By Santhanam S
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Rural Ministry seeks to convert MFIs to local area banks. The news flashes in major news bulletins. Even before any expert in the Micro-credit Summit 2011 held in Delhi on 12-13 Dec 2011 could come up with the idea and even before the ink dries up in finalising the resolutions of the Summit, the Rural Ministry of GoI has come out with a proposal for converting the MFIs into Local Area Banks (LAB’s).
Are LAB’s still in Lab stage?
The LABs were the brainchild of the Hon’ble Minister P Chidambaram during one of his earlier avatars as the Union Finance Minister. Six of them came into being since 1996 after the RBI guidelines for setting up of LABs were issued. Though RBI issued licences for setting up of six LABs, at present, only four LABs are operating. These are the Krishna Bhima Samruddhi LAB and the Coastal LAB are in Andhra Pradesh, the Capital Lab in Punjab and the Subhadra LAB in Maharashtra.
The licence issued to the Vinayak LAB in Rajasthan was cancelled by the RBI as major irregularities were observed in its operations. As the South Gujarat LAB was found to be unviable, in June 2004, all its branches were converted to function as branches of the Bank of Baroda. AP viz., Krishna Bhima Samruddhi LAB and Coastal LAB are having relatively smaller growth. However, the Subhadra LAB, Maharashtra is the smallest with just 4 branches. Some of the highlights of their operations are given below:
Profile of Local Area Banks
(As at end-March) (Amount in Rs. crore)
|Krishna Bhima Samruddhi LAB|
|Note: Figures in parentheses indicate percentage share in total|
|Source: RBI Report 2011|
According to the RBI Report, the total assets of LABs registered a lower growth in 2010-11 over the previous year. In tune with this overall deceleration, the gross advances of LABs marginally moderated to 21 per cent in 2010-11 as compared with the previous year’s growth rate of 22 per cent. In contrast, the deposit mobilisation recorded a marginally higher growth of 22 per cent in 2010- 11 as compared with the growth of 20 per cent in the previous year.
Though there was deceleration in the asset growth of LABs, the RoA of LABs improved to 1.8 per cent in 2010-11 from 1.4 per cent in 2009-10 mainly due to an increase in net interest income. As provisions and contingencies registered higher growth in 2010-11, the increase in net profits was less than the growth in operating profits
Further, from the information available from the respective banks, the Capital LAB has the largest number of customers with over 1.55 lakh. It has also a Forex division to provide foreign exchange services for their clients. In addition, it has an NRI services division to meet the large number of NRI customers whose families are residing in their areas of operation. While the three LABs are fully IT enabled with branches connected to the Head Office thus making seamless business operations possible, the Subdhra LAB is yet to improve its operations. As part of Financial Inclusion, the LABs have appointed Business Correspondents (BCs). In that Krishna Bhima Samrudhhi LAB is having an edge over others in as much as it has inherited from its parent organisation BASIX, the ‘Sub-K’, an agency arrangement for mobile banking services.
With just three out of the banks functioning, of course, well in terms of all basic parameters, it will be pre-mature to say that LABs model is a successful model of banking in the country.
LABs and MFIs- Merits and De-merits
The first and foremost limitation for a LAB to function is the area of operation. At present, a LAB can work only in three contiguous districts though they may cross from one State to the other State. As of now, such a situation has not arisen. It has to extend banking services to Agriculture and other Micro, Small and Medium Enterprises (MSMEs) with a minimum coverage of 40 percent under the Priority Sector Advances.
When we look at the MFIs in the country and the message coming from the Rural Ministry, GoI for converting the MFIs as LABs, one can reasonably assume that those which will be considered will be NBFC-MFIs. Recently (02 Dec 2011), the RBI has come out with detailed guidelines recognising NBFC-MFIs as the new addition to the existing category of NBFCs. In that, it has touched upon the entry point norm, regulatory norms and prudential norms required for the new category of NBFCs. Besides, it has also elaborated on other Regulatory measures such as pricing of credit, fair practices in lending, corporate governance and others.
No exact data are available about such of those MFIs which may be eligible to be covered under NBFC-MFIs. However, from the reviews of various agencies such as Sa-Dhan, m-Cril and others, we can reasonably assume that there may not be more than 15 to 20 MFIs which will fall in the category of NBFC-MFIs. Of course, Sa-Dhan report on MFIs analyses data from 237 MFIs received by it (both its members and non-members) which include NBFC-MFIs, Sec-25 Companies and others.
i.Area of operation and Entry norm
For LABs, the area of operation is restricted to three contiguous districts. When we look at the profiles of NBFC-MFIs, one may find that all these are operating in more than three districts and a few of them are operating in a number of States as well. So, it will be one of the critical issues which need to be addressed. If the entry norm for a LAB to operate in three districts is kept at Rs.5 crore by the RBI, how will the MFIs operating in a number of districts and various states be bringing in additional capital to meet the LABs’ entry norm.
