NBFC-MFIs should stay under RBI ambit

The microfinance industry has informed the finance ministry of its view that the current regulatory architecture should continue for NBFC-MFIs


Raghuram Rajan (left) and finance minister Arun Jaitley (centre), listen as minister of state for finance Jayant Sinha (second from right), speaks at the launch of the Mudra Bank in New Delhi on 8 April. Photo: Bloomberg
Raghuram Rajan (left) and finance minister Arun Jaitley (centre), listen as minister of state for finance Jayant Sinha (second from right), speaks at the launch of the Mudra Bank in New Delhi on 8 April. Photo: Bloomberg

New Delhi: The microfinance industry wants the Reserve Bank of India (RBI) to continue regulating microfinance institutions (MFIs) registered as non-banking financial companies (NBFCs), although the government may make the proposed Mudra Bank a unified regulator for all MFIs.

The industry has informed the finance ministry of its view that the current regulatory architecture should continue for NBFC-MFIs and they not be brought under the regulatory framework of the proposed Mudra Bank. The finance ministry is working on drafting a legislation to give statutory powers to Mudra Bank.

While NBFC-MFIs are currently regulated by the central bank, other MFIs registered under various state society Acts—called non-governmental organization (NGO)-MFIs—are under no regulatory supervision.

“The industry is comfortable and happy with RBI as a regulator and would not want a change,” said Alok Prasad, chief executive officer (CEO) of Microfinance Institutions Network (MFIN), the self-regulatory organization of MFIs. “We have conveyed our views to the finance ministry that we do not want RBI’s role to be shifted to Mudra Bank.”

The concept of a unified regulator for MFIs took root after a parliamentary standing committee of finance proposed the idea while discussing the Microfinance Institutions (Development and Regulation) Bill, 2012. RBI had expressed its inability to regulate the entire sector and was of the view that NGO-MFIs be left in the purview of individual state governments.

While NBFC-MFIs have a 95% market share, NGO-MFIs have only a 5% share, but they are numerous and scattered across the country.

Finance minister Arun Jaitley announced the launch of Mudra Bank, short for Micro Units Development Refinance Agency, with a refinance corpus of Rs.20,000 crore and a credit guarantee corpus of Rs.3,000 crore, to address the lack of access to funds for small entrepreneurs.

In a post-budget note, the finance ministry said the bank will be tasked with regulating MFIs, including overseeing their registration and policy framework.

However, after the launch of Prime Minister Mudra Yojana last week, financial services secretary Hasmukh Adhia said the government is yet to take a call on who will regulate NBFC-MFIs. “A decision will be taken at the time of framing of the Mudra bill,” he said, adding that the bill will be introduced in Parliament in the next one year and will include many provisions of the microfinance bill that had lapsed in 2014.

“NBFC-MFIs are very well regulated by RBI and its supervision has brought a lot of stability to the sector,” said Kshama Fernandes, CEO of IFMR Capital, an institution that facilitates capital-raising for MFIs. “NBFC-MFIs have successfully managed a transmission to a regulatory regime of margin caps, credit bureau reporting, etc., which is very good. However, many of the NGO-MFIs registered as Section 25 companies are not regulated today and that is not good.”

As of December end, MFIs had provided microcredit to more than 28.7 million customers, a 23% increase from the year-ago period. The aggregate gross loan portfolio of MFIs also grew by 51% to Rs.31,450 crore (excluding the sector’s exposure in Andhra Pradesh, which has become a non-performing portfolio) during the same period, according to data collated by MFIN.

MFIs in Andhra Pradesh, then the largest market for small loans to the unbanked poor, ran into a crisis in 2010 after the state passed a law tightening oversight of the institutions following reports that the use of strong-arm loan-recovery methods by microlenders was causing suicides by over-extended borrowers.

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