JOINT MEMORANDUM ON MICRO FINANCE SECTOR (DEVELOPMENT AND REGULATION) BILL 2007
15 May 2007
Shri P. Chidambaram,
Minister of Finance,
Government of India,
134, North Block,
New Delhi- - 110 001
Dear Shri. P. Chidambaram,
The Micro Finance Sector (Development and Regulation) Bill 2007 was presented in parliament and has now been sent to the Standing Committee for its consideration. The structure of the bill, as it exists today requires some basic changes if the sector has to be promoted meaningfully and the ambit of the regulation to cover all in the field and if women’s groups and disadvantaged rural and urban people are to derive some benefit from the Bill.
BACKGROUND OF THE SHG MOVEMENT
In our country microfinance was started in an organised manner in the year 1974 by SEWA, Gujarat followed by many NGOs in the eighties and NABARD started the pilot programme for SHGs in 1992. The largest number of SHGs financed has been through the organised banking sector including cooperatives. Majority of the NGOs now termed as Micro Finance Organisations [MFOs] only play the role of intermediaries and existing laws governed by the Banking Regulation Act do not permit the NGOs to perform the banking role. In a country with a massive network of bank branches [45000 branches of Public Sector Banks, 5000 branches of private sector, 14000 branches of Ribs, 31 state cooperative banks, 1850 urban cooperative banks, 367 district cooperative banks and more than 100000 primary cooperative societies] the system has worked well and there is no need for the NGOs to take over the functions of banks. As stated by Minister of State for Commerce Mr. Jairam Ramesh SEWA took 35 years to reach 2.8 lakh borrowers whereas the Andhra Pradesh experiment through State Intervention could reach 80 lakh clients in 15 years. Now through this bill we are afraid that the state is trying to slowly withdraw from one of its primary responsibility to bring equity and access to credit for the poor by handing over this function to the micro finance organisations. Attempt to either use MFIs as substitutes for formal banking or even as agents of the formal banking sector is unacceptable. The principal reason is because a socially controlled formal banking system can use the cross-subsidization route to cover the higher costs of rural, remote and small-client banking, and therefore offer credit at reasonable interest rates to the target groups under consideration A comprehensive development and regulation should help the micro finance sector to grow in an orderly manner instead of handing over the responsibility to private sector and then try to control the same.
The Perspective of the Bill
The preamble says, “to provide for promotion, development and orderly growth of the micro finance sector in rural and urban areas for providing an enabling environment for ensuring universal access to integrated financial services, especially to women and certain disadvantaged sections of the people, and thereby securing prosperity of such areas and regulation of the micro finance organisations not being regulated by any law for the time being in force and for matters connected therewith or incidental thereto.”
The main aim of the Bill as per its preamble is to “provide for the promotion, development and orderly growth of the micro finance sector” and ensuring “universal access to integrated financial services”. Through this bill there is an attempt to interpret the development and promotion of the micro-finance sector in a very narrow way and mainly interpreted only in terms of thrift, insurance and lending functions which are termed as “integrated financial services” to the client groups. This in itself is insufficient and its full implications and impact should be fully debated before the Bill is passed. Further, the experience of women’s organisations shows that strengthening micro-credit for the benefit of women would require greater infrastructural support and a state policy that enhances and facilitates the institutional credit support, links between local banks and groups of disadvantaged people and women, market protection with forward and backward linkages and state patronage for SHGs in terms of service contracts, etc. It is important to mention issues like education, health and employment which are crucial for removal of poverty. These are absent in the present bill but the bill talks of securing prosperity.
The Regulated and Unregulated Organisations in the Bill
A. Who the Bill Regulates [Clause-2]
The bill aims to regulate the “unregulated” that are classified into two groups:
1. “Eligible clients” who comprise of self help groups of women, landless labourers and agricultural workers, artisans and farmers owning less than two hectares of land. These groups are seen as the clients for receiving micro finance services. “Micro Finance Organisations” that comprise of societies, trusts, charitable organisations, cooperative societies providing micro finance services to these eligible clients. The framers of the Bill claim that these organisations at present are unregulated and micro finance work needs to be regulated in a more orderly fashion which is not entirely true as these organisations are covered by different acts of the state like Societies Act, Trust Act and cooperatives act and they submit regular accounts and reports. (Overriding these laws is also a violation of the rights of State Governments and no discussion has taken place with them.)