The client profiles of most of the MFIs indicate that the urban clients are almost equal to that of the rural clients. In the case of LABs, the focus will be in rural and semi-urban areas. So, it would require redefining their areas of operations from the urban centres to the rural and semi-urban centres.
ii.Type of Capital funds
While the LABs are allowed to raise the capital locally, the MFIs are already having capital funds received from both national and international agencies. So, if the NBFC-MFIs are going to be converted as LABs, then whether these MFIs will be required to return the foreign equity or equity like funds would bother the MFIs, more so they will be allowed to mobilise deposits from the public which will enable them to expand their loan business.
At present, MFIs are providing mainly credit services adopting, by and large, one of the three models viz., grameen bank model or joint liability group model or SHG model. If they were to convert as LABs, they will have to provide a spectrum of financial services and various types of loans (not limiting themselves to one type of loans mainly as they do now). They will also have to provide services to other types of clients who may not fit into the definition of micro-finance. In other words, the MFIs converting as LABs may lose the focus of providing financial services to the exclusive category of unbanked/ under banked/ poor/ ultra poor/ poorest/ low income households as is being done now.
iv. Management style
The management style of operations of each of the MFIs is totally different from one another. Though all the MFIs are tech-savvy in dealing with their clients and management of both front-office and back-office operations well in place, there is no uniformity in their management functioning and maintenance of systems. Similarly, there is no uniformity in maintaining, analysing the data and they are not as applicable to the banks. With the result, there is no uniformity in generating uniform Management Information Systems (MIS) for the use of the Regulator, others concerned with the sector. It is evident from varied types of reporting (Sa-dhan, m-cril, mixmarket, NABARD, State of the Sector Report etc) making it difficult to do any meaningful comparison and analysis. So, if the MFIs are required to become LABs, then there will be uniformity in accounting standards which will be a great positive fall out of the proposed action of the government.
LABs and Reviews:
In 2002, the RBI had set up a Committee to review of the operations of the LABs. Among other things, it opposed giving further licences citing regulatory hurdles. However, in April 2008, the Raghuram Rajan Committee was set up to suggest the next generation reforms for the Indian financial sector. It had recommended setting up of more number of LABs particularly in under-banked or unbanked areas of the country. It had also observed that some of these LABs could eventually become full-fledged banks at some stage. According to the data available with the finance ministry when the Committee was in position, there were 120 unbanked revenue blocks in the country and it had envisaged the proposed LABs as private, well-governed, deposit-taking small-finance banks. They were to have higher capital adequacy norms, a strict prohibition on related party transactions, and lower concentration norms to offset chances of higher risk from being geographically constrained. The RBI and the finance ministry are confident of addressing apprehensions over the viability of these small banks, the governance structures and the ability of the regulator to take corrective action.
Under the present dispensation, the Department of Banking Supervision (DBS) in RBI is in charge of these LABs. However, if more number of LABs are to be formed on the lines of Commercial Banks, then the oversight of these banks is likely to rest with the Department of Banking and Operations and Development (DBOD) in RBI. Of course, it is a minor issue or a non-issue at all.
The LABs though are a few, have demonstrated that given proper management and direction and control, they can work as profitable business models and at the same time serve the unreached / un served poor. All the four LABs are functioning profitably and those two LABs who did not show respect to the Regulator were asked to fold up their business. Now the idea has been proposed, thanks to the grey matters available within the Rural Ministry and surprisingly, it has not struck anyone either within the micro-finance sector or outside the sector. I had, in my earlier article tried to look at how Steve Jobs of Apple fame would have run an MFI in India, mentioned that the MFIs need to develop indigenous models inside of running models used elsewhere. In that respect, the spark given by the Rural Ministry is a welcome one as it will, now generate considerable amount of discussions among those who are concerned with the sector. Of course, as the idea has come from the Rural Ministry, it has to be accepted by the Finance Ministry at the GoI level. If that happens, then all the eyes will be on the RBI who will have to take the lead role in defining the micro-finance sector tweaking the LAB regulations.
Even if we assume that the LAB proposal is not accepted / not likely to be implemented in the near future, there are good lessons to be learnt from the functioning of LABs. They are operating within a limited area of just three districts. Their cost of operations is far less than that of MFIs. Their NPAs are lower than any of the MFIs (particularly those in AP who claim less than 10 percent repayment performance of their loans). All of them are generating profits. There is uniformity in reporting and maintenance of accounting systems which will facilitate better MIS for all concerned.
May be, the coming year 2012 will be a departure for the micro-finance sector as it will have more banks to cater to the poor than the MFIs. Sooner it is done, better for the sector and the people who are in need of it.