‘Micro fin players extending credit only to rural poor’

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New Delhi, Nov 11: In spite of witnessing huge growth in outreach of millions of Micro Finance Institutions (MFI), their activities have remained confined to only extending credit to rural poor, a new report on the state of micro finance release on Tuesday said.

While stating that micro-finance has gone beyond the takeoff stage and has shown vigorous growth in many parts of the country, the report said that the growth is confined to only credit extending activities, with very little component of insurance and savings in the activities of MFIs,

“The expansion with some exceptions lack depth,” a report titled Micro-finance India : state of the sector report 2008 said. The report prepared by ACCESS development services also said that even in credit, increase in client numbers accompanies by increase in geographical coverage did not lead to ‘deeper engagement’ with clients in terms larger loans and diversified products.

“The shallow engagement with the clients on account of the ‘touch and move on’ business models rendered the operations costs high,” the report said. It also said that large MFIs, professionally run medium-sized ones and some of the smaller MFIs find it easier to access funds. “But funds do not flow freely everywhere,” the report said.

On the supervision or regulation of the MFIs, the report states that the proposed micro finance Bill 2007, which has been referred to parliamentary standing committee is yet to reach a conclusive state. “After several announced deadlines, the Bill seems to have entered a comatose phase,” the report said.

“The division within the sector as to what needs regulation, which should regulate and how it shall be done are yet unresolved as there is no consensus emerging from the sector on the regulatory aspects,” the report said.

However the report said that although the debate on regulations seems determined to continue, the micro finance sector is ‘not in a regulatory vacuum’, it said. The self-help groups (SHGs) linked to banks are in Reserve Bank of India viewpoint, under the indirect regulations of RBI as norms for engagement with SHGs as clients have been stipulated by RBI.

Further, the banks are regulated under RBI under the Banking Regulation Act. However with regards to MFIs, of the reported clientele of 14.1 million, 9.56 million are subject to the direct supervision of RBI as non banking financial companies (NBFCs) both in the profit and non-profit sector.

“About 4.53 million clients served by trusts, societies and cooperatives are outside regulatory coverage,’ the report said. It suggested besides the new micro finance Bill, effort should be on unifying, improving and consolidating the present regulatory framework and apply it across all MFIs without any form-related distinctions on prudential norms.

The report also states that savings has been an aspect of micro-finance service that has by and large been left to the working of SHGs. “The MFIs neither actively pursue this nor those who pursue do so in a manner designed to produce best results,” it said. It also commented that micro insurance despite potential has a long way to traverse.