The limited outreach and scale of Indian MFIs, relative to the MFI giants in Indonesia and Bangladesh, reflects, at least in part, the absence of an enabling policy, legal and regulatory framework. MFIs suffer from the fact that their regulatory oversight is fragmented across many government agencies.
Problem of mobilizing fund (The NBFC clause) !!!
ü MFIs are not allowed to mobilize deposits (even from their own members) unless they convert themselves into a non-bank finance company (NBFC).
ü And even as NBFCs, an ‘investment grade’ rating from corporate rating agencies is required for mobilizing deposits.
ü This is difficult for most MFI-NBFCs; based on past examples, on account of the typically geographically concentrated and non-collateralized portfolios that MFIs have, rating agencies, in almost all cases, have not assigned the required credit rating.
ü The minimum start-up capital requirement for registering as an NBFC (Rs 20 million or US$450,000) is typically beyond the reach of most MFIs.
ü Similarly, the minimum capital requirements for insurance companies (Rs 1 billion, or US$23 million) are high.
NGOs not allowed !!!!!
ü MFIs have problems raising equity: NGOs are not allowed to invest in MFI equity, because of the charitable status of NGOs under the Section 11 and 12 of the Income Tax Act. And regulation on equity investment in MFIs dictates that foreign equity must be a minimum of US$500,000, and cannot exceed 51% of total equity; this implies that bringing in US $500,000 foreign equity requires raising an equal amount (almost Rs 23 million) from India – an amount that is considered far too high by most Indian MFIs.
Foreign Funding (not allowed) !!!!
ü What’s more, since 2002, MFIs are no longer allowed to raise debt from foreign donors and development finance institutions through the ‘External Commercial Borrowing’ (ECB) route.
Comparing Indian MFI with that of Bangladesh and understanding our limits !!!!!
ü Second, the cost of funds for Indian MFIs is relatively high, and unlike in Bangladesh and a number of other countries, the Indian MFI sector has not benefited from grants/subsidized funding.
ü Unlike in, say, Bangladesh, where PKSF lends to MFIs at 4-6% p.a. (less than half the market interest rate), Indian MFIs, right from inception, tend raise debt (from SIDBI, FWWB or commercial banks) at market rates (between 11-13.5% p.a.).
ü While, in many ways, this is a more sustainable way to grow, in practice, the high cost of funds combined with problems in accessing equity, has meant that achieving profitability and growth has been more difficult for Indian MFIs than their counterparts in countries like Bangladesh.
Lack of Professionalism !!!!
ü Third, the Indian MFI sector suffers from capacity and skills constraints, and inadequate support systems.
ü As microfinance is a specialized activity and given that many MFIs have evolved from NGOs that have otherwise been focusing on grant based activities, staff tend to have stronger inclination towards social development issues and tend to possess limited skills in finance, accounting and business management.
ü Thus, sensitization to issues like internal controls, importance of credit discipline amongst groups/members, MIS, financial control and management, financial analysis, business planning, systems development, new product design, etc tend to be of relatively low quality.
ü MFIs need considerable technical assistance to scale up skills in these aspects.
ü Fourth, most MFIs in India lend to SHGs.
ü This means that MFIs in India are constrained by many of the same factors that have held back the outreach and scale of SHG Bank Linkage.
ü In particular, capacity, time and cost issues related to group formation have posed constraints
If we mitigate with these issues.....we could definitely have a bright future for MFI in India !!!!