MICROCAPITAL BRIEF: Indian Government Ponders Role of NABARD in New Microfinance Regulatory Framework

The Indian government is considering giving the National Bank for Agriculture and Rural Development (NABARD), a development bank that formulates the credit and banking policy for the rural sector, more supervisory powers over microfinance institutions (MFIs) in India.

The Micro Financial Sector (Development and Regulation) bill, which was first raised in 2007, is set to be passed in the upcoming parliament session as the Indian Finance Ministry is putting the bill on a fast track. Under the proposed bill, all non profit MFIs will be brought under the jurisdiction of NABARD. The Finance Ministry is also considering bringing non-banking finance corporations (NBFCs), a structure used by MFIs, under NABARD.

“The state governments are not equipped to handle supervision and a sector supervisor is the need of the hour,” says Matthew Titus, executive director of MFI Sa-dhan, an Indian microfinance industry association. Citing an unspecified source within the Indian government, an article on the Economic Times [1] newspaper website claims that the Finance Ministry would not include a 24 -percent cap on interest rates in the bill. According to the website of NABARD, non-governmental organizations that act as MFIs are currently not regulated as financial institutions. On the other hand, non profit MFIs are under the supervision of the Reserve Bank of India (RBI) under the Companies Act, while microfinance cooperatives and NBFCs are under the supervision of state governments and RBI respectively.

The Indian MFIs reporting data for 2009 to the Microfinance Information Exchange (MIX), the microfinance information clearinghouse, have an aggregate loan portfolio of USD 4.6 billion, total assets of USD 5.1 billion and 26.4 million active borrowers.

About the National Bank for Agriculture and Rural Development (NABARD):

The National Bank for Agriculture and Rural Development (NABARD) is a development bank in India that formulates the credit and banking policy for the rural sector, supervises and conducts on-site inspections of cooperatives and regional rural banks and promotes the development of microfinance activities in the rural sector. NABARD is charged with the oversight of the Microenterprise Development Programme (MEDI), which focuses exclusively on the development of microenterprises. In 2010, NABARD set a fiscal year target of INR 3,750 billion (USD 80.3 billion) for credit disbursement via commercial banks, state cooperative banks, state cooperative agriculture and rural development banks and other eligible financial institutions up from INR 3,250 billion (USD 69.6 billion) the previous year.

About Sa-dhan:

Founded in 1999, Sa-Dhan is an association of finance institutions that aims to build the field of community development finance in India. It aims to help its 223 member institutions serve low-income households in both rural and urban India. Sa-Dhan’s member institutions report a total outstanding loan portfolio of INR 117 billion (the equivalent of USD 2.6 billion) and a client base of 23 million customers.

By Trevor Kwong, Research Assistant

Sources and Additional Resources:

[1] Source Article: Microfinance to get a regulator in NABARD:

http://economictimes.indiatimes.com/news/economy/finance/Microfinance-to-get-a-regulator-in-NABARD/articleshow/6805941.cms?curpg=1

[2] National Agriculture and Rural Development (NABARD): Microfinance Institutions (retrieved 10/25/2010):

http://www.nabard.org/microfinance/mf_institution.asp

[3] MicroCapital Universe: National Agriculture and Rural Development (NABARD):

https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=National+Bank+for+Agriculture+and+Rural+Development+(NABARD)

[4] Microfinance Information Exchange: India:

http://www.mixmarket.org/mfi/country/India

[5] MicroCapital Universe: Sa-Dhan:

https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Sa-Dhan