India: Microfinance Bill introduced in Lok Sabha

May 2012
India, May, 22 2012 - The government on Tuesday introduced the much-awaited legislation governing microfinance institutions (MFIs) in the Lok Sabha, seeking to empower the central bank to regulate the sector and provide an overarching legislative framework for it.

If approved in its entirety, the Microfinance Institutions (Development and Regulation) Bill, 2012, will take MFIs outside the purview of state-level legislation, including the controversial Andhra Pradesh law that saw the asset base of the microfinance industry shrinking and led to a drastic increase in bad debts due to restrictions on collection practices. The Bill has to be passed by both houses of Parliament before it becomes law.

MFIs give tiny loans to poor borrowers at around 24% interest.

All MFIs will have to register themselves with the Reserve Bank of India (RBI). The central bank can specify lending rates and margins that can be charged by an MFI, the recovery methods to be followed, the processing fees, the tenure and ceiling of the loan.

RBI will also specify a threshold on the assets deployed for classifying any institution as an MFI.

Those 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 Bill proposes the setting up of a microfinance development council with members from various central government ministries, including finance and rural development, RBI, the Small Industries Development Bank of India, the National Bank for Agriculture and Rural Development, the National Housing Bank and another four independent members.

The council will advise the central government on the formulation of policies for the sector and will have a non-government official with relevant banking experience as chairman.

For greater involvement of the states, the Bill also proposes the setting up of state development councils with representatives from state governments.

This council can report unfair recovery methods used by MFIs and also monitor over-indebtedness due to MFI lending practices. There will also be district microfinance committees to closely monitor MFI activities.

The government has also retained the inclusion of thrift or collection of deposits in the definition of services that can be provided by the microfinance institutions despite objections from the Reserve Bank of India, which was concerned about the safety of depositors’ money.

As per the legislation, RBI will constitute a microfinance development fund for funding MFIs, either through debt or equity participation and to fund research for development of the sector. The corpus of the fund will be partly funded by the central government.

The Bill also proposes establishing credit information bureaus for the creation of a database of clients who avail of microfinance services from various agencies.

The Bill is likely to be referred to the standing committee for further deliberations with all stakeholders.

The Andhra Pradesh government and rural development minister Jairam Ramesh have opposed the MFI Bill in its current form.

More than a quarter of the industry was concentrated in Andhra Pradesh before the controversial state legislation was passed in October 2010, following reports of coercion in loan recovery by MFIs that allegedly led to suicides.

The passage of the Bill will provide a respite to the microfinance industry and is expected to help ease the fund flow to the sector.

“The advantage of the Bill is that it will provide a constitutional framework for the microfinance industry,” said Suresh Krishna, managing director of Grameen Financial services Pvt. Ltd. “It also gives greater powers to RBI. Though RBI has already started regulating MFIs registered as non-banking financial companies (NBFCs), the others are also likely to come under its purview after the passing of the legislation,” he said.

In late 2010, RBI had issued regulations to govern MFIs operating as NBFCs based on the recommendations of an expert committee headed by Y.H. Malegam.

Source : Livemint

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