MICROCAPITAL BRIEF: Draft Microfinance Institutions Bill in India to Moot Local Regulations, Allow RBI to Set Rate Cap, Establish Advisory Councils, Microfinance Development Fund

Indian Finance Minister Pranab Mukherjee has reportedly announced that he will propose a Microfinance Institutions (Development and Regulation) Bill in the current parliamentary session. The bill, which was drafted in July 2011, would make the Reserve Bank of India (RBI) the only regulator of the microfinance sector and allow RBI to specify a maximum annual percentage rate that MFIs can charge. It also facilitates the creation of microfinance development councils at the federal and state levels to advise governments on the sector. Lastly, it will allow RBI to create a microfinance development fund to provide loans, refinancing or other financial assistance to MFIs. No information has been released about the potential size of any such fund.

Under the proposal, microfinance institutions (MFIs) would be required to obtain a certificate of registration from RBI prior to offering services, and RBI would be able to cancel the registration of MFIS that fail to comply with RBI regulations or levy a fine against such organizations of up to INR 500,000 (USD 97,000). The bill would also tighten regulations on the auditing of MFIs, allow RBI to inspect MFI accounts at any time and require all MFIs to create reserve funds of unspecified size.

According to a statement attributed to SKS Microfinance chief financial officer Dilli Raj, local regulation by the state of Andhra Pradesh hurt the sector badly, and the new law will boost the sector by providing regulatory clarity. According to Mr Raj, the new bill will also help the microfinance sector recover from its losses in Andhra Pradesh, where SKS has had to pardon loans of INR 9 million (USD 177,000) so far. He hopes that it will also encourage banks to increase funding to MFIs, which was severely curtailed after industry regulation was passed in Andhra Pradesh in 2010.

By Charlotte Newman, Research Associate

Sources and Additional Resources:

Business Standard: “Ailing MFIs Hail Move to Bring in Central Law,” http://business-standard.com/india/news/ailing-mfis-hail-move-to-bring-in-central-law/160778/on

Ministry of Finance, India: “The Micro Finance Institutions (Development and Regulation) Bill, 2011,” http://finmin.nic.in/the_ministry/dept_fin_services/micro_finance_institution_bill_2011.pdf

The PRS Blog: “Andhra Pradesh Micro Finance Institutions (Regulation of Moneylending) Act, 2010,” http://www.prsindia.org/theprsblog/2010/12/16/andhra-pradesh-micro-finance-institutions-regulation-of-moneylending-act-2010/

MicroCapital.org story, March 19, 2012, “MICROCAPITAL BRIEF: India’s SKS Microfinance Responds to Associated Press Article on Suicides in Adhra Pradesh, Calls Allegations ‘Baseless’,” https://www.microcapital.org/microcapital-brief-indias-sks-microfinance-responds-to-associated-press-article-on-suicides-in-andhra-pradesh-calls-allegations-baseless/

MicroCapital.org story, January 24, 2012, “MICROCAPITAL BRIEF: Microfinance Institutions in Andhra Pradesh Request Extension to Meet New Capital Adequacy Ratios Imposed by Reserve Bank of India,” https://www.microcapital.org/microcapital-brief-microfinance-institutions-in-andhra-pradesh-request-extension-to-meet-new-capital-adequacy-ratios-imposed-by-reserve-bank-of-india/

MicroCapital.org story, November 17, 2011, “MICROCAPITAL BRIEF: Reserve Bank of India Recommends Against State Government Regulation of Microfinance,” https://www.microcapital.org/microcapital-brief-reserve-bank-of-india-recommends-against-state-government-regulation-of-microfinance/#more-15639

MicroCapital Universe Profile: SKS Microfinance
https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=SKS+Microfinance

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