Govt tables Microfinance Bill in Lok Sabha

Finance Minister Pranab Mukherjee on Tuesday tabled the Microfinance Bill in Parliament today to bring microlenders under the purview of a single regulator.

The Bill, which was passed by the Cabinet earlier this month, provides for regulatory and administrative powers to the Reserve Bank of India, which is also the banking regulator.

Until now, the microfinance sector had largely gone without a regulator, and was primarily self-regulated under the aegis of the national Micro Finance Institutions Network (MFIN).

The central bank will specify maximum limit of margins and interest rates which can be charged by microfinance institutions (MFIs). It will also rules on fair and reasonable methods of recovery of loans by MFIs.

The microfinance industry was hit badly in late 2010, after the Andhra Pradesh state government passed an ordinance, that later became law, to regulate MFIs, interest rates and their operations. The new Bill will supersede all such state laws

The RBI can now inspect accounts of MFIs and take necessary cease-and-desist orders if any MFI is found in violation. It can also impose monetary penalty for non-compliance with provisions.

MFis have also been prohibited from closing or restructuring their activities without the RBI’s permission.

Under the new Bill, the banking regulator will also make provisions to set up a Micro Finance Development Fund, which will be used to provide providing loans/grants on seed capital.

The Bill also proposes to set up a Microfinance Development Council at the centre, state and district levels; while the central council will advised the central government on policy-making, the state-level councils will report to the central government.

District Microfinance Committees will monitor indebtedness, method of recovery used by MFIs and review the growth and development of MFIs in the district.  

The methods of recovery were what led to the Andhra Pradesh crisis, with a number of rural suicides being attributed to high indebtedness to MFIs, high interest rate loans, and coercive recovery methods, charges the MFI industry has denied.