Microfinance lenders to launch India Microfinance Platform

Microfinance Focus, September 28, 2010: Major Indian banks which constitute the bulk of on-lending funds to the Indian microfinance industry are coming together to create ‘India Microfinance Platform’ – IMFP, as told to Microfinance Focus by industry sources. The platform is expected to come by the second week of October 2010.

The need for such a platform was recognized way back in 2006 where in a meeting held at the College of Agricultural Banking, an RBI promoted institution, representatives of banks met to discuss their activities and future role in microfinance. Emerging concerns like the sector’s over-heating, employee poaching, multiple lending and lack of common reporting, among other issues were also discussed.

After few rounds of informal meetings, bankers again met in late August last year in a meeting organized by Standard Chartered to discuss these concerns. This meeting was marked by the presence of Reserve Bank of India and Indian Bankers Association. In May this year IndusInd Bank organized a meeting in which bankers took forward the agenda of standardizing the reporting format for microfinance organizations and conducting a joint loan portfolio audit (LFA) on a priority basis. Three microfinance organizations were identified for conducting joint loan portfolio audit which included SKS Microfinance, Bandhan and Equitas. Loan portfolio audit for SKS and Equitas has already been done and LFA work for Bandhan is under progress. There has been significant progress made in setting the parameters of common reporting format.

So far most of the efforts in this direction have been made by private and foreign banks and there has been no significant participation form nationalized banks.

SIDBI (Small Industries Development Bank of India), which is expected to become the nodal body for India Microfinance Platform also organized a joint meeting of bankers in late 2009 where it added some new agendas like creating assessment tools to assess code of conduct for microfinance organizations. Building momentum around its initiative, SIDBI organized a second round of meeting in June this year calling bankers to come together and address the issues of transparency, code of conduct assessment and creation of a common reporting system which is available for the public domain.

SIDBI is also reported to have circulated a draft clause for loan agreements to the 15 participating banks for their approvals. The clause included the issues discussed in the last meeting. Out of the 15 banks to which the draft clause was sent, 11 have already submitted their approvals. However the reasons for the dissent of the remaining 4 banks still remains unclear. SIDBI is expected to be organizing another meeting for the bankers very soon.

Supporting the cause of microfinance lenders, SIDBI’s Executive Director, Mr. N K Maini also announced last month during an event of the Association of Karnataka Microfinance Institutions, the SIDBI’s plan of setting up a Lenders Forum for ensuring transparency in the rates of interest charged by MFIs. He also suggested creation of ‘India MIX’ platform for structured reporting from Indian MFIs similar to the international Microfinance Information Exchange (MIX) which delivers data service, analysis, research and business information about MFIs worldwide.

Banks in India have been a major source of lending to microfinance sector partly because they have to fulfil their priority sector lending targets set by the Reserve Bank of India (RBI) and partly because of the growing profitability of the industry. The recently established Microfinance Institutions Network (MFIN) estimates the outstanding loan portfolio of MFIs is at Rs 35,000 crore and nearly half of this resource raised by MFIs is estimated to be provided by banks.

One of the problems facing these bulk lenders, as noted by the Microfinance India: State of the Sector Report 2008, is the lack of full information about the borrowing institutions. Many MFIs have multiple borrowing relationships with multiple lenders. The terms at which these loan contracts are concluded differ from bank to bank. But information relating to the underlying quality of asset as also the operational aspects is not uniformly known to all the lending institutions.

While each institution seems to have a part of the information, a totality of what the borrowing institution is about, is rarely available. Ratings referring to the position at a point of time can be too dated in a fast-developing microfinance sector.

The report notes that there have been attempts in the recent past to pool the information through an informal forum of lenders. The informal forum exchanges information about the MFIs, quality of asset, business models as also the processes that are adopted.

The Reserve Bank of India in recent times is also keeping a special watch on the sector and one of its committees has made recommendations that the priority sector lending status enjoyed by microfinance institutions should be withdrawn. The recommendations were made against the backdrop where banks are found to be increasingly lending to profit making microfinance institutions. The Finance Ministry is also reported to have asked banks not to lend to microfinance institutions which are charging their customers very high rates of interests.

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