Tuesday, July 03, 2007

For a viable microfinance model

An article with this heading that appeared in today’s ET provides some solid suggestions. I recommend reading the full article here.

The problems being faced by the Microfinance sector include:

  • Limited access to foreign capital
  • Reliance on bank financing

Some suggestions for making this a viable model:

  1. Category call: The multifarious structures that have cropped up in the sector (as NBFCs, NGOs and Trusts) have given rise to disparate funding structures. The RBI should resist the temptation of making it mandatory for all MFIs to adhere to a common legal structure. Instead it should devise a funding pattern based on some rating mechanism, which ignores the MFI’s genetic structure.
  2. Capital flexibility: Providing MFIs with lot of elbowroom in funding options. The existing cap of $5 mn foreign loans per annum should be increased. Access to foreign capital and local finance also should be eased.
  3. Emphasis on finance: The RBI should allow MFIs to act as financial conduits. This means that they should be allowed to access savings and offer other financial services.
  4. Regulatory role: A separate regulatory infrastructure for MFIs should be established by RBI much like what it has for commercial banks, urban cooperative banks and NBFCs.