Responsible Finance Forum

Impact of Policies and Regulations on the Micro finance Sector

Partha Ghosh, Richa Valechha and Puneet Chopra
22 April 2015
Source:  MicroSave

The Andhra Pradesh micro finance crisis and the subsequent regulatory regime had a significant impact on the micro finance institutions and their customers. Stipulation of minimum net owned funds, introduction of the concept of “qualifying assets”, strict IRAC and capital adequacy norms, cap on operational income, compliance to credit bureau checks and emphasis on corporate governance for NBFC-MFIs meant only a few who adhere to these covenants would be allowed to continue. More than the need to comply more, it was the impact on growth strategy and marginalising of profits that took the steam out of most of the small and medium scale micro finance institutions. The impact of the regulatory guidelines traversed across the customers and suppliers (banks and institutions financing the micro finance industry).

This report aims to present a qualitative assessment of the impact of the AP micro finance crisis and the consequent regulation of the sectors (NBFC-MFIs) by the RBI. The report examined RBI’s current regulatory guidelines1 for the NBFC-MFIs and the lapsed micro finance bill 20122. Based on the directions/salient features of these two documents we have sought opinions of micro finance customers, management staffs of MFIs and staffs of banks (lenders to MFIs). Nine MFIs and their customers across five states were covered under the study. Three banks that are major lenders to micro finance industry for the last three years have also been included to understand the supply side perspective.