THE introduction of the the Micro Finance Institutions (Development and Regulation) Bill 2012 in the Lok Sabha on May 22, 2012 has to be seen in the context of the UPA government’s neo-liberal policy of financial inclusion.
This policy is largely predicated on the understanding that the banking sector has failed to reach the poor and that this role would have to be now filled by the micro finance institutions (MFIs). The growth of the influence and activities of the MFIs in the last decade is evidence of this, and is recognised in the statement of object and reasons of the bill. While ‘financial exclusion’ is considered prime cause for the existence of the MFIs, the bill also assumes that the existence of such institutions is necessary in order to remove the ‘discrimination and denial of equal opportunities’ faced by deprived sections, many of whom constitute poor women who take loans for their domestic as well as livelihood needs.
The bill thus seeks to provide a ‘formal statutory framework’ for the operation of such institutions. But even while this bill seeks to do this, it also seeks to integrate micro-credit activities in the financial markets. There are several clauses whereby the bill empowers the RBI to invest parts of the Micro Finance Development Fund in the market or enables MFIs to invest their funds in securities. This clearly reveals its neo-liberal intent and shows that the UPA is making just one more effort at making the micro finance sector a ‘market driven’ rather than a ‘welfare driven’ sector.
OF MFI’S NEEDED
While the need for a regulatory framework has been felt by women’s groups since 2007 when the first Micro Finance (Regulation and Development) Bill was introduced, the nature of this regulation has been under debate. In the years following, led by the All India Democratic Women’s Association (AIDWA), these groups carried out a sustained campaign in order to oppose the inadequate and anti-women content of that bill. They also demanded the formulation of a new and effective law to control the increasing influence of corporate MFIs over the banking and credit system. It has been noted time and again that such institutions are providing high interest credit to women’s self- help and joint liability groups in order to increase their own profits. Their practices are not only market driven but also exploitative in character, especially in terms of recovery of loans. Suicides by women in Andhra Pradesh and reports from states like Orissa and Tamilnadu revealed the oppressive nature of the MFIs, especially in terms of fraudulent transactions and oppressive repayment structures leading to a cycle of indebtedness.
In the light of this reality, the AIDWA, along with other women’s organisations, has been demanding the following:
1) The extension of bank linkage programmes and the right of women to cheap credit and access to public sector banks so that they do not need to be dependent on money lenders or MFIs for their needs.
2) An effective regulation of existing MFIs under the Reserve Bank of India (RBI), covering all organisations and institutions while defining ‘micro finance institutions.’
3) Curtailment of the high interest rates and curb on the harassment resorted to by the MFIs. The interest rates of the MFIs should be capped and women should be provided loans at subsidised interest rate of four per cent, irrespective of the agency from which they take loans.
4) Regulation of and stop to the fraudulent and exploitative practices of MFIs, especially in terms of collection of thrift and processing or insurance fees other than interests on loans. Field surveys show that women of self-help and joint liability groups have been cheated by collection of insurance fees and independent deposits (thrift) by the MFIs.
5) Stop to unfair and extortionist practices of the MFIs that have forced people to resort to suicides. Many of these practices relate to oppressive schedules of repayment and the use of uncivilised methods for collection, including harassment by local goons and confiscation of household goods.
It must be stressed that the Micro Finance (Regulation and Development) Bill 2007 was found inadequate and unfair on most of these counts and therefore opposed by most women’s groups. The present Micro Finance Institutions (Development and Regulation) Bill 2012 will also have to be evaluated on the basis of whether it solves these problems faced by women.
One of the main points of criticism in the 2007 bill was that it left corporate micro finance institutions and non-banking financial organisations (NBFOs) out of its ambit. However, subsequent events seem to have forced the government to bring these agencies under the ambit of the law. Section 2 (i) of the bill recognises five types of organisations providing micro finance services as MFIs, namely: a) society registered under the societies act; b) a trust; c) a non-banking financial company; d) any other corporate body; or d) any other entity defined by the Reserve Bank of India.
Thus the bill limits its scope and coverage through such a definition, and excludes the banking institutions, livelihood based cooperatives and moneylending activities covered by other state and central laws.
While the inclusion of corporate entities is a welcome step, the bill is quite vague on how it will deal with the federations of self-help groups (SHGs) that have developed out of long term saving activities of the clients. Should a federation, then, be considered a potential MFI or a client institution that receives loans from MFIs? The bill is not clear on this point.
