Companies & Sectors
Never waste a crisis: Some suggested incentives for the proposed microfinance bill

Linking the implementation of norms and safeguards to availability of priority sector lending can minimise the risk of failure while improving the protection of the interests of clients and investors

While we are on the topic of the microfinance bill, I would like to bring up the aspect of incentives which are very crucial in any regulatory/supervisory framework.  Indeed, incentives are very necessary in a nascent industry like microfinance and their impact is likely to be phenomenal, provided they are well structured and appropriately implemented. Accordingly, I suggest some incentives for the proposed microfinance bill and hope that the Reserve Bank of India (RBI), as the regulatory/supervisory authority, would try and implement this on the ground.

For microfinance institutions (MFIs)

Dividend and bonus share issue capi 

The bill and its regulatory framework would have to specify a permanent specified cap on dividends (it could be 10%-15% on shareholder equity and decided through consensus among industry stakeholders) and issue of bonus shares for any MFI that wants to be registered with the proposed authority as per provisions in the bill.

Registration, in turn, will provide such MFIs with access to priority sector loan funds from banks, the complete freedom to act as banking correspondentsii  and immunity from state level usury laws. Additionally, the MFI will be required to meet certain minimum standards with regard to governance, systems (human resources, portfolio management, MIS, finance and accounting, internal audits, internal controls, and so on), client protection/literacy and other aspects as per the suggested framework that have been outlined in an earlier Moneylife article.

It also goes without saying, that the framework will utilise various means (on-site and off-site supervision, etc) to ensure that these non-negotiable minimum standards are indeed met in a dynamically changing microfinance environment, quarter-on-quarter, year-on-year.

Compensation caps

All stakeholders (from senior management, right up to field level staff and directors/board members, if appropriate) at registered MFIs, would have to adhere to compensation caps as per the suggested framework. At any cost, the compensation should not exceed that of similar positions in public/private sector banks, whichever is higher. Further, for salaries/compensation above a certain limit (to be fixed in the suggested framework) and certain key positions (like managing director, CEO, CFO, etc), the registered MFI would have to take necessary approvals from the authority.

Disclosure by promoters/directors/senior management of their personal assets and shareholding in MFI

Promoters, directors and senior management at all registered MFIs would have to provide yearly statements of their assets and liabilities, as also transparently list their and their family/friends' investment in the MFIs. This would be mandatory as part of the suggested framework.

If any MFI does not want to accept the dividend cap, bonus share issue cap, compensation cap and disclosure norms, then they would be free to raise funds from banks and/or other sources at commercial rates to carry on business. In such a case, the loan will not be from a bank's priority sector quota. So, a bank can lend to an MFI at a higher interest rate after factoring in the appropriate risks for the sector. Thus, such MFIs that are not eligible to register under the legal framework offered by the proposed microfinance bill, will not (a) gain access to priority sector funds, (b) be able to act as banking correspondents, and (c) enjoy the benefits and/or immunity provided by this framework against state level usury laws.

For banks

Focus on all kinds of MFIs

Encourage banks to lend to large and small MFIs (with different models) so that overall risk for the banking sector is minimised. Also, no MFI becomes too big to fail. Thus, it will also minimise the material impact on a bank's balance sheet in case a large MFI fails. This is a very important lesson from the present crisis.

Meeting the standards

Loans made to MFIs that have a dividend, bonus share issue and compensation cap in place, that have agreed to certain minimum standards with regard to governance, systems and client protection and provide the mandatory disclosures as per the proposed framework, will come under priority sector targets. That these loans have to be reasonably priced follows naturally. As noted earlier, banks would be free to set a true risk-based price for loans made to MFIs that do not have a dividend, bonus share issue and compensation cap in place, reflecting the level of operational and other risks (including political risks).

If we get these incentives right, here is what I foresee for each of the players.

For banks

  •  Their systemic risk would be considerably reduced as their lending would be spread across a much bigger portfolio of MFIs-different types, sizes, scale, etc.
  • Political risk would also be reduced somewhat-especially for MFIs operating as part of the proposed framework.

