Banking license & Centralized regulation-Light at the end of the tunnel for MFIs?

Fiscal 2010-11 was topsy turvy for the Microfinance Industry(MFI). The year began well with the successful IPO of India's largest MFI(SKS Micro Finance) but then collapsed mid-year with issues of corporate governance, usurious interest rates and unfair recovery practices. The Andhra Pradesh Government even passed  an ordinance which swung the regulatory pendulum apparently for borrowers(but as in the classic microeconomic case against regulation, actually for moneylenders!). The RBI then set up the Malegam panel which submitted its report in Jan-11. That report recommended a Central regulation for the industry but otherwise was not welcomed by it.

In that light, the Economic Survey 2010-11 brings some badly needed succor to the industry.

1. Central Bill:- Chapter V(here, Pg 7) makes the case for a centralized law(the draft of which is under consideration). MFIs would prefer this to the vagaries of State regulation. 
2. Benevolent approach:- The same Chapter V referenced above makes the economic rationale for not having an interest rate cap. It also elaborates on the overall interest of the borrowers. It could well have been written by the industry trade body!
3. Banking License:- The Survey recommends considering NBFCs and MFIs for new banking licenses. However, they may only get the universal banking licenses in the first step, with the para banking activities(like credit cards etc) permit later.
4. General Pro lender approach:- Chapter II(here, pg 17) clearly states that the laws should not permit spurious reneging on contracts. Though opined in the context of long term infrastructure financing, the principle does apply to MFI contracts as well.

Takeaway:- This may be a good time to load up on SKS(and banking stocks hit due to exposure to the MFI industry). Given that the regulatory pendulum is again shifting towards the MFIs, now may be the time the markets recognize this fact and remove the regulatory discount