The Regulatory Trigger
By The Shakespeare Walla
Abstract: Current sentiment around commercial financial inclusion (microfinance, business correspondents or anything to do with banking the poor) is at historic rock bottom. Government has over the past 2-3 years systemically tightened control, ordered closure of several channels i.e. removal of gold loans from PSL, banning chit funds, ordering a shutdown of retail deposit accepting RNBFC’s and most recently murdering the livelihood of over half a million post office savings agents. Moreover with the only listed Indian MFI trading at an Atkins’s diet friendly 10% of its IPO price and other big MFIs banging lender doors for the borrower friendly corporate debt restructuring packages, the mood is sharply reminiscent of Dickensian times. However unlike London weather, dark clouds won’t last and the author believes sunshine is around the corner. Three triggers: a benevolent policy thanks to India’s stud central bank and a real robust demand powered by a constantly rocketing Indian population growth, increasing unemployment, worsening inflation, a proven puncture in the resilience of India’s growth story or the worst performing BRIC economy in recent times and stable like the rock of Gibraltar, universe fame stark Indian poverty.
NBFC-MFI. The Real Trigger: Basically, India’s stud Central bank of India which famously ducked the global financial mess has woken up to a decade old demand for a special category of NBFC’s i.e. NBFC-MFIs. Result, MFIs have arrived; the Government has realized the role and importance of the MFI channel for financial inclusion. RBI will play a role similar to a venture capitalist: ‘policy’ investing in a category called NBFC-MFI and ensuring they grow by making the right policy and procedural framework. A circular full of rules was issued last week, which I will categorize in three:
(Real) Rules of the Game (Entity Level)
- $1 MM/INR 50MM capital requirement –Great, most existing MFIs comply.
- Loans upto $1000/INR 50,000 – Great, most existing MFIs comply.
- 12% margin cap – Great, most existing MFIs ‘can’ comply. Concern only for Hedge Fund investee MFIs
Take for Granted (Product Level)
- Tenor – –Great, most existing MFIs comply.
- Moratorium –Great, most existing MFIs comply.
Fillers: (These kind of conditions have never worked for any sector, in any capitalist economy. Most of them are duds.)
1. Not more than 2 MFIs to a borrower – Well borrowers will always lie. See 3.
2. All sanctioning and disbursement of loans should be done only at a central location and more than one individual should be involved in this function – How on earth do you define central, say some kms of the equator? Well RBI should define the locus;
3. Household Income Eligibility for the Micro Loan to qualify as a Qualifying Asset – 5 Million of the 1200 Million in India pay taxes. Every one claims to be below the tax bracket. So again a real dud. Can’t expect MFIs to be playing the role of Income Tax Assessors (Not a bad idea though for increasing fee income)
The Secret Sauce: Banks will need to do periodic reporting to the central bank (RBI) on their exposure to NBFC-MFIs as a part of their priority sector targets and financial inclusion efforts. Due apologies to banks but don’t think any bank can or will want to displease the RBI through reporting stagnant cesspool figures for financial inclusion (exposure across various categories SHG’s, MFI-NBFC’s et. al.) and hence we will all see a definite uptick in bank disbursements to NBFC-MFIs. Just wait for a quarter or two!