The New MFI Bill: Challenges before RBI

In the past two years the microfinance sector has witnessed an euphoric and unregulated growth as over-regulation and stoppage of lending in one state. The draft Microfinance Institutions (development and regulation) Bill 2011 seeks to bring some clarity and uniformity of rules to this sphere, reports Gopika Gopakumar of CNBC-TV18.

The key feature of this Bill is that it will bring all microfinance services under one regulator - the Reserve Bank of India.

The Bill also proposes setting up of Centre and state level councils to advise the government on policies for the development of the sector. The central council will consists of officers from Finance and Rural Development Ministries, the RBI, SIDBI, NABARD and NHB besides six experts.

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The state advisory councils will have representatives from the state microfinance sector, the RBI and banks. They will advise on lending, recovery methods and grievance redressal mechanism.

What the New Microfinance Bill 2011 says?

> All microfinance companies must first register with the RBI before they begin operation.

> If activities of MFIs are found to be hurting the interest of clients, the regulator can issue 'cease and desist' order and can even cancel the registration.

> If the MFI is not satisfied with RBI's actions, then it can appeal to the central government, which will have the final say.

The Bill also directs all MFIs to set up a reserve fund which cannot be used without RBI's permission. All MFIs will also be required submit their balance sheets to an RBI approved auditor. The bill gives sweeping powers to the RBI.

Among other things, the regulator will have a say on how much loans can be disbursed by the MFIs, the numbers of borrowers who can avail these loans and also the areas where they can operate. The RBI can also delegate an inspecting authority to look into the books of MFIs.

Will the Reserve Bank be able to handle such intricate details about hundreds of tiny companies working in far off villages?

Usha Thorat, Former Deputy Governor, RBI, said, "Consumer protection objective is most difficult areas of regulation to enforce because it requires various process. It is not like I go to a bank offsite and onsite inspection and look at their terms and procedures, look at the riskiness of assets or at their mismanagement."

Reddy Subrahmanyam, Principal Secretary, Rural Devpt, AP, said, "Our understanding is that the existing RBI machinery or the proposed ombudsman may not be a solution. It may not be adequate to look at ground level realities. I think that's the fact which we need to discuss further."

The new draft Bill says microfinance is not money lending and therefore not under the state governments' jurisdiction. But states like Andhra Pradesh are questioning the validity of this. 

However, legal experts are dismissing this contention. HP Ranina, Central Board Member, RBI said, "What the Bill says is that money lending done by MFIs is not deemed to be money lending. But that is right and fair for the simple reason that even banks do money lending, even non-banking financial organizations do money lending."

"But yet they are in the purview of RBI, who is the regulator of all banks and banks necessarily lend money to the outside world. The Money Lenders Act which is covered by Constitution, which is part of state subject generally applies to unorganised sector were money lending is done."

But RBI believes state government opposition could pose problems. There are many skeptics and it is yet to be seen what changes will happen before the bill becomes law.

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