India: Industry Welcomes Draft Bill on Microfinance

Jul 2011
New Delhi, India, July, 06 2011 - The Bill says MFIs registered with the apex bank won’t be treated as moneylenders, thereby keeping them out of the purview of the Andhra Pradesh Micro Finance Institutions (Regulation of Money Lending) Act, 2010.

The government on Wednesday released the draft of a new Bill to govern microfinance institutions (MFIs) that will, if approved in its entirety, take them outside the purview of state-level legislation, including the Andhra Pradesh law that has thrown the industry into crisis.

The Microfinance Institutions (Development and Regulation) Bill gives more powers to the Reserve Bank of India (RBI) to regulate microlenders. It will cover all MFIs, including the smaller ones. MFIs give tiny loans to poor borrowers at around 24% interest. The Bill has to be approved by the cabinet and Parliament before it becomes law.

The industry welcomed the draft, saying it offers more clarity to the future of India’s Rs. 20,000 crore microlending sector. The Bill, which has been posted on the finance ministry website for public comment, says MFIs registered with the apex bank won’t be treated as moneylenders, thereby keeping them out of the purview of the Andhra Pradesh Micro Finance Institutions (Regulation of Money Lending) Act, 2010.

“This (the new draft Bill) covers all types of MFIs, including the smaller companies, which gives confidence to the sector,” said Vijay Mahajan, president of lobby group Microfinance Institutions Network. “The regulations have been drafted in line with the recommendations of Malegam committee, but go well beyond that to provide comfort to the sector. It is a new generation Bill.”

More than a quarter of the industry is concentrated in Andhra Pradesh, which promulgated a law in October restricting operations of microlenders. This led to a drastic rise in bad loans as borrowers stopped repaying debt. Banks in turn stopped lending to MFIs. The state law, which had been preceded by an ordinance, followed reports of coercion in recovering loans that allegedly led to suicides.

Early this year, RBI issued regulations to govern MFIs operating as non-banking financial companies, based on the recommendations of an expert committee headed by noted chartered accountant Y.H. Malegam. The new rules capped the interest rate MFIs can charge at 26% and made a minimum two-year tenure mandatory for all loans above Rs. 15,000.

While the panel looked into operational issues, the new Bill provides an overarching framework, signalling the government’s stand on the importance of the industry, said Mathew Titus, executive director of Sa-Dhan, an association of MFIs.

In what could affect the larger institutions, the Bill says that any MFI that becomes systemically important will have to register itself under the Companies Act.

The draft Bill also proposes the setting up of a Microfinance Development Council, which will advise the government on policies and programmes required for the development of the sector.

The members of the council will represent the industry, the government, RBI, the National Housing Bank, the National Bank for Agriculture and Rural Development (Nabard) and the Small Industries Development Bank of India. The council will also look into establishing credit information bureaus for the creation of a database of clients who avail of microfinance services from various agencies.

The draft legislation proposes to establish state advisory councils for close coordination between the states and the Centre with regard to the working of the industry.

The Bill also envisages a Microfinance Development Fund to be constituted by RBI to provide loans, refinance, grants, seed capital or any other financial assistance to any MFI and to which all government grants received and fees payable for this sector will go. The Bill will also empower RBI to ask MFIs to cease their activities if warranted upon inspection of the accounts. It will also be able to cancel registration granted to the MFI.

It also gives RBI the option of delegating its powers to Nabard in respect of any MFI or class of MFI. The earlier draft of the Bill had envisaged Nabard as the regulator for smaller MFIs, a move that was opposed by RBI.

“The decision to bring in a single regulator is good for the sector as it gives more clarity,” said Chandra Shekhar Ghosh, chairman and managing director of Bandhan Financial Services Pvt. Ltd. The Bill can help improve the condition of MFIs, but there needs to be more clarity on the role of RBI and government in governance, he said.

Source :

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