Some key leaders of the microfinance sector came together in October 2009 to set up Micro Finance Institutions Network (MFIN), a self-regulatory national organisation of the RBI-regulated MFIs. MFIN strives to promote the key objectives of microfinance and establishing guidelines for responsible lending and client protection in this sector.

Alok Prasad, CEO of MFIN, is a veteran public and private sector banker. Previously, he worked in key positions with Citi Microfinance Group (India) and Citibank India after spending 15 years with the Reserve Bank of India (RBI). He was also a member of the start-up team of the National Housing Bank.

In an interview with Geetanjali Minhas, Prasad speaks about industry trends, the Andhra Pradesh experience and the much-awaited Microfinance Institutions (Development and Regulation) Bill, 2012.

For the microfinance sector, has the dust settled after two turbulent years?
In 2010, the Andhra Pradesh government passed an ordinance to regulate MFIs (microfinance institutions) and that had a huge impact in the country. Post-October 2010 was a difficult phase for the industry when funding completely dried up as banks and investors slammed their brakes. Best institutions were struggling. But right from November-December 2010, the RBI and the finance ministry got into the act.

With regulatory attention from the government and the RBI and policy developments have had a very positive effect; like the drafting of a revised microfinance bill which was put in public domain in July 2011. In December 2011, the RBI came out with a detailed set of directions for NBFCs (non-banking finance companies) and MFIs and created a special category of ‘NBFC-MFIs’. This meant that regulations, rules and guidelines designed to deal with this class of organisations could be gradually developed, formed and released – which is what is happening now.

From January-March 2012, banks once again started funding outside AP. It was like lifeblood flowing back into the industry and investor interest began to resurface. Some investors put investment categories for MFIs. IFC (International Finance Corporation) made investment in Bandhan, a Kolkata-based MFI. Small investments were made in six-seven microfinance companies. Things began to open up both on the equity and debt sides. While the industry grew by 5% in 2011-12 at the national level, in Andhra it shrunk by 25-26%. Disbursements outside Andhra grew by 22%. So today we have a clear Andhra/non-Andhra divide.

In my view, nothing will happen in Andhra till the state government changes its attitude. Separately, we have a microfinance bill tabled in parliament and once it becomes law it will send a strong signal to the state government to back off and either repeal the law or soften the impact of that law. Otherwise you will have a duality of regulations in AP. You cannot have two regulators for the same industry.

What is the solution for the Andhra Pradesh crisis?
It is about making choices available for the clients. The AP government has destroyed choices and forced self-help groups (SHGs) as the only model, created a whole lot of bureaucracy for it, which is inefficient and corrupt, as is true of many other government agencies. They have a vested interest in perpetuating that model and trying to keep everybody out. People have to get together and prevail upon the government. The RBI is the regulator for the financial system in the country. Parliament has passed a law to deal with that and you need to back off.

Have microfinance companies learned from experience? Will they provide new activities?
The MFI industry was very unipolar in its approach. Today, the industry is looking at new kinds of products and models, multiproduct business with products specifically designed to meet the needs of a larger mass of clientele.

There is no separate regulatory body for microfinance yet. Is that a hindrance?
As things stand, RBI is the regulator for NBFCs and MFIs. It is the non-NBFCs and non-MFIs for which there is no regulation. There is need for a regulator, which is what the microfinance bill provides for.

Under the excuse of the high cost of micro-financing, some microfinance companies have been exploiting the poor instead of helping them.
Because some institutions made mistakes, it is extremely unfair to paint the entire industry black. Across industries, over the world, people make mistakes and learn from them. This industry is still in its infancy and will evolve. A lot of people in this industry are hurt and troubled, because some people made mistakes and everyone is being described as wrong. You need to make a distinction between a large mass of people who were doing the right things and a few others who made mistakes.

How do you reach out to the unbanked population?
Since independence, mainstream banks have failed to do so. You need a class of institutions that reach out and serve half of the country’s population whom the mainstream banks don’t serve. The government and RBI have come out with a range of policy prescriptions and initiatives to open that end of the market and do financial inclusion. Today, even after 65 years of independence if we are still talking about it. It means that the policies have failed. On the other hand, in five-seven years, MFIs have reached out to 30 million clients largely in rural areas. It has more loan accounts below Rs 50,000 than the entire banking system. We need to build on that. 

Are microfinance companies living up to the promise of financial inclusion and inclusive growth?
It is a process and good progress has been made. With a good supportive regulatory framework and enabling environment, they will do much better work in promoting financial inclusion.

How is the industry looking at the Microfinance Institutions Development and Regulations Bill?
I was a member of the drafting committee. We have created a very good document. I can say that the entire MF industry is eagerly awaiting its passage in parliament. We are hopeful that it will be passed by the winter session.

This bill also provides for the creation of a microfinance development council. Is this council going to help MFIs?
It is not about MFIs merely, but helping clients. It is a good framework whereby the government is endeavouring to ensure that interests of clients are protected with good growth of the industry.