Salil Tripathi, director of policy at the British nonprofit Institute for Human Rights and Business, argues through the “Poverty matters blog” on the website of the UK’s Guardian newspaper that, while recent Reserve Bank of India (RBI) regulation is a positive step for the future of microfinance, the legislation passed by the state government of Andhra Pradesh reflects a monopolistic tendency. Mr Tripathi states that the move by local officials favors its own lending activities through self-help groups (SHGs) while it restricts the role of the private sector. On the other hand, he argues that the regulation suggested by RBI, while reducing choice and access to finance for the poor to a certain extent, is actually intended to protect the interests of the poorest [1].
The legislation passed by the state government of Andhra Pradesh prohibits lenders from visiting clients on a weekly basis for repayment and also prohibits borrowers from taking on loans from private institutions without prior approval from self-help groups (SHGs). At the national level, the Reserve Bank of India (RBI), the governing body for Indian financial institutions, subsequently proposed a regulation that capped the interest rates charged by microfinance institutions (MFIs) at not to 24 percent per year, capped loans at the equivalent of USD 550 and restricted the number of loans per borrower to two [1].
Both sets of regulations came in response to dozens of suicides that were reportedly linked to aggressive loan recovery tactics by agents of microlenders in Andhra Pradesh. In the last quarter of 2010, the situation came to a head as borrowers – with government encouragement- refused to repay their loans to MFIs.
By Medha Ravi, Research Associate
About the 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. The current focus of RBI is to supervise financial institutions, consolidate accounting standards, resolve legal issues in banking fraud, monitor non-performing assets and supervise the rating model for the banking sector. RBI consists of twenty-two regional offices.
Source and Resources:
[1] The Guardian: “Who is responsible for India’s poor – the state or the private sector?”, http://www.guardian.co.uk/global-development/poverty-matters/2011/jan/26/microfinance-regulations-india
MicroCapital.org story, January 25, 2011, ” MICROCAPITAL BRIEF: Microfinance Under Scrutiny – Arguments For and Against From the Daily Star of Bangladesh and Forbes Magazine”, https://www.microcapital.org/microcapital-brief-microfinance-under-scrutiny-arguments-for-and-against-from-the-daily-star-of-bangladesh-and-forbes-magazine/
MicroCapital’s Microfinance Universe Profile: The Reserve Bank of India (RBI), https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Reserve+Bank+of+India+%28RBI%29
Browse the MicroCapital Universe and add your entry to the wiki at: https://www.microcapital.org/microfinanceuniverse/
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