For MFIs

  •   Some large MFIs may borrow from banks under priority sector lending, while others may not. But that is a choice that each MFI will have to make, based on its vision and mission and the perceived benefit of operating under the proposed framework.
  •  Large MFIs that do not accept dividend, bonus share issue and compensation caps are likely to become pure play financial institutions. They will be able to give reasonable returns to their investors but they may be more prone to operational and political risks. However, that is something that they may choose to live with.
  •  Large MFIs who have accepted a dividend, bonus share issue and compensation cap, and who remain pure financial institutions, will start getting surpluses. This can then be ploughed back for the development of the microfinance industry at large. Thus, they will be able to build their reserves and, over a course of time, will be able to offer cross-subsidisation across different kinds of products to clients. For example, an income generating loan at 24% or less, education loan at 8%, etc.
  •  Socially focused MFIs will now get adequate funding and will become true livelihood finance and support institutions, where credit would be just one of the products on offer. They may also offer additional support like health advisory services. Thus, these organisations will be able to work on poverty reduction as well as financial inclusion and, thereby, contribute meaningfully to the inclusive growth agenda in India.

For clients

  •  Their interests will be protected. They will have true choice. If they want only credit they will perhaps get it from a large registered MFI at a relatively lower rate. If they want livelihood support with credit they will get it from a socially focused MFI.
  •  If they want to increase their loan size slowly, they can approach a socially focused/small MFI. If they want to increase a loan size faster, they can go to larger MFIs.

For investors

  •  They will now have wider choices. They can either invest in truly commercial for-profit MFIs or they can invest in and/or support MFIs that have capped dividends, bonus share issue and compensation and those which avail priority sector funding, and can act as banking correspondents.  It would entirely depend on their social and commercial goals.
  •  Investors who believe that all problems can be solved only commercially, can invest in non-dividend capped MFIs. Investors who believe in the double bottom line can invest in dividend capped MFIs. Donors can support NGO MFIs.

I hope that I have been sufficiently clear in outlining my incentive proposals. I strongly believe that a crisis should never be wasted, but rather converted into a learning opportunity instead. I also believe that microfinance will not die, irrespective of whatever happens now with regard to the on-going crisis. It is my optimism that makes me seek a proper regulatory/supervisory framework, one that can enable MFIs to grow and flower, one that can protect clients and one that can safeguard public and people's money (loans which are public deposits). All three are important and there can be no compromise on that. I hope the powers that be understand this and attempt to help the microfinance industry with such a clear enabling regulatory/supervisory framework as part of the proposed microfinance bill. It is not too late even now.

 iReturn on Assets and Return on Equity caps are possible but there will be workarounds to that by bundling products along with the loan. Thus, the MFIs will be able to show that their revenues are now coming from other income streams. If these caps are in place, then the existing caps on interest rates and margins can be done away with.
  iiDividend capped NBFC MFIs, with their primary social orientation, should be allowed to become banking correspondents since there is minimised conflict of interest. Further, they should be encouraged to open savings bank accounts with banks and eventually the loan size to the borrower by the MFI should be linked to the savings of the borrower with the bank (perhaps the supervisory authority can come out with prudential guidelines for ratio of loan to savings). This, in essence, will: (a) Encourage savings for clients; (b) Simplify regulation: One will be able to allow savings to clients without creating deposit taking MFIs in the short and medium term; and (c) Reduce chances of over indebtedness by linking loan size to savings amount.

(The writer has over two decades of grassroots and institutional experience in rural finance, MSME development, agriculture and rural livelihood systems, rural/urban development and urban poverty alleviation/governance. He has worked extensively in Asia, Africa, North America and Europe with a wide range of stakeholders, from the private sector and academia to governments.)




6 years ago

Good suggestions. Are these being proposed in addition to the controls proposed in MF bill in India?

I think the MFIs who will not qualify for priority sector lending will hardly exist as there will be no incentives for commercial banks to assume a risk which cannot be dimensioned.
I think we should look at very few controls which can be effectively implemented/monitored and controlled and not more controls.
Any ideas for encouraging banks to start lending to Indian MFIs in short term?

