The industry, experts say, has been asking for a separate status along with certain privileges including permission to borrow from foreign social investment institutions under the external commercial borrowing guidelines and to accept deposits from the existing customers. This would enable MFIs to bring down the cost of funds, which could result in better pricing of loan products, higher penetration in the rural market and in genuine poverty alleviation.
According to Vijay Mahajan, member of both the Rangarajan committee and Raghuram Rajan committees and chairman of Basix -a micro finance and livelihood institution, The idea of creating a separate status for the micro finance industry was mooted to the RBI way back in the year 1999. And the suggestion was repeated at every possible meeting of the industry, but to no avail.
Under the NBFC regulations, which are part of the RBI Act, the apex bank can create several kinds of NBFCs. And there are already separate categories like the one for hire purchase and lending companies and even for the recently formed Asset Restructuring Company. Then why should not the apex bank create a separate status for MFIs, which play an important role in inclusive growth, he asks.
Mahajan says, right now borrowing from banks is the only major source of funds for MFIs and it is available for 13-15% interest rates. The average cost of funds of any MFI would be anywhere between 12%-15%, depending upon their bargaining capability. If a separate status is given, the industry can ask for certain privileges like accessing the ECB route to raise funds and accepting deposits. This would help us bring down the cost of funds by about 3%-4%.
Earlier NBFCs were permitted to raise money through ECB route but for macro economic reasons, RBI stopped that. ECB was a very good window for the MFIs. RBI's argument is that, if you are working for the poor, then it has to be done as a charitable activity and there should not be any profit motive behind it.
But, unfortunately, if you are a charitable institution doing micro finance, then your source of funds are very limited. How would you address the needs of 150 million to 200 million people with money raised in the form of donation There is a need for, lakhs of crores of rupees , he said adding even today, there are a lot of institutions outside the country which want to contribute. We can raise money from some foundations and pension funds at say LIBOR plus 100 basis points. There are also companies which are willing to offer rupee denominated loans at LIBOR plus 100 basis points.
Suresh Gurumani, chief executive officer and managing director of SKS Microfinance agrees to the view and adds that MFI-NBFCs have specific needs since they operate in remote regions of the country, deal with micro loans which are given without any collateral, high operational costs and actually deliver financial services at the doorsteps of the members. These companies are not only profitable but also have very strong social commitments.
By getting a separate categorisation, the MFI-NBFCs can approach regulators and policy makers with their specific needs so that they can deal with challenges specific and exclusive to this sector. The sector could also be in a better position to take forward its arguments, he said.
The industry, besides asking for access to ECB and savings deposits also wants permission to become business correspondents of banks. This would enable banks to reach the financially excluded rural and urban poor and offer them savings services on behalf of the banks.
According to G Padmaja Reddy, managing director of Spandana Sphoorty Financial Ltd, the idea of MFIs is to offer a bouquet of products to its customers right from loan products to savings products. RBI should allow MFIs to take deposits at least from its existing customers. The rural community, do not have the capability to save more. So, if the apex bank allows us to take deposits from our customers, our exposure to them in terms of loans offered would be much higher than their savings, at any given point of time. And if we get a separate status, then we might also have separate set of regulations exclusive to the sector and even have a separate department to listen to the woes of the MFIs.