Microfinance institutions (MFIs) in India reportedly continue to struggle after recasting of a significant portion of their wholesale debt and the adoption by the Reserve Bank of India (RBI), the country’s central banking authority, of many of the Malegam Committee’s proposals on regulating the sector.
Although the uncertainty of whether the RBI will adopt the proposals of the Malegam Committee has been settled, India’s Business Standard newspaper reports that investors are refusing to lend to MFIs until the new RBI regulations are harmonized with the Andhra Pradesh Microfinance Act (please refer to the June 11 story from MicroCapital regarding the possible mooting of a state regulation of the microfinance sector). The Andhra Pradesh Microfinance Act was passed in December 2010 by the Indian state of Andhra Pradesh to regulate MFIs there after multiple suicides were blamed by families and various media sources on the pressure to repay microloans.
“It is important to understand that the reason for this crisis, and the related debt restructuring, is the Andhra Pradesh Microfinance Act, and not the MFIs, their promoters or the banks who have lent money to MFIs,” said Mr Mark Stoleson, chief executive officer of Legatum, a multi-billion dollar global fund that is a majority shareholder in Share Microfin, an MFI in India. “Legatum believes in order for debt and equity capital to once again flow into the microfinance sector, any ambiguity in the regulatory framework must first be addressed. The Andhra Pradesh Microfinance Act should be urgently repealed and RBI must re-establish its authority as the regulator of non-banking financial companies,” Mr Stoleson added.
By Carol Kim, 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 (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, RBI reduced its stake in NABARD from 72.5 percent to 1 percent in October 2010.
Sources and Additional Resources:
Business Standard: “MFI woes persist despite debt recast, Malegam proposals”, June 2011, http://www.business-standard.com/india/news/mfi-woes-persist-despite-debt-recast-malegam-proposals-/438573/
MicroCapital.org: “MICROFINANCE BRIEF: New Draft Bill From Ministry of Finance Would Expand Role of Reserve Bank of India (RBI) to Regulate Entire Indian Microfinance Sector, Cutting Roles of NABARD, State Governments”, June 11, 2011, https://www.microcapital.org/microcapital-brief-new-draft-bill-from-ministry-of-finance-would-expand-role-of-reserve-bank-of-india-rbi-to-regulate-entire-indian-microfinance-sector-cutting-roles-of-nabard-state-governments/
MicroCapital.org: “MICROFINANCE PAPER WRAP-UP: Microfinance in India – A Crisis at the Bottom of the Pyramid; Published by Legatum Ventures”, May 10, 2011, https://www.microcapital.org/microfinance-paper-wrap-up-microfinance-in-india-a-crisis-at-the-bottom-of-the-pyramid-published-by-legatum-ventures/
MicroCapital.org: “MICROCAPITAL BRIEF: Reserve Bank of India (RBI) Enacts Most of Microfinance Guidelines Proposed by Malegam Committee”, May 5, 2011, https://www.microcapital.org/microcapital-brief-reserve-bank-of-india-rbi-enacts-most-of-microfinance-guidelines-proposed-by-malegam-committee/
MicroCapital.org: “MICROCAPITAL BRIEF: Malegam Proposals on Indian Microfinance Likely To Be Ratified on April 1, Bankers Defend MFIs’ Priority Sector Status”, April 1, 2011, https://www.microcapital.org/microcapital-brief-malegam-proposals-on-indian-microfinance-likely-to-be-ratified-on-april-1-bankers-defend-mfis%E2%80%99-priority-sector-status/
MicroCapital’s Universe Profile: 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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