MICROCAPITAL BRIEF: Indian Government Proposes Micro Financial Sector (Development and Regulation) Bill Include NBFCs, Andhra Pradesh Considers Non-Banking Financing Company (NBFC) Model to Balance Microfinance Institutions (MFI)

The Indian federal government has proposed changes to the Micro Financial Sector (Development and Regulation) bill to cover all types of microfinance institutions (MFIs), including non-banking finance companies (NBFCs) operating in the microfinance sector [2]. The Micro Financial Sector (Development and Regulation) bill, which was first passed in 2007, covers only MFIs not overseen by the Reserve Bank of India (RBI), India’s central bank [2]. RBI regulates banks and most NBFCs. This leaves NBFCs operating in the microfinance sector outside of the purview of both RBI and the Micro Financial Sector (Development and Regulation) bill [2].

The Business Standard, an Indian financial newspaper, has reported that the government of the Indian state of Andhra Pradesh is considering promoting an alternative to existing microfinance institutions (MFIs) through the formation of a non-banking financing company (NBFC) model that would work in collaboration with public sector banks to meet the microcredit requirements of self-help groups (SHGs) [1]. The NBFC model involves financing mandal samakhtas, the federated bodies of SHGs that exist above the village administration level, who in turn would provide loans to SHG members for income-generating activities. Under the current model, once a SHG takes a loan it is not eligible for additional credit until its previous loan has been repaid. Proponents of the NBFC model suggest that this restriction drives the members to seek higher cost loans from alternative sources [1].

By: Alexandra Pattee, Research Associate

About Reserve Bank of India (RBI): 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 owns just a one-percent stake in NABARD as of 2011.

Sources and Resources:

[1] Business Standard, “State mulls separate NBFC to counter MFIs”, https://www.microcapital.org/microcapital-brief-funding-shortage-continues-in-indian-state-of-andhra-pradesh-loans-overdue-to-sks-microfinance-total-27m/

[2] Business Standard, “New Bill to cover all MFIs”, http://www.business-standard.com/india/news/new-bill-to-cover-all-mfis/4

MicroCapital.org Article, April 1, 2011, “Funding Shortage Continues in Indian State of Andhra Pradesh, Loans Overdue to SKS Microfinance Total $27m”, https://www.microcapital.org/microcapital-brief-funding-shortage-continues-in-indian-state-of-andhra-pradesh-loans-overdue-to-sks-microfinance-total-27m/

MicroCapital.org Article, April 1, 2011, “Malegam Proposals on Indian Microfinance Likely To Be Ratified on April 1, Bankers Defend MFIs’ Priority Sector Status”, https://www.microcapital.org/microcapital-brief-malegam-proposals-on-indian-microfinance-likely-to-be-ratified-on-april-1-bankers-defend-mfis?-priority-sector-status/

MicroCapital.org Article, March 23, 2011, “Bankers Urge Reserve Bank of India’s (RBI’s) Malegam Committee to Maintain Priority Status for Microfinance Sector”, https://www.microcapital.org/microcapital-brief-bankers-urge-reserve-bank-of-india?s-rbi?s-malegam-committee-to-maintain-priority-status-for-microfinance-sector/

MicroCapital.org Article, March 22, 2011, “India’s Business Standard Supports Reserve Bank of India (RBI) Proposal to Establish Two Types of Banking Licenses”, https://www.microcapital.org/microcapital-brief-india?s-business-standard-supports-reserve-bank-of-india-rbi-proposal-to-establish-two-types-of-banking-licenses/

MicroCapital.org Article, March 15, 2011, “Federal Microfinance Bill May Replace Existing State Microfinance Legislation in India”, https://www.microcapital.org/microcapital-brief-federal-microfinance-bill-may-replace-existing-state-microfinance-legislation-in-india/

MicroCapital.org Article, March 14, 2011 “India’s Andhra Pradesh State to Tighten Local Microfinance Institutions (Regulation of Moneylending) Act”, https://www.microcapital.org/microcapital-brief-indias-andhra-pradesh-state-to-tighten-local-microfinance-institutions-regulation-of-moneylending-act/

MicroCapital.org Article, January 26, 2011, “Reserve Bank of India (RBI) Subcommittee Proposes Regulation for Microfinance Institutions (MFI)”, https://www.microcapital.org/microcapital-brief-reserve-bank-of-india-rbi-asks-banks-for-plans-on-financial-inclusion-and-criticizes-microfinance-institution-interest-rates/

MicroCapital.org Article, October 16, 2010, “Reserve Bank of India (RBI), in Move to Expand Rural Financial Access, Updates Guidelines to Allow Individuals, Nonprofits and Corporations “But Not Microfinance Institutions” to Serve as Business Correspondents for Banks”, https://www.microcapital.org/microcapital-brief-reserve-bank-of-india-rbi-asks-banks-for-plans-on-financial-inclusion-and-criticizes-microfinance-institution-interest-rates/

MicroCapital.org Article, July 8, 2009, “India Appears Ready to Finally Pass New Microfinance Bill”, https://www.microcapital.org/microcapital-story-india-appears-ready-to-finally-pass-new-microfinance-bill/

MicroCapital’s Microfinance Universe: Reserve Bank of India (RBI), https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Reserve+Bank+of+India+%28RBI%29

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