not advisable
to allow the MFOs to collect this as thrift. Even terrorist
organisations can start a trust and mobilise money. The money
deposited by the poor can be swallowed by unscrupulous individuals
and institutions.
17.
Can the Ombudsman scheme help?
Creating
another set of provisions for one more Ombudsman scheme which has not
achieved the goal so far is not going to help at all.
18.
Can you see the reemergence of the licence raj?
As
per the bill all existing MFOs should get a licence from Nabard.
Organisations have worked in the field for many years. Why there
should be a licence now?
19.
Appeal
Our
request is that this bill should be rejected. Wider consultations
should take place at all levels and then we can arrive at a
conclusion whether to have another bill or not.
Email:
Thomas
Franco <ngcfranco@gmail.com>
Thomas
Franco <ngc_franco@sancharnet.in>
-X-
Critical Concerns
