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No conflict of interest, will not give up role as lender, says Nabard……….Dinesh Unnikrishnan
The organization is fully equipped to manage functions of a lender and a regulator, says executive director The National Bank for Agriculture and Rural Development (Nabard) does not see a conflict of interest in its functions as a lender and a regulator, even if it oversees the microfinance sector as proposed in a draft legislation.
It is not ready to give up its role as a lender to regional rural banks (RRBs), cooperative banks and self-help groups (SHGs) as the organization is equipped to manage both functions, executive director Prakash Bakshi said.
The proposed microfinance development and regulation Bill suggests Nabard as the regulator of all microfinance institutions (MFIs) that are not incorporated as non-banking financial companies. State-owned Nabard has been regulator of RRBs and co-operative banks since 1982.
“Nabard has been (functioning as) a lender in the past as well and this is a fundamental job of the organization, and this role cannot be given up. It has been refinancing cooperative banks and RRBs for several years,” Bakshi said on the telephone on Friday. “I do not really see any conflict of interest even if Nabard takes up the role of microfinance regulator.”
MFIs typically borrow money at 9-12% from banks and issue small loans to poor people at 24-32%. Smaller MFIs account for only around 8% of India’s Rs.20,000 crore microlending industry in the form of cooperative societies or trusts, but their regulation is important as millions of poor borrowers rely on these firms for credit.
Y.H. Malegam, chairman of a panel appointed by Reserve Bank of India to review microfinance regulations, has said Nabard should give up its role as a lender to become MFI regulator.
“The Bill says that Nabard should be the regulator. But it is also a participant in the business as it lends money,” Malegam said in a 28 January interview. “There is a conflict of interest…”
“I would fully agree with Malegam that if Nabard wants to be microfinance regulator it has to give up its activities as a lender,” said Kishore Puli, managing director and chief executive of Hydrabad-based Trident Microfin Pvt. Ltd that has 250,000 borrowers and a loan book of Rs.168 crore.
The Malegam panel suggested a 24% lending rate cap for MFIs and recommended that their borrowers belong to households where incomes do not exceed Rs.50,000 per annum. It has also asked for capping an MFI’s exposure to an individual at Rs.25,000.
Andhra Pradesh, which accounts for more than a quarter of India’s microlending industry, has passed a law to regulate MFIs following reports that coercive methods used by MFIs to recover loans drove some farmers to commit suicide.
The law prohibits MFIs from weekly collections, register details with local authorities and made state approval necessary for a second loan to a borrower.
Collection rate of MFIs fell to 10-15% in Andhra Pradesh and fresh loan disbursals came to a grinding halt. Banks also stopped lending to MFIs due to uncertainty in the sector.
Traditionally, Nabard has played a significant role in lending to RRBs, cooperative banks and SHGs through refinancing.
During 2009-10, Nabard offered a refinance support of Rs.3,173.56 crore to banks against their loans to SHGs, up 21.1%, from Rs.2,620.03 crore in the previous year.
Under an SHG-bank linkage programme, Nabard disbursed around Rs.12,861.65 crore to banks during the period.
The development organization, which has so far restricted its role to refinancing, also plans to start funding big-ticket projects such as building cold storages and warehouses following recommendations by management consulting firm Boston Consulting Group.
So far, Nabard has been funding farm projects such as irrigation, roads and bridges at subsidized rates from the Rural Infrastructure Development Fund (RIDF), a fund contributed by banks to meet shortfalls in priority sector lending. Priority sector norms require banks to lend 40% of total loans to agriculture and weaker sections. Any shortfall can be compensated by proportionate contributions to RIDF. Nabard has an RIDF outstanding of Rs.64,000 crore.
Banks invest in RIDF at 6%, which Nabard lends at 6.5% to state governments to fund farm-related infrastructure projects.
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