OPINION

Regulating microfinance

The Microfinance Institutions (Development and Regulation) Bill, unveiled recently, envisions a larger regulatory role for the Reserve Bank of India and 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. Although these stipulations seek to remove a serious lacuna in the regulation of microfinance, they are extremely cumbersome and will be difficult to enforce. In mainline financial sector regulation, the accent has been on laying down broad rules for banks and others to follow. Moreover, 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. 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.

Evidently, the context in which the new legislation is proposed is as important as its substantive provisions. 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. These stringent rules came in the wake of allegations that some MFIs were indulging in such wrongful and high-handed practices. As a consequence of the government's action, some high-profile MFIs were badly hit because banks pulled out their loans and this, in turn, snapped those institutions' loan recovery circle. If enacted, the new Bill, which empowers the central government to override existing laws, might give the MFIs some relief, but there is very little chance they will be allowed to go back to their old ways. For its part, the Andhra Pradesh government has voiced its opposition to several of the provisions and pointed out that, 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.

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