In
1998 when I joined a start-up microfinance company IASC as its first CEO there
were a plethora of challenges to be faced from day one. Of the ninety and odd
candidates who applied for the position the onus to run the institution fell on
my shoulders. HDFC Ltd was the promoter of the company and had inserted an
advertisement inviting candidates for the position of the CEO in the middle of
the year 1998. With not many microfinance institutions (MFIs) around we had to
create precedence and also set an example for many other MFIs.
We
took three months for the preparatory work and started rolling out micro-loans
from January 1999. Loans were primarily extended to individuals in Self Help
Groups (SHGs) and it was an innovation at that point in time. Being a Section
25 company we had planned to carry on the business of microfinance as a
non-profit institution.
We had extended
loans to a considerable number of groups (SHGs) when we had to virtually stop business due to the issuance of an important
circular by the RBI. The circular was as an aftermath of a series of steps the
RBI had taken after the CR Bhansali Scam came to limelight, the second biggest
financial scam then. The circular DNBS (PD) No. CC.10/02.59/98-99 April
20, 1999 stated : “ With a view to imparting greater financial soundness and
achieving the economies of scale in terms of efficiency of operations and
higher managerial skills, the requirement of minimum NOF of Rs. 25 lakhs has
been raised to Rs. 200 lakh for the NBFC which commences business of a
non-banking financial institution on or after April 21, 1999. This stipulation
will not, however, be applicable to NBFCs which are already registered with RBI
or to such companies whose applications for a certificate of registration are
submitted on or before April 20, 1999.” The circular further stated “In sum,
henceforth, any NBFC making an application to Reserve Bank of India for a
certificate of registration should have NOF of Rs. 200 lakhs.” The legal
advisors of the company advised us to apply to the RBI for registration as an
NBFC as there were no exemptions as such and we were also advised to stop
business till the matter was solved.
For the
next over nine months we had a tough time managing groups (SHGs) which had come to us
for repeat loans. We realised that, if repeat loans were not given the earlier loans may have
repayment problems. On one side we were convincing the groups that we would be
able to come over the problem and on the other side we were actually working towards
the registration of the Section 25 company. Sitting in a small office in the
second floor in Marthandam, my friend Jobins and I, were burning the midnight
oil to send many concept notes to the RBI through the promoter HDFC. Thanks to
the involvement of HDFC, the RBI took a special interest in looking at our application.
At one point in time I had sent detailed concept notes describing microfinance,
poverty level in India, the need for microfinance, and the modus operandi of
our financial model.
As days
passed on the RBI started taking a special interest in our case and had worked
out some solution in their mind and they came back to us asking for more
specific concept notes. The most crucial concept note that I prepared for transmission
to the RBI was on who could be called as a typical client for a microfinance
institution and the upper limits of loans to the microfinance client. I still
remember how Jobins and I used to discuss this matter over dinner at Hotel Taj
and come back to the office and spend considerable time building up the concept
note.
While
considering the client of a microfinance institution, we had suggested to
include families categorised under the Economically Weaker Sections (EWS) and
to some extent families belonging to the Low Income Group (LIG) for which
definitions were already available with the Government. We had also insisted
that these were the segments of the society which were neglected by the
mainstream banks and were vulnerable due to various uncertainties in their cash flow.
With
regard to the upper loan limits we both had the longest discussions and took
lot of our time to conceive the most logical limits. Since IASC was already rolling
out Micro-Housing Loans of Rs 35,000 per individual at that point in time and
as we were also pioneers in extending higher loan sizes to village
entrepreneurs and farmers for micro-enterprise loans, we decided to include
both micro-enterprise loans and micro-housing loans for consideration of the
upper limits. The best thing that happened was the far sightedness we both had
when we decided to recommend the upper limits. We presumed that if our suggestion
was going to be part of some RBI stipulation we need to have at least the next
ten years in mind when we decide the upper limit. We extrapolated the then existing
loan sizes for the next ten years and then taking into consideration the
inflation rates and a few other considerations we arrived at the upper limits. We therefore suggested that an upper limit of
Rs 50,000 be fixed for the micro-enterprise loan and Rs 1,25,000 be fixed for
the micro-housing loan both for individuals.
We both
were the happiest persons on January 30th, 2000 when the RBI’s
Department of Non-Banking Services (DNBS) came out with a circular signed by Mr
YSN Murthy, NOTIFICATION No.
DNBS.138/CGM(VSNM)-2000 dated January 13, 2000.
While
on one side the just emerging microfinance sector had all reasons to be happy
to see the first ever circular from the RBI on microfinance loan limits, I felt extremely gratified by the fact that
the RBI had accepted our recommendations on the upper limits as we had
suggested. History was also created on that day as the RBI had exempted Section
25 companies from the formal registration with the RBI which meant that we
could resume business immediately. Mr Murthy then Chief General Manager who
consistently worked on the epoch making circular also needs to be appreciated.
People
reading this may wonder as to why I have brought this into the public domain
after such a long time. Well someone
rightly said that you have to blow your own trumpet yourself as you alone could
play the best tune on it.
P.Uday Shankar.
