In order to incorporate recent developments in the micro finance sector, the government plans to rework the Micro Financial Sector (development and regulation) Bill to encourage ?responsible and disciplined lending in the sector,? a senior official said. The MFI sector has come under stress recently after numerous suicides by borrowers in Andhra Pradesh, coercive recovery practices, high interest rates and massive over lending by MFIs that pushed small borrowers into a debt trap.
While raising the bar on lending by MFIs, the government, though, does not plan to abolish for-profit micro finance institutions (MFIs), as was recently suggested by some politicians and activists. The finance ministry also does not intend to bar MFIs in raising funds from the public by listing on the stock exchanges, the official said.
?We believe there is a space and need for micro finance in the Indian financial system. We want to encourage organised and disciplined microfinance institutions,? the official said. The government has no intentions to ban MFIs from raising public funds by listing, he said. MFIs have lent about Rs 24,000 crore by September end to the small borrowers.
While pitching it as the next sunrise sector for investors and small borrowers, the successful share sale of SKS Microfinance also led to criticism in certain sections that commercialisation of the industry could be dangerous for the borrowers and the sector itself. But officials associated with regulating the sector seem to endorse the SKS Microfinance model. SKS Microfinance, which initially began operations in 1998 as a non-governmental organisation, converted into a non-banking finance company and recently raised Rs 1,630 crore by selling shares at Rs 985 each. Its stock peaked at Rs 1,404.85 on September 15 at the Bombay Stock Exchange. As on Monday, the stock has fallen to Rs 640.75.
?We have no problems with any MFI raising funds from the public. All we want to ensure is disciplined lending at reasonable rates,? another official working on the draft said.
Andhra Pradesh recently brought in a legislation intending to regulate the MFIs, while the RBI constitute a committee headed by YH Malegam to go into the regulation of MFIs. The fresh Bill would aim to prevent multiple lending, while nudging MFIs to charge ?reasonable rates? of around 22-24%, the official said. The Bill, though, would not specify the rates to be charged, he said.
?The Bill need to incorporate the recent developments. Let the Malegam Committee come out with its report. After that, we will finalise our views and the changes required,? he said. The government is conscious that supporting the MFIs is important for the banking sector too.
?If the MFI sector collapses then the banks will also take a hit.? Banking sector’s exposure to the MFI sector is estimated around Rs 15,000 crore.