 
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.
Constraints !!!!!
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
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If we mitigate with these issues.....we could definitely have a bright future for MFI in India !!!!