B. Who the Bill does not regulate but NEEDS to regulate
Two important entities are left out of the scope of the bill and need to be included into the definition of micro finance organisations:
1. Section 25 companies giving micro finance services.
2. Non-banking finance companies providing financial services with profit motive. These include even corporate houses that are now entering into financial services.
The argument given to keep these entities outside the scope of this bill is that they are already regulated by RBI regulations and Companies Act. RBIs regulating mechanism is weak and Sec-25 companies are the ones which are least regulated. So it is debatable whether this regulation is adequate and covers all micro finance operations of these companies. It is also questionable whether the issue of the nature of relationship (being constructed through financial services) between these micro finance companies and the eligible clients is addressed in these regulations. For these reasons, and a holistic regulation and development of the sector it is thus essential that these entities be included in the definition of the micro-finance organisations. These are the institutions which use unethical methods and charge exorbitant interest rates as experienced in Andhra Pradesh.
C. SHG federations and workers groups: The grey areas
The status of two other entities needs to be clarified in this bill.
1. SHG federations of client groups who provide assistance to collect thrift which is kept in the groups’ account and provide inter-loaning functions: Many of these are registered as societies and cooperatives, but the nature of their operations and their relationship with individual SHGs is markedly different from any other NGO classed under micro finance organisations or eligible clients. It is not clear where these groups stand in this bill and we suggest that a separate entity be created called a “federation” which can be provided exemptions from some of the restrictions placed on other entities. In many states Panchayat, Block and District Level Federations have come up.
2. Several trade unions are also making self help groups in industrial and urban areas. These workers savings groups should be classed as “eligible clients”.
A. Micro Finance Development Council
· The bill provides for setting up of a micro finance development council as an advisory body to the NABARD. It also provides for Ombudsmen to redress grievances. This should be modified. A representative micro finance development council should be the regulatory and monitoring authority for overseeing the sector. The NABARD should be the implementing body for promoting credit functions of micro finance operations and should come under the overall supervision of the Council. There is no need for Ombudsmen which is a structure which has not worked well.
The composition of the council is specified by the Bill. This needs to be modified and made more representative. One Representative each of National Commission of Women, Rashtriya Mahila Kosh, Women and Child Development and Panchayat Raj Ministries should be added. The chairperson should be a woman and an equal number of non-official representatives should include 50% women from different federations; representatives of farmers, artisan, labourer and worker groups at least some of whom should be dalits and adivasis
· NABARD should be the nodal implementing agency that reports to the Council on thrift and lending regulations.
· Its powers should include issuing guidelines for doing lending functions. These guidelines should be approved and certified by the Council. These functions are absent from the current bill
C. Role of State and District Level Committees
The role of the District Consultative Committees [DCC] and state bodies needs to be addressed in the bill. At present the bill is silent on this. [At present there is a District Consultative Committee under the chairmanship of the District collector in which NABARD, RBI, BANKS, and GOVERNMENT and in some places NGO representatives are there. The District Level Review Committee has elected representatives in addition to the DCC and there are standing committees which can be revitalised with more representation to women.]At the District level the DCCs with a microfinance standing committee and at the State level the SLBC with representations to women’s organisations can do the monitoring.
The position and role of the federations needs to be further worked out and discussed. At present the bill is silent on this.
Financial Services in this Bill
The Bill creates a provision for offering thrift services by MFOs to the eligible clients in addition to lending. These need to be treated as separate issues in this Act.
A. Thrift Operations
1. The statement of objects and reasons mentions giving thrift operations to MFOs as one of the objectives of the Bill. This should be clearly opposed and deleted from the bill.
a. At present the savings of SHG members are kept in a bank account, in the form of a savings bank account which is a demand deposit, over which the women have control over the same. The women earn interest income by lending to their own members which is shared. This control will go to the NGO with this provision.
b. If a MFO wants to mobilize thrift now it can start a cooperative bank like SEWA has done. That will be controlled by members. In Andhra Pradesh Multipurpose Cooperative societies are doing well. We already have many experiences of unscrupulous NGOs. The CAPART website has a long list of NGOs which have been blacklisted.
c. The rural branches of banks are getting reduced and rural credit is also going down. This provision will give the banks to get out of rural credit as now they can tell people that they should go to the NGO which is collecting thrift for their credit needs.
d. No amount of regulation can provide full protection to the poor depositors if this floodgate is opened.
e. We have to see the entry of the private sector into banking through this act without much stake of theirs which will lead to slow withdrawal of the commercial banks from the rural areas. Many cooperative banks and Regional Rural Banks which have started making profit by entering into micro finance will be affected as the savings will go to the NGOs and loans also will be made available by the NGOs.
