'Microfinance Bill leaves out MFIs'

Q&A: Vijay Mahajan

Excluding MFIs from the ambit of microfinance bill is an anomaly, says Vijay Mahajan, CEO, Basix

Does the microfinance Bill address the sector comprehensively?

The primary problem with the microfinance Bill is that it leaves out microfinance institutions and applies only to microfinance organisations ie NGOs, societies and trusts which have formed self-help groups.

MFIs which come under Non-Banking Financial Institutions have been kept out despite the fact that the largest 10 entities in the sector are NBFCs.

Why is it so?

MFIs are NBFCs which are covered under RBI guidelines. But while the RBI has guidelines for nine different categories of NBFCs, it is reluctant to add a tenth category viz MFI NBFCs.

How has this harmed MFIs?

Many RBI directives issued for MFIs don't benefit them as there is no such entity as an MFI NBFC in the RBI's scheme of things.

The provision for business correspondents under microfinance benefits NGOs and not MFI NBFCs. Again, IRDA guidelines on microfinance don't apply to NBFCs. Now, this Bill which allows collection of thrift allows it for NGOs but not a Rs 20-crore MFI. 
 

THE MFI STORY
Total MFIs	800
Total loan outstanding (2005)	Rs 1,100 crore
Projected loan by 2010	Rs 12,800 crore
(Source: Sa-dhan study)

What does the Bill achieve?

The Bill is desirable, but one must remember that it allows any NGO to collect deposit.

What about interest rates and the demand for a cap on them? The Bill doesn't touch that.

It is presumed that interest rates should be low irrespective of transaction costs, which constitute 70 per cent of the total expense. Costs can be either subsidised by an NGO or the government or met through cross subsidy as banks do. Or the MFI has to charge the full cost as interest.

What are the existing rates?

The break-even rate for an MFI would be 24 per cent. We at Basix, which is both an MFI and an NGO, charge a minimum interest of 12 per cent from SHG federations and a maximum of 18 per cent from single SHGs.

Which are better, MFIs or SHG federations and SHGs?

Both are needed. While MFIs provide faster and bigger loans at higher rates, SHGs give smaller credit after a year of savings.

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www.basixindia.com