Money & Banking
Priority sector lending to MFIs—need for adequate supervision

If the concerned RBI departments could not monitor five of the top 13 NBFC-MFIs that were supposed systemically (very) important, then, how can they be expected to set up supervisory mechanisms for several hundred MFIs as per the proposed Microfinance bill?

If equity was in some ways responsible for the burgeoning growth of Indian microfinance institutions (MFIs), the (huge) amount of (priority sector) debt leveraged by these 13 NBFC-MFIs (in top 14 MFIs) and other NBFC MFIs is another issue here.

Obviously this hugely increasing trend of priority sector funds being absorbed by NBFC-MFIs would be clear from the filings made by them to the Department of Non-Bank Supervision, RBI. In numerical terms, the growth of debt for MFIs, in terms of funds accessed from commercial banks and SIDBI, is given below and this growth is best described as phenomenal:

As can been be seen from the above table, bank loans outstanding with MFIs increased several fold after the Krishna crisis. Specifically, during the year before the 2010 Andhra Pradesh (AP) crisis, it increased phenomenally to about 6.40 times the loan outstanding of the base year (2006-07). Likewise, SIDBI loans outstanding with MFIs increased several fold after the Krishna crisis. Specifically, during the year before the 2010 AP crisis, it increased phenomenally to about 6.92 times the loan outstanding of the base year (2006-07). The steep growth of commercial bank and SIDBI loans outstanding with MFIs, over the years succeeding the Krishna crisis, is captured in Figure 1 below:

Figure 1: Commercial bank and SIDBI loans outstanding with MFIs during years 2006-2010

As N Srinivasan says in the 2010 State of Sector Report, “Bank loans to MFIs did not exhibit any overt signs of increased risk perceptions towards the microfinance sector. …Public sector banks have taken to MFI financing in a big way. Public sector banks (not including SIDBI) had an exposure of Rs4,737 crore to MFIs in comparison to private sector banks’ exposure of Rs 4,133 crore. Foreign banks had outstanding loans of Rs1,994 crore and FWWB had increased its exposure from Rs295 crore last year to Rs360 crore. SIDBI almost doubled its exposure to Rs3808 crores during the year. At this level SIDBI had a share of more than 25% of the market.”

And readers would recall that the top five AP-headquartered MFIs thrived on this burgeoning debt provided by SIDBI and commercial banks as evident from the table below:

Again, all of the above raises some very crucial questions for the RBI, the Department of Non-Bank Supervision and other RBI departments. A key issue here is whether or not the concerned departments (Department of Non-Bank Supervision, Department of Banking Operations Development and Department of Banking Supervision) felt alarmed about this burgeoning growth of priority sector lending (PSL) and other funds from SIDBI/Banks to NBFC MFIs in terms of the following aspects:

  • Which banks/DFIs are providing these PSL funds to various MFIs? What do the growth trends say? Has growth been unusually large in comparison to previous years? Is there any cause for alarm given the huge growth of (PSL and other) funds from banks and DFIs to MFIs? How has this growth in priority sector loans been absorbed by MFIs? Overall, what can be said with regard to due diligence by banks/DFIs in terms of sanctioning and disbursement processes with regard to priority sector funds and loans to MFIs?
  • How and where are the MFIs investing these priority sector loans and other funds? As microfinance assets? What other assets? Specifically, for what purposes are these PSL and other funds being used by the MFIs? Especially, did DFIs/banks look for any differences between the proposed and actual end use of priority sector funds by MFIs? Is there any reason to believe that these priority sector loan funds may be used for non-priority sector purposes? If so, what are the reasons and what are the ways of addressing this?
  •  Do returns by NBFC-MFIs show unusual trends with regard to microfinance asset growth? Is there any cause to believe that growth in micro-finance assets has occurred through multiple lending, over lending and/or ghost lending? Have any of the institutions provided interest free loans from their PSL funds to their promoter, senior management and/or board members? If so, for what purposes?
  •  Plus several other questions

Now, in summary, as this and other previous Moneylife articles (Lessons from the commercial micro-finance model in India; Dissecting the mechanics of growth in Indian microfinance; and The special category of NBFC MFIs: Lessons for the Department of Non-Bank Supervision, RBI) have shown, there are several unanswered aspects with regard to RBI’s role leading to the 2010 Indian microfinance crisis:

1.    Did the Department of Non-Bank Supervision miss any of these (significant) trends? If so, why? What lessons can be learnt from this with regard to supervisory arrangements in the future (especially those given in the proposed micro-finance bill)?
2.    If not, having spotted these happenings in the first place, why did it not take necessary corrective action? Again, what lessons can be learnt from this with regard to supervisory arrangements for the future (especially those given in the proposed microfinance bill)?
3.    If the concerned RBI departments could not monitor five of the top 13 NBFC-MFIs that were supposed systemically (very) important, then, how can they be expected to set up supervisory mechanisms for several hundred MFIs as per the proposed Microfinance bill?

And without sufficient supervision, none of this will work on the ground and therefore, it is important for the RBI, DNBS and other concerned departments to take stock of what happened and why from a regulatory/supervisory standpoint. That is certainly some food for thought and let me reiterate that India is a great country for legislation but the implementation record is rather poor in many cases. We certainly require a microfinance bill to provide legitimacy to the microfinance sector and that is a noble objective indeed but we cannot and must not stop with that. Rather than being a paper tiger, the bill should have the teeth and mechanisms to ensure orderly growth of the sector and for this, the most critical aspect is to look at the supervisory capacity of the RBI (and/or other organizations) and evaluate it to see what needs to be done to ensure ground level implementation. I do hope that the concerned people and powers that be, pay attention to these critical issues.

