Assam's MFI Bill, Congress' loan waiver promise a 'moral hazard': Report

Mumbai, Jan 04: The passage of a Bill to control the microfinance industry and the Congress party'' loan waiver promise if voted to power in the April 2021 polls in Assam is a "moral hazard", according to a report.

With West Bengal also headed for elections, the report by Kotak Institutional Equities warned that such loan waivers can have many adverse outcomes for the finance industry because the quantum of outstanding loans is much higher.

In Assam, the current Assembly has set aside RBI observations and passed a Bill to put more controls on the microfinance industry dealing with loan amount caps, prior registration and other operational restrictions, while the Congress party has promised loan waivers if voted to power.

"Either way, we see these developments setting a negative precedent in dealing with credit to relatively sensitive segments, and potentially creating a moral hazard," the report, released on Monday, said.

The Assam Assembly passed the Micro Finance Institutions (Regulation of Money Lending) Bill, which in a way introduces a parallel set of regulations besides RBI''s rules governing the sector, it said, pointing to some specific provisions.

These include two lender cap for all borrowers and up to Rs 50,000 limit for borrower indebtedness for vulnerable segments and prior registration of lenders with the state agencies. They also include loan repayment to be made at the panchayat offices or public places designated by the deputy commissioners, and a three-month interest moratorium in events of floods or other natural calamities.

Though Assam contributes less than 1 per cent of advances for the system, a few lenders like Bandhan Bank and Ujjivan Small Finance Bank have higher proportion of reliance on the state, it said.

Pointing to past instances of credit culture deterioration on account of events such as the anti-CAA agitations last year, the brokerage said that as of September 30, advances where repayments were due for over 30 days stood at 18 per cent as against 5 per cent average for the system as a whole.

Assam''s Bill has some similarities to Andhra Pradesh''s 2011 law, which had plunged the entire industry into a crisis, the brokerage said pointing to the requirement like prior registration with the state and other operational restrictions.

Further, public statements by Assam Finance Minister Himanta Biswa Sarma also indicate a friction between the state government and the RBI regarding provisions of the Bill. We have also seen unwillingness to sign the industry code of responsible lending (CRL) by a part of the industry, it said.