Pushparaj M

6 years ago

The MFI bill should also ensure the legal proceedings against the wilfull defaulters of this sector.Also some unethical processes by MFIs like maintaining 2 or 3 cash books in the Trust a/c..etc should be punished. Otherwise the entire chapter crisis will become a never ending processes. RBI have to implement the monitoring and supervisory mechanisms also instead of issueing the NBFC licenses like driving license.Few promotors of MFIs are looting poor's money like anything by using the word of Empowerment.All the MFIs should follow the same methodology to lend to clients and for recovery.

Share prices set for a short rally in a day or two: Friday Closing Report

Nifty should find support at 4,785 and then at 4,700. The resistance would be at 5,000

The domestic markets fell by nearly 2% on Friday, closing the week with a loss—the fourth consecutive weekly loss—on global fears that the US could slide into a recession. The intra-day lows on both the Sensex and the Nifty today were the lowest since 26 May 2010.

We expect the Nifty to find support at 4,785 and then at 4,700. After a loss of a day or two, we can expect a bounce back on the bourses. Today’s decline on the market was on a volume of 69.81 crore shares on the National Stock Exchange (NSE).

The market opened lower, tracking weak global markets on the back of weak economic data from the US and the continuing debt issues in Europe. The Nifty opened 85 points down at 4,859 and the Sensex began the day at 16,238, a loss of 232 points from its previous close. Heavy selling was witnessed in IT and banking stocks, with blue-chips like Infosys, ICICI Bank, TCS and HDFC Bank falling sharply.

The decline attracted bargain-hunting and investors lapped up stocks at lower prices. The market touched the day’s high in mid-morning trade, though the indices were in the negative. At the highs, the Nifty rose to 4,894 and the Sensex touched 16,288.

However, the continuing decline in Asian indices through the session pulled the market down again. Signs of a sharp slowdown in global growth and institutional selling saw the indices drift further southwards.

European stocks edging towards two-year lows on worries over the ongoing debt crisis in Eurozone countries added to the woes and the indices dropped to intra-day lows in the post-noon session. At the day’s lows, the Nifty fell 148 points to 4,796 and the Sensex plummeted 482 points to 15,988.

However, the indices staged a pullback to close above those lows. The Nifty closed at 4,846, a loss of 99 points, and the Sensex finished trade at 16,142, down 328 points from its previous close.

The advance-decline ratio on the NSE was 336:1096.

Among the broader markets, the BSE Mid-cap index declined 1.36% and the BSE Small-cap index lost 2.01%.

Barring the BSE Realty index (up 0.77%), all other sectoral gauges settled lower. The top laggards were BSE IT (down 4.41%), BSE Capital Goods (down 4.17%), BSE TECk (down 3.70%), BSE Bankex (down 1.90%) and BSE Consumer Durables (down 1.68%).

Jaiprakash Associates (up 2.50%), DLF (up 2.47%), Hero MotoCorp (up 2.19%), Hindalco Industries (up 1.13%) and Tata Power (up 1.03%) were the top Sensex gainers. Infosys (down 5.79%), Tata Motors (down 5.28%), Larsen & Toubro (down 4.95%), BHEL (down 4.63%) and ICICI Bank (down 3.65%) finished at the bottom of the index.

The main gainers on the Nifty were JP Associates (up 3%), DLF (up 2.85%), Hero MotoCorp (up 2.17%), Hindalco (up 2%) and Reliance Infrastructure (up 1.20%). The key losers on the Nifty were Tata Motors (down 5.58%), Infosys (down 5.48%), L&T (down 4.98%), BHEL (down 4.71%) and Dr Reddy’s (down 3.53%).

Markets in Asia also closed the week on a dismal note. The Seoul Composite plunged over 6% on fears that the global slowdown would lead to another recession. Poor economic data from the US and concerns about the health of banks in Europe also weighed on the markets in the region.

The Shanghai Composite declined 0.98%, the Hang Seng tumbled 3.08%, the Jakarta Composite dived 4.43%, the KLSE Composite fell 1.29%, the Nikkei 225 tanked 2.51%, the Straits Times slipped 3.23% and the Taiwan Weighted plunged 3.57%.