One last point—I have flagged issues and again, the objective here is not to undermine the capacity of concerned people or the good work being planned. The objective, solely, is to assist in enabling the development of better regulatory and supervisory mechanisms that can work on the ground towards the benefit of large numbers of low income people, who continue lack access to quality and affordable financial services at the grass-roots—a very necessary condition for the inclusive growth that India seeks to achieve.

(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)

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Food inflation declines sharply to 6.60% for week ended 26th November

Overall, vegetables became cheaper by 1.25%, a big relief after double-digit inflation in vegetable prices during the months of September and October. However, other food products grew more expensive on an annual basis, led by protein-based items

New Delhi: Food inflation fell sharply to 6.60% for the week ended 26th November, reflecting a decline in prices of essential items like vegetables, onions, potatoes and wheat, reports PTI.

Food inflation, as measured by the Wholesale Price Index (WPI), stood at 8% in the previous week ended 19th November. It was recorded at 8.93% in the corresponding period last year.

According to data released by the government today, onions became cheaper by 39.20% year-on-year during the week under review, while potato prices were down by 15.75%. Prices of wheat also fell by 4.70%.

Overall, vegetables became cheaper by 1.25%, a big relief after double-digit inflation in vegetable prices during the months of September and October.

However, other food products grew more expensive on an annual basis, led by protein-based items.

Pulses became 13% costlier during the week under review, while milk grew dearer by 11.02% and eggs, meat and fish by 10.04%.

Fruits also became 10.72% more expensive on an annual basis, while cereal prices were up by 1.68%.

Inflation in the overall primary articles category stood at 6.92% during the week ended 26th November, as against 7.74% in the previous week. Primary articles have over 20% weight in the wholesale price index.

Inflation in the non-food segment, which includes fibres, oilseeds and minerals, was recorded at 1.37% during the week under review, as against 2.14% in the week ended 19th November.

The rate of price rise in non-food primary articles has fallen sharply during the past couple of months, from over 8% to around 1%, as per the latest numbers.

Fuel and power inflation stood at 15.53% during the week ended 26th November, the same as in the previous week.

The decline in the rate of price rise in food items is likely to bring some relief to the government and the Reserve Bank of India (RBI), which have been facing flak from all quarters for persistently high prices.

Speaking in the Lok Sabha yesterday, finance minister Pranab Mukherjee said the ideal rate of inflation is around 5%-6%.

The fall in food inflation comes as a silver lining for the government at a time when the economy is experiencing a slowdown, with gross domestic product (GDP) growth dipping to 6.9% in the second quarter, the lowest rate of expansion in over two years.

The eight key infrastructure industries witnessed dismal growth of 0.1% in October, the lowest in the past five years.

Headline inflation, which also factors in manufactured items, has been above the 9% mark since December 2010. It stood at 9.73% in October this year.

The RBI has hiked interest rates 13 times since March 2010 to tame demand and curb inflation.

In its second quarterly review of the monetary policy last month, the central bank had said it expects inflation to remain elevated till December on account of the demand-supply mismatch before moderating to 7% by March 2012.

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Credit Suisse sees Sensex at 13,200; rupee at 55 by June

“We remain bearish on the overall market, with downside risks to both multiples as well as earnings. The Sensex is likely to fall in the range between 13,200 and 14,400 and the rupee may touch Rs54-Rs55 by June 2012,” Credit Suisse India equity strategy head Neelkanth Mishra told reporters

Mumbai: The Sensex is likely to rule between 13,200 and 14,400 points and the rupee may touch Rs54-Rs55 by June next, reports PTI quoting a Credit Suisse India report.

“We remain bearish on the overall market, with downside risks to both multiples as well as earnings. The Sensex is likely to fall in the range between 13,200 and 14,400 points and the rupee may touch Rs54-Rs55 by June 2012,” Credit Suisse India equity strategy head Neelkanth Mishra told reporters here.

The market is not trading at its face value and possibility of downtrend is most likely, he said while releasing the Credit Suisse India 2012 Outlook report here.

The trend is already clear; he said and pointed out that “Q2 was the first quarter in two years to see a year-on-year (y-o-y) decline in profits for companies in the Nifty. More worrying is that this happened despite a 20% annual sales growth, thus indicating continuing margin depletion, which is already at a three-year low.

“We fear that a potential slowdown could impact sales and could put further pressure on operating profit growth due to negative operating leverage,” the report said.

The rupee has been one of the weakest currencies globally in 2011 and the weakest in Asia, falling 17% since August alone. Credit Suisse believes the rupee would continue to be weaker.

Mr Mishra pointed out that the rupee is likely to continue to weaken over the next three-to-six months, putting more pressure on inflation, delaying rate cuts and hurting foreign- investor returns.

“We expect the rupee to touch Rs 54-Rs55 by June next, but it is unlikely to touch Rs60,” Mr Mishra said, adding only debt flows can potentially support the rupee.

However, the stress on European banks and depletion of risk appetite could keep the dollar access for domestic corporates restricted. As a result, estimates and prospects for companies that have dollar revenues but rupee costs have not been updated so far, IT services and pharma exporters in particular, the report said

“We expect the domestic IT services sector to particularly get a second headwind with a structural downward revision in rupee estimates,” it said.

In a sustained high interest rate and risk-averse environment, the agency believes rate sensitive sectors are likely to remain under pressure. Further, high interest rates and slowing growth will continue to pressure asset quality at banks.

On the high government borrowing, the report said it is also likely to put pressure on credit growth.

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