MICROCAPITAL STORY: India Appears Ready to Finally Pass New Microfinance Bill

The Council of Ministers of the present Indian government will approve the 2009 Micro Financial Sector (Development and Regulation) Bill shortly, according to a press release on BusinessStandard.com, the online business news portal owned by Business Standard Ltd (BSL). As per the press release, the Indian Finance Ministry headed by Mr. Pranab Mukherjee has prepared the note for the long pending Microfinance Bill to be cleared by the members of the Indian Cabinet. The India Microfinance Bill was originally tabled in March 2007 in the elected lower house of the Indian Parliament – also called the Lok Sabha – following which it was referred to the Standing Committee on Finance for further examination. However, with the recent concluded elections and the formation of the next Lok Sabha in India, the old bill lapsed with the dissolution of Parliament and hence the need for the new Bill. MicroCapital had previously reported on the introduction of the old India Microfinance Bill; more information is available in this MicroCapital story.

The Business Standard press release quotes unknown sources as stating that the content of the new Bill is ‘more or less the same’ as the old Bill. No information is available on changes, if any, made to the old Bill. As per available information, the objective of the Microfinance Bill is to ensure development and orderly growth of the micro-finance sector in rural and urban areas in the country. The Bill aims to provide an enabling environment for ensuring ‘universal access’ to integrated financial services, especially to women and certain disadvantaged sections. In addition to regulation and stricter accounting standards, the legislation would also allow societies and trusts to accept public deposits. Similar to the Bill tabled in 2007, the new Bill will entrust the function of development and regulation of the country’s micro-financial sector to the National Bank for Agriculture and Rural Development (NABARD), a subsidiary of the Reserve Bank of India (RBI). NABARD is a development bank established in 1982 to facilitate credit flow for promotion and development of agriculture, small-scale industries, cottage and village industries, handicrafts and other rural crafts in India. In addition, it also has the mandate to support all other allied economic activities in rural areas and to promote integrated and sustainable rural development. As of March 2008, NABARD reported total assets worth Rs. 987.3 billion (USD 20.3 billion – p 123).

As per publicly available information, key provisions in the Bill include:

The empowerment of NABARD to frame a scheme for appointment of one or more microfinance ombudsman for settlement of disputes between eligible clients and micro finance organizations.
Creation of a micro finance equity and development fund facilitating the development of the sector in India.
Creation of a reserve fund by every MFI that accepts deposits with a minimum of 15 percent of the MFI’s net profit realized out of its thrift and micro finance services to be transferred to the fund.

The microfinance Bill tabled in 2007 mandated that every MFI accepting deposits had to be registered with the NABARD. Conditions for registration as laid down in the old Bill include: (a) net owned funds of at least Rs. 5 lakh (approximately USD 10K); and (b) at least three years in existence as a microfinance organization. In addition, the old Bill mandated all MFIs, whether registered or not, to submit annual financial statements to NABARD. While the content of the new Bill is not publicly available, based on sources quoted in the press release, it is expected that the new Bill would be roughly similar to its 2007 version.

The Bill has had its share of criticisms as well. The appointment of NABARD as the regulatory body comes amid concerns voiced by several players, dating back to the old Bill’s introduction in 2007. Given the fact that NABARD is also a key participant in the nation’s microfinance sector, the concerns were primarily based on the reasoning that NABARD’s additional role as the regulator of the country’s microfinance sector could lead to a ‘serious conflict of interest’ in its operations. Another perspective on the appointment of NABARD was offered by researchers Mukul G. Asher and Savita Shankar, in their paper ‘Microfinance Bill: Need for a Major Rethink’, where they state that NABARD ‘lacks expertise to regulate and develop microfinance organizations (MFOs) in the urban sector as its role has been confined to rural areas and to agriculture’. A 2007 news release by the Indian business daily The Financial Express, quotes Mr. Jairam Ramesh, the then Minister of State for Commerce, as saying the microfinance Bill ‘did not give role to markets, which could regulate the sector’. Players in the industry have also been critical of the Bill allowing societies and trusts to accept public deposits. LiveMint.com, the business news portal of the Indian news daily, Hindustan Times, quotes (unnamed) critics as saying that this move would put poor customers’ deposits at risk by forcing organizations that lack banking knowledge to operate like banks.

By Bharathi Ram, Research Assistant

Additional Resources:

Business Standard: Cabinet to approve microfinance bill, About Us

The Hindu Business Line: Microfinance Bill tabled

MicroCapital Story – Delays in India Microfinance Bill

LiveMint.com: Demand for tighter microfinance bill, neutral regulator

NABARD: Home, Annual Report

IndiaTogether.com: PRS Legislative Brief – Microfinance Bill

Microfinance Bill: Need for a Major Rethink by Mukul G. Asher and Savita Shankar

The Financial Express: Microfinance Bill may not be a balanced law, says Ramesh