A further question needs to be asked on clubbing of societies with corporate bodies, even as there is a welcome recognition to regulate the NGOs, societies and all other entities in the sector. Is the government simply legitimising the operations of all corporate entities by clubbing them with other so-called non-profit agencies or do the two need to be treated differently? If a distinction is made between the two, then perhaps the inclusion of federations will become easier to tackle. In addition to this, Section 15 states that the net owned fund of any organisation should not less than Rs five lakh if it is to be registered as an MFI. This limit should be removed as the MFIs will only be induced to register multiple companies and societies in order to evade such registration.
Section 2 (j) of the bill defines micro finance services as a financial service provide by an MFI, namely 1) micro credit activity not exceeding Rs five lakh per individual or Rs 10 lakh for special purposes notified by the RBI; 2) thrift activities (or money collected from clients in any form other than deposits); 3) insurance and pension funds; 4) remittances by individuals with prior approval of the RBI. This definition is problematic, especially with respect to micro credit which is ordinarily meant to meet small consumptive and business needs of women. Experience has shown that women may take multiple loans not amounting to more than Rs 30,000 to 50,000. A loan of one lakh or above is taken only for acquiring assets. Such a loan should ordinarily come from banking companies who fall outside the purview of this bill.
Thus, by placing a limit of Rs five lakh per individual, the government is only opening the door for corporate MFIs to enter into new lending activities, like car loans or house loans for lower middle class households. While this may help corporate houses to maximise their profits and cross-subsidise the cost of their micro-credit activities, it will defeat the very purpose of micro-credit which is to meet the credit needs of small consumers and producers who are otherwise unable to access cheap credit. The Rs five lakh limit will also induce the corporate MFIs to differentiate between the borrowers and discriminate against small credit users. Hence this limit should be drastically reduced to Rs 50,000 for individual loans in order to ensure that ‘micro-credit’ remains focussed on those social groups and women who cannot afford big loans at high rates of interest.
Further, the MFI’s should not be allowed any thrift activities. While the bill says that no money can be collected in form of deposits, it is not clear what other type of thrift activities it seeks to regulate.
NO CURBS ON HIGH INTEREST
RATES, COERCIVE PRACTICES
One of the biggest problems with the proposed bill is that it, like all its preceding drafts, does not place any limit or curbs on the margins of the MFIs which have otherwise been charging rates of interest that may vary from 24 to 36 per cent or even more in some cases. This bill gives the power to the RBI to determine the “aggregate percentage rate (i.e., rate of interest, and all other costs incurred) and the limits to ‘margin’ (profits) being harnessed by MFIs. In this sense it seeks to give no assurance to women borrowers who have been demanding credit at affordable and cheap rates of interests (preferably not exceeding four per cent). If micro-credit is a lending activity for the financially excluded and deprived sections who have no access banks, it has to ensure that the interest rates charged by MFIs is no higher than the rates of interest at which public sector banks provide loans to women or their SHGs which may vary from four to 12 per cent, depending on the willingness of governments to subsidise these loans.
In terms of the institutional structures and rules, the bill gives the RBI enormous and unrestricted powers to make rules and regulate the operations in the sector. It also empowers the RBI to delegate powers to any other decision making body like the NABARD. In addition, it seeks to provide for national, state and district level Micro Finance Councils which are merely advisory in character and whose main aim is to promote micro finance activities. Apart from the limited representation for women in general, there is no provision for representative of client organisations (like SHGs or joint liability groups) or even women’s organisations in these councils.
No specific undesirable or extortionist unfair practices currently employed by MFIs find any mention in the bill. Issues of repayment and coercion are left to the discretion of RBI and any grievance redressal mechanisms being notified by it. In this form, the bill does not address the specific concerns of the families where women borrowers are facing harassment and in some cases even committing suicides to escape from the exploitation of MFIs.
Thus a preliminary analysis of the bill shows that it does not meet the needs of women borrowers who are the main focus of the micro finance sector. Rather it is one more step in the direction of legitimising the activities of corporate MFIs and integrating small borrowers with the market. Therefore women’s organisations need to analyse it carefully and build a sustained campaign that will put pressure on the government to redraft this Bill in order to address their specific concerns.