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State of the Microcredit Summit Campaign Report 2002

Plenary Session: Policies, Regulations and Systems That Promote Sustainable Financial Services to the Poor and Poorest

Asia/Pacific Regional Microcredit Summit Meeting of Councils

Poverty Targeting Trainings Begin in Asia

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Plenary Session: Policies, Regulations and Systems That Promote Sustainable Financial Services to the Poor and Poorest

Remarks by Vani Sharma

We agree with the authors on their definition of microfinance as encompassing a range of financial services to the poor, including lending, savings and insurance, [and] that microfinance should both work for the poor and be financially sustainable. As regards to the position in the paper that microfinance should be treated as a vital part of the financial system with the special needs and features of microfinance operations and institutions recognized in financial policy and regulations, we in the Reserve Bank of India (RBI) recognize that microfinance is an extremely important focus for credit delivery, particularly to women. The monitoring and credit policy statements made by the governor contain references to the progress and policy development with regard to the microfinance sector.

As the central bank to a developing country with a large, poor population, RBI has been advocating flow of adequate institution credit for the needy sectors of the economy, particularly for the underpriveledged classes. Policy initiatives taken on by us in this regard included attempts to strengthen the cooperative credit system, which can be considered as first generation MFI, expansion of banking facilities to the under-banked areas through an extensive network of commercial bank branches, adaptation of multi-agency approach to rural credit (that is, besides cooperative and commercial banks), we have regional rural banks, set up primarily to cater to weaker sections in rural areas. Commercial banks are also mandated to lend 40 percent of their credit to priority sectors, of which 25 percent (that is 10 percent of the total credit) should be for weaker sectors. As a result of these initiatives, we have an extensive retail network of formal financial systems spread through the country, comprising more than 65,000 branches of commercial banks and regional rural banks, of which more than 33,000 are in rural areas and there are more than 100,000 outlets of cooperatives.

Despite the impressive branch network, it was observed that a large section of the very poor remain outside of the formal banking system, therefore SIDBI, the apex financial institution jointly owned by the government of India and the RBI launched its bank linkage program in 1992. The program has been a huge success and is the world’s largest microfinance program in terms of outreach. 8.4 million families have been assisted, but not through the formal banking system, through around 500,000 groups, of which 90 percent are women and recovery rate is reported to be near 100 percent. The bank’s assistance to groups amounted to about 12 billion rupees.

In February 2000, we issued comprehensive guidelines to banks for mainstreaming microcredit and enhancing the outreach of microcredit providers. Banks have been given complete freedom in selection of MFI intermediaries, descriptions of lending and interest rates. To encourage banks to lend more to this sector, we have allowed them to classify microcredit given directly or to intermediaries as a priority-sector lending. Because of this initiative there has been significant growth in bank credit to MFIs.

On regulation, the paper recommends that MFIs engage exclusively in microlending or those which mobilize savings from borrowers as collateral substitutes and small community-based institutions that mobilize small amounts of savings from non-borrower members, need not be subject to prudential regulation. They have recommended that only those institutions which mobilize savings from the public need to be regulated. We agree with that.

As regards deposit-taking MFIs the paper suggests regulation through creation of new legal structures or by modifying existing legal structures to provide for low minimum capital requirements of between $500,000 and $5,000,000 and a capital adequacy ratio between eight and ten percent. So as regards the regulatory issues we have a number of players in India and some of them are regulated and some are not. The regulatory issues which require arrangements to various statutes are being examined by the government of India and the Reserve Bank of India.

Read remarks by Antonio Vives