MFIs hope for better time ahead on regulatory clarity

Mumbai: After reeling under a credit scarce situation and regulatory dilemma, the domestic microfinance industry is hopeful of a slow, but steady progress next year, say industry experts.

"Next year, things may not change dramatically, but definitely, there will be a slow and steady progress on the back of clarity on a lot of regulatory issues," Bangalore-based Janalakshmi MFI chairman Ramesh Ramanathan told PTI.

He also expressed hope that credit flow to the microfinance industry from various financial institutions, especially from banks, will improve next year.

In 2010, following a spate of suicides by harried MFI borrowers, after being allegedly harassed by the collection agents of MFIs, Andhra Pradesh, the largest MFI market with over a quarter of the Rs 20,000 crore micro-advances, issued an Ordinance, which strictly regulated the collection and lending practices. Later on, the state passed a legislation to effect the Ordinance into an Act.

These regulations had a very debilitating impact on the industry, as borrowers refused to pay up, leading to a credit crisis in the industry. Their woes escalated when banks refused fresh loans, as these micro-lenders were forced to default on their debt-servicing.

However, the Reserve Bank this month notified new norms by classifying microfinance lenders as NBFC-MFIs and brought them under its regulatory purview.

The RBI also put a cap on interest and margin at 26 and 12 per cent respectively, in its effort to bring about transparency and safeguards against harassment of clients.

"Due to the clarity on many issues on regulatory front, credit flow from banks is likely to increase next year," says Ramanathan.

Officials from the Hyderabad-based MFIs also sound optimistic about the future. "Situation will definitely improve next year as a lot of dilemmas related to regulation has been cleared. Also, we are expecting a favourable disposition from the Andhra High Court regarding the state Act restricting MFIs," said an official of a Hyderabad-based MFI, who wished not to be quoted.

The only listed micro ledner SKS Microfinance has dragged the AP into the High Court, challenging the legality of the legislation that greatly restricts the operations of MFIs in the state.

The officials also expressed hope that credit flow from banks would improve after the classification of MFIs as a separate class of NBFCs.

Earlier this year, YH Malegam, who was the head of the RBI appointed committee on MFIs, had said that credit flow to micro-finance institutions would be adequate in the future after the regulations relating to MFIs have been issued.