BLOG

India Microfinance Bill – The Good and The Bad

India’s microfinance bill is a very positive development for the microfinance sector because it brings the sector into the ambit of organized financial services. It continues the process initiated by the Malegam Committee Report earlier this year and then followed by the first set of Reserve Bank of India (RBI) regulations on May 3, 2011. Previously, MFIs were loosely regulated and operated in the twilight zone, vulnerable to ordinances or legislations like those in Andhra Pradesh last year which suffocated the entire sector in the state.

Here’s what is welcome and what is not so welcome in the bill:

Positives:

  1. Unlike the Malegam Committee recommendation this bill focuses on customer protection through establishing an ombudsman.
  2. Like banks and other financial institutions, MFIs registered with the RBI will be outside the ambit of state money lenders acts.
  3. The bill prescribes an inclusive process where all the stakeholders, Central and State Governments, will be involved, while the RBI will be the overall regulator for the sector.
  4. It reverses the retrograde development by the Malegam Committee of only focusing on loans, and instead introduces the whole range of financial services–especially thrift (small savings)–needed by the poor to be offered by MFIs.
  5. It reverses the Malegam Committee’s recommendation of higher capital requirement and forcing the industry to consolidate which in the long run would have been anti-competitive.
  6. It forces systemically important MFIs (those with more than Rs.100 crores or $22.4 million loan book) who are currently trusts or societies to convert into more transparent organization like an NBFC-MFI or Section 25 Company.

Negatives:

  1. Retains some of the negative developments of the Malegam Committee recommendations in terms of micromanagement: specifying financial product specifications, margin & interest rate caps.
  2. Retains the possibility that RBI may delegate the responsibility of supervision of smaller MFIs to organizations like NABARD.

India’s Ministry of Finance released the much awaited draft microfinance bill which is to be introduced in the country’s parliament shortly. This post kicks off a short series of commentary on the bill by a variety of experts from the region on what the bill means for India and the global microfinance industry.

Topic: Policy

Comments

08 September 2012 Submitted by Tara Kumar (not verified)

I agree! This is an extreamly positive development in the mf sector. As an intern with Opportunity International this summer, I’ve learned a lot about the microfinance sector and the difficulties that exist when it is unregulated. Opportunity works in 24 countries (full list on opportunity.org), and the difficulties present in each country are unique but can stem from no regulation or rules around the microfinance industry which makes it more turbulent. I commend India on introducing this bill and look forward to see where it goes.

08 September 2012 Submitted by Chanchal K. gautam (not verified)

Dear Mr. Sumit Gosh, I would like to know why this delegating operational power to NABARD, the proposed regulator of Draft Micro Finance Bill,2007 is negative move?

08 September 2012 Submitted by Toru Iwai (not verified)

Although some negatives, the bill contains lots of positives as you mentioned. I hope this bill is a step toward a sustainable development of MF in India.

08 September 2012 Submitted by Toru Iwai (not verified)

Although some negatives, the bill contains lots of positives as you mentioned. I hope this bill is a step toward a sustainable development of MF in India.

Add new comment