NBFC to replace MFIs in micro lending
Hyderabad: In what could be a major blow to crippled micro-finance institutions with significant exposure in Andhra Pradesh, the government is preparing to come up with a non-banking financial company (NBFC) to replace MFIs.
Once that happens, it would change the landscape of micro-lending not just in the state that is known to have innovated micro-finance products and institutional models but globally too.
The principal secretary of the state's rural development ministry, Reddy Subrahmanyam, told that the proposal was at an early stage and a feasibility study was going on with an aim to start operations on August 15.
To begin with, the proposed NBFC would have Rs 500 crore of authorised capital and Rs 150 crore of paid-up capital. A state-based public sector bank would act as the lead equity partner and both the central government and the state government wo'uld join the company as equity investors. Also, the National Bank for Agriculture and Rural Development (Nabard) would pick up a sizeable equity stake.
'The NBFC would raise some Rs 1,000 crore of funds from the market in the first year of operations to lend to poor borrowers. The fund size would increase progressively over the years,' said the bureaucrat, adding that approvals from the Reserve Bank of India are expected to be in place before August.
Pointing out that the current credit support of over Rs 7,000 crore through self help group (SHG)-bank linkage programme was not adequate and it wasn't meeting the emergency credit needs of the poor, he said the proposed NBFC was expected to fill the gap.
Under the proposed model, the NBFC would offer credit limits to mandal samakhyas, depending on their corpus and, in turn, they would extend credit limits to village organisations of SHGs. Individual SHG members could approach their village officer for credit requirements based on their ability to repay loans.
'We are thinking of a system wherein this NBFC can release funds directly to SHGs after due intermediation by mandal samakhyas within 3-4 working days from receiving credit requests,' said Subrahmanyam. He said the basic difference between the proposed NBFC and the existing MFIs would be that due diligence and intermediation here would be done by community-based organisations compared with low level employees of private MFIs.
To economically uplift the weaker sections of society, the Andhra Pradesh government had over a decade ago set up self help groups, mutually-aided cooperative societies, to be controlled by members, along with Indira Kranti Patham Village Organisations, which broadly sketch financial services initiatives.
However, these bodies could not attract much credit attention from state-owned banks and eventually women members started relying more on private micro-finance bodies.
Raising doubts on implementation of the state's proposal, Vijay Mahajan, president of Microfinance Institutions Network (MFIN), said, 'Globally it is observed that the government should not get into retail financing for it leads to conflict of interests. Practically speaking, all operations of micro-finance (institutions) in the state have ceased after the ordinance and so it cannot be seen as a threat to existing players. We could as well operate in other states, if the government is so keen to root us out. This case only proves that the AP government is endorsing the existing MFI system.'
Padmaja Reddy, MD of Spandana, said, 'The rationale behind the state government setting up such a financial institution is unclear. The question is, is it looking at an NBFC to leverage significantly on the raised paid-up capital? Also, the government would then play a typical role of a lender with its borrower, in lines with the existing structure.'
The industry also asserts that the proposed NBFC, which would come under the purview of RBI, cannot be immune to the current crisis and will face similar hurdles to raise capital.
'Primarily, right now the RBI does not allow any public sector bank to hold majority stake in an NBFC. Second, a banker would check on certain parameters like capital adequacy ratio, among others, and this NBFC would definitely not get an extra leverage for credit disbursement from banks,' said Mathew Titus, executive director of SaDhan, a self regulating body of MFIs.
According to Vikram Akula, chairperson of SKS Microfinance, in the first half of last year around Rs 5,000 crore were disbursed by MFIs, but it dropped drastically to Rs 8.5 crore in the second half, thanks to the Andhra Pradesh legislation to rein the industry which only led borrowers to go back to money lenders.
Hyderabad: In what could be a major blow to crippled micro-finance institutions with significant exposure in Andhra Pradesh, the government is preparing to come up with a non-banking financial company (NBFC) to replace MFIs.
Once that happens, it would change the landscape of micro-lending not just in the state that is known to have innovated micro-finance products and institutional models but globally too.
The principal secretary of the state's rural development ministry, Reddy Subrahmanyam, told that the proposal was at an early stage and a feasibility study was going on with an aim to start operations on August 15.
To begin with, the proposed NBFC would have Rs 500 crore of authorised capital and Rs 150 crore of paid-up capital. A state-based public sector bank would act as the lead equity partner and both the central government and the state government wo'uld join the company as equity investors. Also, the National Bank for Agriculture and Rural Development (Nabard) would pick up a sizeable equity stake.
'The NBFC would raise some Rs 1,000 crore of funds from the market in the first year of operations to lend to poor borrowers. The fund size would increase progressively over the years,' said the bureaucrat, adding that approvals from the Reserve Bank of India are expected to be in place before August.
Pointing out that the current credit support of over Rs 7,000 crore through self help group (SHG)-bank linkage programme was not adequate and it wasn't meeting the emergency credit needs of the poor, he said the proposed NBFC was expected to fill the gap.
Under the proposed model, the NBFC would offer credit limits to mandal samakhyas, depending on their corpus and, in turn, they would extend credit limits to village organisations of SHGs. Individual SHG members could approach their village officer for credit requirements based on their ability to repay loans.
'We are thinking of a system wherein this NBFC can release funds directly to SHGs after due intermediation by mandal samakhyas within 3-4 working days from receiving credit requests,' said Subrahmanyam. He said the basic difference between the proposed NBFC and the existing MFIs would be that due diligence and intermediation here would be done by community-based organisations compared with low level employees of private MFIs.
To economically uplift the weaker sections of society, the Andhra Pradesh government had over a decade ago set up self help groups, mutually-aided cooperative societies, to be controlled by members, along with Indira Kranti Patham Village Organisations, which broadly sketch financial services initiatives.
However, these bodies could not attract much credit attention from state-owned banks and eventually women members started relying more on private micro-finance bodies.
Raising doubts on implementation of the state's proposal, Vijay Mahajan, president of Microfinance Institutions Network (MFIN), said, 'Globally it is observed that the government should not get into retail financing for it leads to conflict of interests. Practically speaking, all operations of micro-finance (institutions) in the state have ceased after the ordinance and so it cannot be seen as a threat to existing players. We could as well operate in other states, if the government is so keen to root us out. This case only proves that the AP government is endorsing the existing MFI system.'
Padmaja Reddy, MD of Spandana, said, 'The rationale behind the state government setting up such a financial institution is unclear. The question is, is it looking at an NBFC to leverage significantly on the raised paid-up capital? Also, the government would then play a typical role of a lender with its borrower, in lines with the existing structure.'
The industry also asserts that the proposed NBFC, which would come under the purview of RBI, cannot be immune to the current crisis and will face similar hurdles to raise capital.
'Primarily, right now the RBI does not allow any public sector bank to hold majority stake in an NBFC. Second, a banker would check on certain parameters like capital adequacy ratio, among others, and this NBFC would definitely not get an extra leverage for credit disbursement from banks,' said Mathew Titus, executive director of SaDhan, a self regulating body of MFIs.
According to Vikram Akula, chairperson of SKS Microfinance, in the first half of last year around Rs 5,000 crore were disbursed by MFIs, but it dropped drastically to Rs 8.5 crore in the second half, thanks to the Andhra Pradesh legislation to rein the industry which only led borrowers to go back to money lenders.
News Posted: 11 April, 2011
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