Sa-Dhan Newsletter Volume 3 Issue 2

Microfinance Regulation

other hand, loaning agencies aimed for increased portfolios

thumb impression verification machines. Such innovations

in order to remain "sustainable". During this period a large

along with smart cards go a long way in facilitating operations,

number of new entrants came in the mF sector and focused

reducing paperwork, building sound databases and accounting

only on consumer finance (finance mainly meant for salaried

systems but are highly cost heavy. For example, in an FFP

persons) and these entrants were the first to be affected by

branch visited by the study team, they found that a sophisticated

the economic downtrend. The falling repayment rates in such

electronic system of thumb impression had been introduced

agencies also affected others, who were concentrating on

for the savings accounts clients, which were only six in total

income generating loans. "Borrowers' Associations" demanding

number.

waiver or rescheduling of loans issued by mFIs sprung up

This model of micro-banking has also not been successful in

gradually. While these associations have so far not succeeded

generating additional revenues through deposits, despite the

in their effort to extract any waiver from the authorities, they

fact that, this was one of the main reasons for the promotion

have vitiated the repayment climate in the mF sector, and have

of FFPs as regulated mFIs. Though, mFIs have increased the

discouraged other borrowers from making prompt repayments.

ratio of public deposits to loan portfolio, the small saving

With some caution one can also say that often in mFIs across

accounts formed very negligible proportion of this, as the

the world, repayments of earlier small sized loans have been

general tendency of the FIs has been to prefer large institutional

in fact prompted by the promise or availability of larger loans

or individual deposits. Easy flow of donor money could be

once the smaller ones are repaid. The actual "demand" for

a principal reason, for the mFIs not concentrating on deposits

mC soon gets saturated at client level due to several reasons

as a source of loanable funds.

and once this happens there is no attraction of a next loan

thus affecting the current loan repayment.

FFPS IN BOLIVIA AND NBFCS (NON BANKING

FINANCIAL COMPANIES) IN INDIA:

As per existing regulations, mFIs have complete freedom in

deciding interest rates on their loans. The loans may be given

The FFPs in Bolivia are like (loan) companies in India under

out in US dollars or in the local currency, with the latter

the broad category of NBFCs (comparison of the two given

having a higher interest than the former. From the rates

in the table below). While the Minimum Capital Required

charged by mFIs there is a clear indication that they get a

(MCR) for an FFP in Bolivia is about 2.4 times of that needed

good margin to sustain their operations. This also might be

by an NBFC in India, the MCR for setting up a commercial

important from the context of the micro-banking model in

bank in Bolivia is one fifth of what is needed in India. Two

Bolivia, which seems to be infrastructure heavy, thus being

reasons were attributed for keeping a higher level of MCR for

costly, and requiring huge margins even though being heavily

FFPs in Bolivia. First, it would ensure that only those who

donor funded. FFPs are introducing technology-based systems

are serious in establishing an FFP come forward to set up

like touch screen ATMs with visual and audio instructions and

one. Second, it would enable the FFPs to mobilize adequate

public deposits thus reducing dependency on donors.

FFPs in Bolivia and NBFCs in India

Features

FFPs in Bolivia

NBFCs in India

Capital

US $ 1 M (INR1 48 M)

US $ 417,100 (INR 20 M)

Savings

Can accept deposits 3 months after the date

Only by Companies making profit for 3

of commencement of business. Institutional

years. Deposit scheme to be rated by

time deposits allowed first.

accredited rating agencies.

Cannot keep current accounts

Can accept only term deposits exceeding

one year

Quantum of deposits to be mobilized limited

Quantum of deposits to be mobilized limited

to 10 times the capital

to 1.5 times the Net Owned Funds (Capital +

Free Reserves - certain deductible items)

Interest rate is deregulated

Cap on the maximum interest rate offered

Loans

Exposure norm limited to 3% of the capital

Variable exposure norms

for one borrower. No other restriction.

Other

Can offer other fee based services - payment

Not allowed to engage in fee based

services

of salaries, pension of other institutions etc.

services.

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