India

There is a wide array of institutions and classifications that overlap in the India microfinance sector, making analysis difficult and identification of appropriate regulators confusing. Furthermore, the scope and reach of microfinance in India is hard to capture because direct bank lending is usually not included in microfinance analysis. Commercial banks in India are required to make a certain percentage of loans to designated "priority sectors." Microfinance is one of the priority sectors banks may choose from, and loans are made to institutions as well as individuals in order to fulfill the requirement. As of April 2011, microfinance loans must meet certain prudential requirements in order to qualify for priority sector status. The majority of microfinance is provided by commercial banks, regional rural banks (RRBs), self-help groups (SHGs) (with special linkage programs to banks), cooperative societies, and microfinance institutions (MFIs) that take a variety of forms, including NGOs (registered as societies, trusts or Section 25 companies) and non-bank financial companies (NBFCs).

 
Banks and NBFCs are regulated by the Reserve Bank of India (RBI) with the National Bank for Agriculture and Rural Development (NABARD) supervising and inspecting RRBs; SHGs are regulated by NABARD; cooperative societies are regulated by the state-appointed Registrar of Cooperative Societies (RCS) and state government (with NABARD conducting supervision and inspections); and cooperative banks are regulated by RBI and RCS. Because not all register as NBFCs, most MFIs fall outside of the regulatory gambit though hundreds have joined umbrella self-regulatory organizations including Sa-Dhan and Micro Finance India Network (MFIN). Under pressure from RBI, MFIN has created a code of conduct in order to prevent over-lending to individual borrowers and plans to form ombudsmen offices to address grievances, while Sa-Dhan is developing a code of conduct as well. NBFC MFIs have also come together to form Alpha Micro Finance Consultants P Ltd, in order to provide credit bureau services to MFIs in India.
 
The widely-debated Micro Financial Sector (Development and Regulation) Bill was introduced in 2007, proposing important changes to the microfinance industry, but was never passed. In 2010, the Andhra Pradesh government issued the Microfinance Institutions Ordinance (later, the Andhra Pradesh Micro Finance Institutions (Regulation of Money Lending) Act), which requires all MFIs to register as well as adhere to other rules set forth in the ordinance. In response, RBI formed the Malegam Sub-Committee to make recommendations on how RBI ought to regulate the microfinance industry. In response to the Malegam Committee report, RBI issued a May 2011 circular implementing some of the Malegam recommendations through prudential requirements for microfinance loans to qualify for priority sector status. RBI subsequently created a new category of NBFC-MFIs in December 2011 and issued directions aimed at addressing responsible pricing, transparency and over-indebtedness.
 
Additionally, in late June 2011, a revised Micro Finance Institutions (Development and Regulation) Bill was introduced before Parliament, most notably proposing RBI as the sole microfinance regulator in the country.

Publications

29 April 2016
This Working Paper addresses qualitative research on how microentrepreneurs approach, decide, and act on key business and financial management issues.This report provides a comprehensive summary of the objectives of the research, the behavioral methodology used for the qualitative research conducted in India and the Philippines, and key findings on how microentrepreneurs manage their finances.
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English (36 pages)
29 April 2016
Consumer lending in India has rapidly expanded in the past decade and has been motivated by a strong focus on financial inclusion, services a large number rural, low-income clients with little former formal financial sector experience. There is a strong imperative for customer protection norms to accompany this rapid growth, to sustain the benefits of financial inclusion that accrue to customers, communities, and the larger economy.
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English (51 pages)

From Our Blog

Man with lemons, India
26 September 2016
Envisioned as a digital revolution for government transfers, India's Direct Benefit Transfer program transfers government benefits into recipients' bank accounts. Three years in, the government continues to face challenges in digitizing transfers. Is there a way forward?
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Woman holding child, India
24 August 2016
Two years ago, India launched a national financial inclusion program known as Pradhan Mantri Jan Dhan Yojana (PMJDY) which aims for at least one bank account for every household. Has there been any real impact of PMJDY on financial inclusion?
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