Keya Sarkar: A micro finance test for Chidambaram

OUT OF FOCUS

In this year's Budget speech, the micro finance sector certainly got more than its fair share of mention. Although the sector has an outreach to the poor (5 million families) of almost half that of the entire banking sector, it is not considered to be part of mainstream financial services.

There is no legal framework for this sector and the funding of micro finance institutions (MFIs) by banks is not only small but also erratic. So anything more than a passing reference by the finance minister is certainly cause for cheer.

After the initial feel good, however, a reading of what actually the finance minister said reveals a mere continuity of direction, no huge change in stance.

In fact, the only one new announcement made is a statement of intent, leaving the implementation to the RBI. The pronouncements by the finance minister for the sector were:

The programme of linking self-help groups (SHGs) with the banking system has emerged as the major micro-finance programme in the country.

Credit-linked SHGs now number around 10.8 lakh and the minister has now set a target of an additional 2.5 lakh in this fiscal.

There is an existing Rs 100-crore "Micro Finance Development Fund" managed by Nabard, and mainly disbursed for capacity building in the MFIs.

In this Budget, the minister has proposed increasing the fund size to Rs 200 crore as well as re-designating it as the "Micro Finance Development and Equity Fund" in order to infuse capital into some of the MFIs.

More importantly, this fund will be managed by a board consisting of representatives of Nabard, commercial banks, and professionals with domain knowledge.

The board will be asked to suggest suitable legislation, and the finance minister expects to introduce a draft Bill in the next fiscal.

In the November of 2003, the government had stopped the access of the financial sector to external commercial borrowings (ECBs). MFIs, being part of the financial sector, had also been denied access, thereby adding to their funds crunch.

In this Budget, the finance minister has reopened the ECB window for NGOs. While the speech did not specify this, the reopening presumably includes NGO MFIs as well.

In his speech the minister said that since MFIs seek to provide small-scale credit and other financial services to low-income households and small informal businesses, the government intends to promote MFIs in a big way.

The way forward is to identify MFIs, classify and rate such institutions, and empower them to mediate between the lending banks and the beneficiaries.

Commercial banks may appoint MFIs as "banking correspondents" to provide transaction services on their behalf.

Of the mentions that the micro finance sector got in the Budget, it is clear that there are two of significance, namely, the minister's desire to introduce a draft Bill in the next fiscal towards a legal framework for the sector and the suggestion that banks appoint MFIs as banking correspondents.

While the draft Bill, if it happens, will be a great boost for the sector, it is still not immediate. And for the latter, that is the appointment of MFIs as banking correspondents, it has huge implications for the sector.

While ICICI Bank, one of the most aggressive in the micro finance sector, had taken a lead in using MFIs akin to direct sales agents that banks use for disbursing car loans and housing loans, much of its effort was in an environment not blessed by the RBI.

So, what the finance minister is proposing will have to be put into a structure by the RBI, and knowing its scepticism about players in the field, one hopes the RBI will not drag its feet.

More importantly, when this statement of intent by the finance minister gets translated into a guideline by the RBI for the banks to use, it will hopefully retain the spirit in which it was proposed.

Despite considerable lobbying by the micro finance sector, what the minister did not concede is the sector's plea for allowing MFIs to become deposit takers, a separate regulatory authority, and changes in tax laws and a go-ahead on accessing foreign equity.

In his address on January 20 to a conference organised by Sidbi and Sa-Dhan, a micro finance association, the minister spelt out why he was against any of these.

On the question of not allowing MFIs to be deposit takers, the minister really had no compelling reason to put forward. If status quo is maintained in that MFIs are not allowed to accept deposits, but only allowed to disburse credit, then the minister saw no need for a separate regulatory authority.

As for changes in tax laws, he said he was against subsidies. He was against MFIs accessing foreign equity because the availability of money, according to him, was not the issue. (Banks park 40 per cent of their funds in SLR securities when the mandatory requirement is only 25 per cent.)

But unless he can demonstrate during the year that his ministry, along with the RBI, can get the banks to behave in a manner that substantiates his stand that money is indeed not an issue, all that the Budget will end up with is lip service to over 600 million, who have no access to financial services.