RBI Steps Forward on Activity-based Regulation for Microfinance
With the second wave of the pandemic receded, the economy is picking up slowly. However, local restrictions continue in some states and a lull in monsoon held back sowing of the kharif crop. The Markit PMI Composite Index for manufacturing and services, contracted further in June, showing the fastest reduction since July 2020. GST collections dropped below the one lakh crore mark for the first time since September 2020. This drop reflects the reduced business due to lockdowns in May and looking at the trend in e-way bills generated, is expected to rise again this month. The number of e-way bills generated, that had fallen from 5.88 crore in April to 3.39 crore in May, returned to 5.5 crore in June, indicating that activity has resumed. CMIE reports that the unemployment rate has been falling since early June, but is still high particularly in urban areas. The biggest concern to the economy comes from rising crude prices, which has resulted in record high petrol and diesel prices, as Union and State governments are using this source to garner revenue through taxes. Not just crude, all commodities are on a upswing, creating cost-push inflationary pressures globally, and this has been flagged by the RBI in the latest Financial Stability Report. This will impact household demand, given the existing stress on incomes. Recovery from the pandemic therefore will be muted this year.
The RBI has taken a step forward in activity-based regulation by releasing a Consultative Document on Microfinance regulation, requesting public feedback by July 30, 2021. The proposals aim at harmonising the regulatory frameworks for various regulated lenders in the microfinance space, with two main objectives in mind – one, to protect microfinance borrowers from over-indebtedness and two, to encourage competition towards lower interest rates by empowering the borrowers with appropriate information. The proposals on interest rate disclosures are essential for customer awareness and protection. The RBI also proposes to fix the maximum overall ceiling for debt-servicing ratio at 50% of household income. But, the definition of household income is being left to individual boards of the Regulated Entities. This discretion in the definition of a crucial benchmark may create challenges in implementing policy consistently across players and regions.
We still await the report from the RBI Working Group on Digital Lending. Meanwhile fintech has been powering on providing solutions for under-served segments. This has also thrown up interesting insights into the financial lives of these segments. For instance, KarmaLife has an interesting study out on the financial resilience of digital gig workers over the past year and women delivery agents.
It is now fairly well understood that the cause of gender-parity is hampered by gender-agnostic services and processes. In fact, when it comes to cash services at the last mile, engaging women customers requires special attention. CGAP has an excellent slide deck out last month on how to apply the gender-lens in the agent network. The Bank Sakhi model in India has been highlighted as an example for other countries, though more data needs to be collected on the difference in activity rates and in agent performance across gender. Indicus has been calling out for gender-based data for long (See Indicus Policy Brief, June 2018) and we hope that the forthcoming Financial Inclusion Index from the RBI includes the gender-aspect.