On Thursday, foreign institutional investors were net sellers of stocks worth Rs488.67 crore. On the other hand, domestic institutional investors were net buyers of stocks worth Rs330.42 crore.

Today, state-run ONGC pipped corporate giant Reliance Industries (RIL) in late morning trade to emerge as the country’s second-most valued company, behind Coal India, with a slightly higher market valuation. Around 1145 hours today, ONGC commanded a market valuation of Rs2,38,528 crore on the BSE, which was a little more than RIL’s market value of Rs2,37,882 crore at that time. ONGC ended 0.45% lower at Rs275 on the NSE, while RIL settled at Rs731, down 1.38%.

Tata Consultancy Services (TCS), the IT leader, today announced the launch of iON—the first-of-its-kind fully integrated information technology solution for small and medium businesses (SMB) in the national capital region. iON provides best-in-class, on-demand business solutions using the very latest in scalable cloud computing technology. Using a pay-per-use business model, iON helps SMBs leverage world-class technology solutions as a key business differentiator. The stock settled 2.74% lower at Rs936 on the NSE.

Jindal Cotex has received an approval to raise funds/capital up to Rs200 crore by way of issue of equity shares/securities, including GDRs and/or ADRs convertible into equity shares, FCCBs, QIP or any instrument or securities representing convertible securities such as convertible debentures, bonds, warrants, etc, convertible into equity shares, in one or more tranches, in domestic or foreign markets. The stock fell by 2.11% to Rs90.25 on the NSE.



Anna vows to continue hunger protest till Jan Lokpal is adopted

As support for anti-corruption movement surges across the country, nine opposition parties announce protests on 23rd August for effective legislation

New Delhi: Anna Hazare, who has become a forceful symbol of people's anger against corruption in the country, today vowed to continue his hunger protest till a strong legislation is passed to deal with the scourge. Addressing a huge gathering soon after he reached Ramlila Maidan from Tihar Jail, the 74-year-old crusader said, "We will not leave this ground till the Jan Lokpal Bill is brought."

A jubilant crowd cheered the Gandhian leader as he stepped out of Tihar jail this morning to continue his hunger protest in public, after the government first jailed him on Tuesday, then ordered his release, but when he refused to leave, even agreed to allow him to stage his protest.

"The fight for freedom has begun", "Bharat Mata ki Jai", he shouted, as he stepped out of the gates of the jail to a deafening roar from supporters, and then travelled on a truck decorated with flags slowly through the crowds to Ramlila Maidan.

In his address at Ramlila Maidan, Mr Hazare said, "There was a revolution in 1942 because of which the British had to quit India. But the loot and rowdyism have not stopped. That is why the second freedom struggle has begun. Do not allow this torch of struggle to be put out whether Anna is alive or not," he told the crowd.

Hazare's anti-corruption crusade which has gained unprecedented support from various sections around the country, received a further boost today with nine opposition parties, including the Left parties, announcing that they would jointly organise nationwide protests next week to demand effective legislation to curb corruption in high places.

"We have decided to conduct demonstrations, dharnas and other forms of protests all over the country against rampant corruption and the growing attacks on democratic rights," on 23rd August, CPI(M) general secretary Prakash Karat told a news conference after a meeting of the nine parties in the national capital.

CPI general secretary AB Bardhan said, "We may even demand its (the government Lokpal Bill) withdrawal if necessary." Mr Karat said the parties would also express their opinion before the parliamentary standing committee looking into the legislation.

Also present at the conference were N Chandrababu Naidu (Telugu Desam Party), HD Deve Gowda (JD-S), Ajit Singh (Rashtriya Lok Dal), Debabrata Biswas (Forward Bloc), Abani Roy (Revolutionary Socialist Party). M Thambidurai  of the AIADMK and Bhratruhari Mahtab of the Biju Janata Dal also attended the meeting.

To a question whether the nine parties would coordinate with the Bharatiya Janata Party-led NDA, Mr Karat said the nine parties would organise their own programmes. "The NDA has also expressed that the government version of the Bill does not serve the purpose," he said. Reports continue to pour in of gathering support for a strong anti-graft law.

