Friday, July 15, 2011

The New Microfinance Institutions Bill

Over the last year or so, there has been a serious debate about the nature of regulation governing the microfinance sector. In view of the debacle in Andhra Pradesh, the Reserve Bank of India (RBI) had appointed a committee under the chairmanship of Mr. Malegam to review issues pertaining to the sector. The committee submitted its report in January this year.
In view of these events, the Government decided to relook at the Microfinance Bill previously presented in Parliament in 2007. Consequently, the Ministry of Finance has drafted the Micro Finance Institutions (Development and Regulation) Bill, 2011, which is published on its website for comments which are due August 7, 2011.
Under the new Bill, the RBI is designated as the umbrella authority that will regulate microfinance institutions. The Bill details the powers exercisable by RBI over the various types of institutions currently carrying on microfinance activity (which include non-banking finance companies and cooperatives). More importantly, the draft legislation seeks to do away with the fragmentation that currently exists in regulating the sector. For example, RBI’s role is expected to supersede regulatory powers exercised by various state governments, such as Andhra Pradesh that swiftly promulgated an ordinance last year that significant curtailed the ability of microfinance institutions to carry out their activities in that state. However, states can be expected to challenge the possible usurpation of powers by Parliament (and there are already signs of that occurring), which in turn lead to interesting constitutional questions involving the division of legislative powers between the centre and the states.
As for regulation of the sector itself, the scope of the Bill largely covers the role of RBI in overseeing the sector in terms of its supervisory powers over various institutions carrying on microfinance activity. All institutions will be required to register with the RBI. In that sense, it does not cover the whole gamut of issues considered by the Malegam committee. Moreover, as noted in this critique, the Bill’s predominant focus on organizational aspects of microfinance institutions overshadows the required regulation on the relationship between the institutions and their customers, who are represented by the needy sections of society. The Bill perhaps lacks in its silence on the latter aspect.
Although the Bill is an important step in generating greater discourse on the topic, it is bound to generate issues or objections from various interest groups, with the likelihood that its passage in any form or its implementation could be met with delays.

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