f. The bill does not prohibit FDI in this sector and this can lead to many foreign funding agencies getting into thrift collection through their sponsored NGOs. Already many funding agencies have got into the boards of MFIs which are registered as NBFCs by investing in their equity capital.
g. NABARD website says every day 400 women join SHGs and every day one NGO enters the field of microfinance. Allowing anybody to collect thrift will be dangerous.
h. India has a good saving rate and the savings come from household sector which contributes the maximum. When it is channelised through the banking sector it benefits the country but if this goes into the hands of unscrupulous persons in the name of microfinance it will be a huge loss to the nation.
2. The regulations should ensure that even if limited thrift is collected by MFOs, it should be deposited in local banks in the name of the groups doing the actual savings. Any withdrawal
should be done by the eligible clients themselves. By doing this we will be able to ensure that the status quo remains and the thrift functions are not privatised.
3. The obligation to create a reserve fund, the quantum of the reserve fund and who should control the reserve fund need to be clearly specified. At present the bill states that the reserve fund is meant to be created through the net profit or surplus. The phrase “net profit should be deleted from this clause. Further it should be specified that the surplus can only be used to run day to day local operations or as bonus to eligible clients or for any other activity that brings direct benefit to the eligible clients. The rules for how much of the reserve funds can be collected and retained for maintenance of local operations should vary with local situations and should be determined by the district consultative committee. It should not exceed 15 per cent. Rules for federations should be more liberal than for other MFOs.
4. Countries like Bangladesh, Pakistan, Syria, and Kenya have passed Micro Finance Bill with very stringent norms.
B. Lending Operations
1. The bill is silent on one of the most important facets of the lending function, i.e., the amount of interest to be charged by the lending organisation. The bill should clearly mention that the ceiling on how much interest should be charged should be determined by the NABARD, as long as the interest prescribed is equal to or lower than the rates prescribed by nationalised banks. [Earlier RBI guidelines had restricted NGOs from charging more than 2% interest than the bank rate which has been removed at the present time.
2. The bill defines micro finance services and prescribes a ceiling of Rs.50, 000 for groups for different purposes and 1.5 lakh for housing loans. This limit needs to be discussed.
3. Stricter and more detailed lending norms need to be prescribed by the bill. At present the MFOs/MFIs charge interest without any rationale. There is no cap on interest that can be charged to the ultimate beneficiary. Only on RMK loans there is a cap of 18%.
4. The bill provides for business collaborators/facilitators to provide financial services. This should be deleted because this amounts to outsourcing of one of the key function of the banks.
5. The implication of lending by private agencies and the conditions under which they should be allowed to lend need to be specified.
OTHER IMPORTANT MATTERS
- The issue of registration proposed in this bill needs to be further discussed. At present the MFIs are registered under different acts of the state and in many states they have a registration with DRDA also. Seeking approval to start or continue financial services except acceptance of thrift should be done by approaching DCC and by submitting quarterly report to the DCC.
- A new section needs to be introduced on “Rights of Eligible Clients” vis-à-vis the state. It should cover e: 1) obligation to give service contracts 2) protect markets for SHG goods 3) technical know how (already in functions of NABARD).
- Nature of control and funding in Micro Finance Development and Equity fund:
This fund should be made available to NABARD, RMK, SIDBI, BANKS and MFOs for providing capacity building support to MFOs/Federations and SHGs. [At present SIDBI alone provides capacity building support to NGOs linked to their loan amount] The fund should be under the control of the Micro Finance Development Council which will have link with State Level Consultative Committee and District Consultative Committees and managed by NABARD.
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 this act. Guidelines are urgently needed to ensure inclusion of the poorest
- Clause 31 gives arbitrary powers to the Government to exempt organisations from the purview of this Bill, which cannot be allowed.
Hence we request you to kindly oppose this bill and reject the same and demand redrafting of the bill if necessary after discussing the bill with the real stake holders who will be benefited or affected by it.
Brinda Karat, AIDWA Vice- President, MP, Rajya Sabha,
Sati Devi, MP, Lok Sabha
Sudha Sundararaman, General Secretary, AIDWA
Asha Mishra, Pushpa, Bharat Gyan Vigyan Samiti
Punitha, MALAR, Kanyakumari
Subhulakshmi, Nirantar, New Delhi
Geetha (Himachal Pradesh)
Anisha Begum (Gujarat)