Today, government employees in RAJASTHAN decided to join the agitation with a half-day mass leave post-lunch. "We have given a call for half-day mass leave and a candle march will be taken out at Ambedkar circle (in Jaipur) in the evening. We as citizens are with Anna. We want to give a message that we are not corrupt and we are also against corruption," said Mahendra Chaudhary, a representative of the state employees federation.

Traders also staged a dharna at Badi Chaupad in the walled city. Wearing black ribbons on their arms, they raised slogans in support of Mr Hazare.

In MUMBAI, dabbawalas who deliver tiffins to over two lakh customers at their work places, today took a break from their daily routine to support social activist Anna Hazare in the fight against corruption. "We don't have any demands of our own. We are here for Anna," said a dabbawala who was among those who joined the protestors at the Azad Maidan.

"In the last 120 years, we have been on the job, come rain or shine. We never stop work. But we decided to back Anna's agitation as it is for a just cause," said Sopan Mare of the Nutan Mumbai Tiffin Box Suppliers' Association.

Asked about the inconvenience caused to customers, Mr Mare said, "They will not mind it. They know we are supporting a just cause." Over 5,000 dabbawalas walked in a procession from the Churchgate railway terminal to Azad Maidan a little before noon.

In JAMMU, several people took out protest marches and sat on dharna for a fourth consecutive day today in support of the Jan Lokpal Bill.

Jammu and Kashmir National Panthers Party state secretary Manoj Kumar led his party activists on a dharna near the city railway station. They shouted slogans condemning the arrest of Anna Hazare and demanded that the prime minister and judges be brought under the check of the Lokpal.

"Accountability should start from the top with the prime minister. Rules and regulations are equal for the prime minister as they are for the common man," Mr Kumar said. "The PM and the judges should also be made accountable and come under the Lokpal."

Over 500 girls from schools in GCW Gandhi Nagar marched in a peaceful procession. They raised slogans of 'Bharat Mata ki Jai' and 'Vande Matram', and appeared excited about the release of Anna Hazare from jail.

This morning, lecturers at Government Gandhi Memorial Science College marched in a candle-light procession on the campus in an expression of support for the anti-corruption campaign.

Arun Kandroo, general secretary of the All Party Migrants Coordination Committee, led activists in a demonstration in the Bagwati area and urged people to join the campaign for a strong anti-corruption legislation.

"The demand by Anna Hazare is every common man's wish. A strong Lokpal will ensure accountability from the top, starting with the prime minister. Scams after scams have shaken the faith of the common people in the government and the rulers," Mr Kandroo said. "There should be Jan Lokpal and not the government-formulated weak Lokpal which has loose ends that can help offenders escape punishment."



Vicky singh

6 years ago

I m vicky. I also with anna hajare i prefer his effort this kind of person is always be possitive thinkin. I will fully suported him till he is walking on this way. Jan lokpal bill must be pass in our contoury.


6 years ago

Anna to chidambaram- Kuchh bhi karne ka tha LEKIN ANNA ka ego hurt nahin karne ka tha Atta MAJI SATAKLIRE Aali re aali atta maji bari aali CHIDAMBARAM tujha aaicha gawat !


6 years ago

Anna and Sreeramulu

Remembering Shri. Potti Sreeramulu

I was not aware of this Mahatma. But yesterday while watching the TV, my 80 years old mother told me about him. We are Malayalees and living in Kerala yet my mother advised me to know more about this Mahatma. My old mother painfully asked me whether our Anna Hazare will meet the same fate of Potti Sreeramulu?.

Potti Sreeramulu , was an Indian revolutionary. He became famous for undertaking a fast-unto-death for achieving the Andhra State and losing his life in the process. His sacrifice became instrumental in the linguistic re-organisation of states. He is revered as Amarajeevi (Immortal being) in Andhra for his sacrifice. As a devout follower of Mahatma Gandhi, he worked life long to uphold principles such as truth and non-violence, patriotism and objectives such as Harijan upliftment.

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