Submission to the RBI Sub‐Committee of the Central Board of Directors to Study Issues and Concerns in the MFI Sector
Micro‐Credit Ratings International Limited, M‐CRIL
M‐CRIL is the world leader in the rating of microfinance institutions (MFIs). By December 2010, M‐CRIL had undertaken around 700 financial and social ratings and assessments of around 400 institutions covering 32 countries of Asia, Africa, and Europe.
M‐CRIL was the pioneer in the rating of MFIs in India; it has been engaged with Indian MFIs since 1998 when the Indian microfinance sector was in its infancy. As a result, M‐CRIL has rated practically every Indian MFI of a significant size several times over the past few years. Resulting from this, M‐CRIL’s knowledge of Indian microfinance is unparalleled by any research or assessment agency.
Using this knowledge, M‐CRIL has been publishing a periodic review of Indian microfinance regularly since 2001. The most recent review, M‐CRIL Microfinance Review 2010 was published in November 2010 and contains a comprehensive overview of the operational and financial performance of Indian MFIs in recent years. It undertakes both an analysis of Indian MFI performance over time and a comparison with microfinance in countries such as Bangladesh as well as with benchmarks for South Asia, all of Asia and the global industry.
M‐CRIL Managing Director, Sanjay Sinha, has been a leading commentator at conferences and in newspaper columns (mainly The Economic Times and recently in a letter published in The Economist) on performance and trends in Indian microfinance. Most notably, in numerous conferences and recent writings, over the past couple of years, he has warned of the dangers for the future of the industry resulting from uncontrolled growth shifting the focus from clients to an ethos of promoter hubris and self‐enrichment. Not surprisingly, in recent weeks commercial banks have returned to recommending M‐CRIL as their preferred rater for the rigor of its analysis and its more prudential standards than others.
Submission to the Committee in relation to its Terms of Reference
1. Review the definition of Microfinance and Microfinance Institutions for the purpose of regulation of non‐banking finance companies (NBFCs) undertaking microfinance by the Reserve Bank of India and make the appropriate recommendation
As suggested by MFIN (below):
• Loans to individuals not exceeding Rs50,000 per borrower
• Loans to micro‐enterprises, not exceeding Rs2 lakhs
• Loans to housing in line with National Housing Bank limit for EWS
• Micro‐savings up to a limit of Rs50,000
• Remittance services up to an amount of Rs10,000 per transaction
• Distribution of financial products such as micro‐insurance, micro‐pensions, SIPs of mutual funds, and so on according to definitions established by those separate regulatory authorities
2. Examine the prevalent practices of MFIs in regard to interest rates, lending and recovery practices to identify trends that impinge on borrowers’ interests
The recently published M‐CRIL Microfinance Review 2010 contains a detailed analysis of these issues. It makes two key points
(i) MFIs have failed to serve fully the interests of most microfinance borrowers since they have limited their loan sizes to a level that is no more than 12.5% of India’s GNI per capita (average outstanding loan <Rs8,000 at the end of March 2010). This compares with the average microfinance loan outstanding of Rs3,700 in March 2002, amounting to 18% of GNI per capita at that time. This means that Indian microfinance provides a financial facility in 2010 that is one‐third less useful than that provided in 2002.
While limiting the loan size reduces risk to a given MFI from an individual borrower, by failing to meet the borrower’s needs it pushes her into the arms of other MFIs at the same time, thus promoting a culture of multiple borrowing (and multiple lending by MFIs). It is this multiple borrowing that can lead to borrowers’ over‐indebtedness.
When combined with a culture of zero tolerance of delinquency1 (and no restructuring) prevailing in most MF NBFCs, borrower over‐indebtedness leads to MFI loan officers engaging in overbearing (though not necessarily coercive) behavior at the interface with borrowers. The fact that MF borrowers are predominantly women and loan officers are mostly men, overbearing behavior is sufficient to create the perception of coercion in the micro-financial system.
Part of the solution to this problem is for microfinance to operate in a less frenetic environment in which steady growth is pursued in preference to hectic expansion. This would enable MFIs to train their staff better to understand their customers better, create relationships with clients, and undertake more informed appraisals of their credit absorption capacity and broader financial needs. Naturally, loan disbursements of the order of Rs40,000 need better appraisals than loan disbursements of Rs12‐15,000. Larger loans would not only be better at meeting the needs of most borrowers, but the greater time spent in establishing relationships with borrowers would also help to alter the culture of money retailing rather than relationship building that currently prevails in the industry.