Sa-Dhan Newsletter Volume 3 Issue 2

Microfinance Regulation

be paid and on what dates.

than those of bank clients. The lesson is that new and risk

prone business needs stricter norms to comply with even

HRD for banking with the poor: All mFIs paid sufficient

when they are dealing with the poor. It is clear that mFIs,

attention on training of the "credit managers". The training

which do not have reasonable capital, have little chance to

focused on appraisal of the borrower (repaying capacity of the

work professionally, and even Section 25 companies [not-for

borrower) rather than on the micro-enterprise of the borrower.

profit companies] in India will have to conform to this

Implicitly, it means that the dividing line between micro-

requirement, even if they do not accept public deposits.

enterprise(s) and even consumption requirements is rather

thin, and recognition of this fact is the key to the success of

Credit Information Bureau: The regulated mFIs were

the mF sector. Thus, while almost all mFIs had loan products

networked together through the SBFE to a credit information

ranging from micro-enterprise loans to housing loans, the

bureau, which enabled them to access information if a

essence of all appraisal was, whether the individual can repay

potential borrower was using credit facility from any other

the loan or not, irrespective of the source from which the

agency. This helped to avoid taking risky decisions. Once

repayment installments will come.  The mFIs also put

this becomes on-line, it will be updated to the last minute.

substantial emphasis on training for post loan follow up - on

Even the unregulated mFIs (NGOs) were networked in a loose

how should loans and bad loans in particular, be followed up

way through a similar bureau managed through interventions

rather than just monitored. Emphasis was again on how the

of apex institutions like FONDESIF or NAFIBO. It might be

mFI should get back the loan rather on just finding out who

worthwhile for local associations of NGO-mFIs and banks to

the defaulters are.

develop similar bureaus, even on informal basis, as this will

bring efficiency in their working, and will free the potential

Incentives for business generation: Compensation packages

borrower from running about to get "no dues" certificates

for almost all mFI staff, and specially the credit managers,

from bank branches in nearby areas.

were based on basic salary plus incentives based on business

(loans disbursed and repayment of loans) generated. Loans

Transformation from unregulated to regulated mFI: While

are then seen as products on sale. This strategy did help in

efforts (or at least the desire) to transform NGO-mFIs into

business development, but seemed to have an inbuilt bias

regulated mFIs persist everywhere including in India, the

against smaller loans. With proper parameters (that include

Bolivian example shows clearly that the path is not all that

number of small clients) to judge business generated, this

easy. The NGO-mFIs in Bolivia found it very difficult to get

method can lead to significant increase in both the quantity

the necessary capital to convert themselves into FFPs. Most

and quality of business.

depended on donors or some "large hearted" private investors

whose large heartedness was not always permanent. Indian

Regulation of mFIs: All FIs, including banks, open-credit

NGOs will also face this problem (even when some of the

cooperatives and FFPs were regulated and supervised by the

present legal impediments are cleared).

SBFE. The autonomy of the SBFE was ensured through a

system of graded payment based on volume of business that

The real "cost" of transformation is however much beyond the

the regulated FIs have to make to the SBFE.  The SBFE

minimum capital requirements. Investments in technical up-

therefore does not have to depend on the budgetary provisions

gradation, development of accounting systems, procedures,

(or largesse from the Central bank) even though it is technically

and manuals, monitoring mechanisms to meet the regulator's

under the Finance Ministry. It can take independent view and

needs, and training for the existing staff to meet these high

impose harsh decisions. Given the size of India, it may be

standards are heavy.  It also needs a lot of time and

worthwhile to have self-regulatory organizations of mFIs to

substantial planning to get these things done.  In other

begin with, and the Bolivian example shows how it can be

words, transformation of unregulated NGO-mFI to a regulated

made autonomous and functional.

mFI is a hard task, to be taken up painstakingly, and needs

substantial amounts of money. NGOs in Bolivia have learnt

An off-site monitoring system that requires even FFPs to

it the hard way, and it is necessary that all champions of mF

submit almost 500 returns annually to the SBFE helps the

sector in India also accept this reality. This cannot be avoided

latter screen the FIs including the regulated mFIs and look for

for long when the business of an NGO-mFI grows beyond

early warning signals and shows status of remedial action.

certain limits. For highly localized low volume micro-credit

The FIs are inspected more or less frequently depending on

services, NGOs may still be the best answer.

the size of business, the NPA levels, and client profiles of the

FIs etc. Institutions with large and sound business pay higher

Government support: The Bolivian Government seems to

fees to the SBFE and are inspected much less compared to

have played its role fairly and with vision. It encourages

the smaller and poorly managed ones who pay lower fee but

reforms; helps develop practices and policies without

are more frequently inspected and directed. And the system

interfering in the day to- day affairs of the mFIs.

seems to be acceptable to all.

Role of apex organizations: FONDESIF and NAFIBO show

The provisioning and CRAR norms were more stringent for

that member NGOs or mFIs need not only loanable funds but

FFPs than for banks as the risk profile of their clients is higher

also capacity building, which includes HRD, computer

hardware and software, and development of performance

standards.

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