After months of deliberations and input from academics, policymakers and practitioners, the Indian government has published a draft of its “Microfinance Institutions (Development and Regulation) Bill,” as the first version of a future authoritative policy to govern the domestic microfinance sector. The bill incorporates many of the suggestions proposed by the Malegam Committee, which was established in late 2010 to help address the problems that had arisen during the so-called “Andhra Pradesh crisis.”
Under the terms of the new bill, the entire microfinance sector would fall under the jurisdiction of India’s central banking authority, the Reserve Bank of India (RBI). RBI would have the power to regulate all institutions that engage in microfinance, but would also have the authority to delegate responsibility for certain institutions to the National Bank for Agriculture and Rural Development (NABARD). Any organization engaging in microfinance services would be required to apply for a certificate of registration with RBI, including any non-banking finance companies (NBFCs) that have microfinance operations. Should RBI be concerned about the practices or finances of a particular institution, it would have the power to revoke the registration license and thus prevent the microfinance institution (MFI) from continued operations. State legislation, including the Andhra Pradesh Law that was enacted in late 2010, would be nullified under the current proposal [1].
The microfinance bill proposes the establishment of a “Microfinance Development Council,” with representation from the government, RBI, the National Housing Bank (NHB), NABARD and the Small Industries Development Bank of India (SIDBI), a state-sponsored bank focusing on microfinance. The council would be tasked with proposing policy changes and possibly working to establish a nationwide microfinance credit bureau. Although the state government will no longer play a regulatory role, the bill does not rule out the possibility of state-level advisory councils. Additionally, the bill calls for a “Microfinance Development Fund” to be constituted by RBI, which would disburse funding from the Finance Ministry for investment, capacity building programs and other support [1].
In an article published by CGAP (Consultative Group to Assist the Poor), N Srinivasan, an independent consultant and author of the annual “Microfinance India – State of the Sector Report” published by ACCESS Development Services, has described the bill as “comprehensive and well-rounded.” In Mr Srinivasan’s opinion, the strengths of the bill include a focus on client protection, with specificity relating to grievance redressals, credit bureau enrolment and the enforcement of codes of staff conduct. With RBI as the overarching authority, MFIs will have to follow detailed and homogenous procedures for registration, operating guidelines and reporting standards. Mr Srinivasan also commends the Finance Ministry for describing loan terms using an effective annual percentage rate (APR) inclusive of interest rates and fees, as this reflects the true cost to clients better than standard borrowing rates. The bill leaves open the possibility of MFIs being permitted to accept deposits, which would “make meaningful financial inclusion possible,” according to Mr Srinivasan [2].
But Mr Srinivasan also points out a number of concerns that he believes will need to be addressed. For instance, why are cooperative societies that do not accept deposits excluded from the definition of microfinance institutions? Additionally, Mr Srinivasan is critical of the penalties for infractions that have been defined in the draft bill, calling the maximum amount of INR 500,000 (USD 11,000) “paltry in comparison with the size of MFIs and the damage potential of ill-advised actions.” Instead, he proposes that penalties be proportional to the size of the lender [2].
The draft bill is available for review on the website of India’s Finance Ministry: http://finmin.nic.in/the_ministry/dept_fin_services/micro_finance_institution_bill_2011.pdf
By Rohan Trivedi, Research Associate
About The Reserve Bank of India (RBI):
Established in 1935, the Reserve Bank of India (RBI) undertakes consolidated supervision of the financial sector comprising commercial banks, financial institutions and non-banking finance companies (NFBCs). The current focus of RBI is to supervise financial institutions, consolidate accounting standards, resolve legal issues in cases of banking fraud, monitor non-performing assets and supervise the rating model for the banking sector. In 1979, the National Bank for Agriculture and Rural Development (NABARD) was formed at the behest of RBI to provide regulatory oversight to regional rural banks (RRBs) and to promote the development of agricultural lenders: tasks that had been the responsibility of RBI. As of July 2011, RBI has proposed to bring all microfinance institutions (MFIs) under its own purview, including nonprofit MFIs, agricultural lenders, RRBs, state cooperative banks, district central cooperative banks and state cooperative agricultural and rural development banks. Although RBI was originally the parent organization of NABARD and until October 2010 held a 72.5 percent stake in the outfit, RBI owns a one-percent stake in NABARD as of 2011.
Sources and Additional Resources:
[1] LiveMint.com: “Industry welcomes draft Bill on microfinance”, http://www.livemint.com/2011/07/06231559/Industry-welcomes-draft-Bill-o.html?h=B
[2] CGAP Microfinance Blog: “India’s Microfinance Bill Answers Most Questions”, http://microfinance.cgap.org/2011/07/24/india’s-microfinance-bill-answers-most-questions/#more-2293
MicroCapital.org story, July 8, 2011: “MICROCAPITAL BRIEF: Microfinance Institutions in India Continue to Struggle for Funding After Loan Recast, Adoption of Malegam Proposals”, https://www.microcapital.org/microcapital-brief-microfinance-institutions-in-india-continue-to-struggle-for-funding-after-loan-recast-adoption-of-malegam-proposals/
MicroCapital.org story, June 11, 2011: “MICROCAPITAL BRIEF: New Draft Bill From Ministry of Finance Would Expand Role of Reserve Bank of India (RBI) to Regulate Entire Indian Microfinance Sector, Cutting Roles of NABARD, State Governments”, https://www.microcapital.org/microcapital-brief-new-draft-bill-from-ministry-of-finance-would-expand-role-of-reserve-bank-of-india-rbi-to-regulate-entire-indian-microfinance-sector-cutting-roles-of-nabard-state-governments/
MicroCapital.org story, May 5, 2011: “MICROCAPITAL BRIEF: Reserve Bank of India (RBI) Enacts Most of Microfinance Guidelines Proposed by Malegam Committee”, https://www.microcapital.org/microcapital-brief-reserve-bank-of-india-rbi-enacts-most-of-microfinance-guidelines-proposed-by-malegam-committee/
MicroCapital Universe Profile: Reserve Bank of India (RBI), https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Reserve+Bank+of+India+%28RBI%29
Browse the MicroCapital Universe and add your entry to the wiki at https://www.microcapital.org/microfinanceuniverse/
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