Microfinance Institutions (Development and Regulation) Bill

The Microfinance Institutions (Development and Regulation) Bill: An analysis

Need of the Bill: About a year ago, the government of Andhra Pradesh — the State that accounts for nearly a third of microfinance business in the country — introduced tough rules to clamp down on such practices as overcharging customers and employing coercive methods to recover loans.

Neither self-regulation nor regulation by Nabard, which also lends to the MFIs, has been found viable. Hence the onus has fallen squarely on the RBI.

Advantages:

Proposes that all microfinance institutions with net-owned funds of over Rs.5 lakh register with it.

The RBI will define and fix what the Bill calls “an annual percentage rate”, to be charged by private MFIs, and also set the range within which it can operate. That rate will include interest, processing fees, service charges and any other charges or fees that are payable by the borrowers.

Difficulties in implementation:

Extremely cumbersome and will be difficult to enforce.

Given the low threshold for registration envisaged under the Bill, the number of MFIs that will come under the regulatory scanner will be too large for any meaningful supervision.

Even if the RBI became the principal regulator, it would be well within the State government's jurisdiction to exercise control over money lenders and check usurious practices