The Ministry of Finance in India recently unveiled its plan to pass a new microfinance bill to regulate the microfinance sector. The ordinance passed by the government of the Indian state of Andhra Pradesh in October 2010, in response to a series of farmer suicides, severely curtailed lending activity in the region. The bill, which is reportedly being drafted along the lines of the recommendations made by the Reserve Bank of India’s Malegam Committee which was formed in the wake of the unrest in Andhra Pradesh, is likely to render state legislation on microfinance null and void.
An unnamed finance ministry official indicated that the microfinance bill will include measures such as capping interest rates and prohibiting of MFIs from accepting deposits . The recommendations made by the Malegam Committee include a 24 percent cap on the interest rate charged by microfinance institutions (MFIs) and a 10 percent cap on MFIs’ markup over borrowing costs.
By Medha Ravi, Research Associate
About Reserve Bank of India:
Established in 1935, the Reserve Bank of India undertakes consolidated supervision of the financial sector comprising commercial banks, financial institutions and non-banking finance companies (NFBCs). The current focus of RBI is to supervise financial institutions, consolidate accounting standards, resolve legal issues in cases of banking fraud, monitor non-performing assets and supervise the rating model for the banking sector. In 1979, the National Bank for Agriculture and Rural Development (NABARD) was formed at the behest of RBI to provide regulatory oversight to regional rural banks (RRBs) and to promote the development of agricultural lenders: tasks that had been the responsibility of RBI. While all microfinance institutions (MFIs) and non-banking financial companies still operate under RBI regulations, the responsibility for inspecting nonprofit MFIs, agricultural lenders, RRBs, state cooperative banks, district central cooperative banks and state cooperative agricultural and rural development banks was transferred to NABARD. RBI maintains these responsibilities for for-profit MFIs. Although RBI was originally the parent organization of NABARD and until October 2010 held a 72.5 percent stake in the outfit, RBI has since largely divested from NABARD. As of October 2010, owns 1 percent of the bank. RBI consists of twenty-two regional offices as of March 2011.
Source and Resources:
 Business Standard news article, “New MFI Bill to leave no space for state laws”, http://www.rediff.com/business/report/new-mfi-bill-to-leave-no-space-for-state-laws/20110307.htm
MicroCapital.org story, January 26, 2011, “MICROCAPITAL BRIEF: Reserve Bank of India (RBI) Subcommittee Proposes Regulation for Microfinance Institutions (MFI)”,http://www.microcapital.org/microcapital-brief-reserve-bank-of-india-rbi-subcommittee-proposes-regulation-for-microfinance-institutions-mfi/
MicroCapital.org story, January 14, 2011 “MICROCAPITAL BRIEF: Reserve Bank of India (RBI) Indicates No Interest in Rate Cap, States It Has No Solution For Microfinance Institutions (MFIs) Whose Clients Won’t Repay Their Loans”, http://www.microcapital.org/microcapital-brief-reserve-bank-of-india-rbi-indicates-no-interest-in-rate-cap-states-it-has-no-solution-for-microfinance-institutions-mfis-whose-clients-won?t-repay-their-loans/
MicroCapital.org story, November 16, 2010 “MICROCAPITAL BRIEF: Under Pressure From State Government of Andhra Pradesh, Indian Microfinance Institutions Agree to Cap Interest Rates at 24%”, http://www.microcapital.org/microcapital-brief-under-pressure-from-state-government-of-andhra-pradesh-indian-microfinance-institutions-agree-to-cap-interest-rates-at-24/
MicroCapital’s Microfinance Universe Profile: Reserve Bank of India (RBI), http://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Reserve+Bank+of+India+%28RBI%29
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