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Business News/ Politics / Policy/  Sinha panel proposes new regulator for MFIs
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Sinha panel proposes new regulator for MFIs

Such a regulator will have representatives from RBI, Nabard and Sidbi, besides nominees from central govt and MFIs

MFIs offer small loans to low-income borrowers typically at 24%-36%, and borrow from commercial banks to do business. Photo: Rituparna Banerjee/MintPremium
MFIs offer small loans to low-income borrowers typically at 24%-36%, and borrow from commercial banks to do business. Photo: Rituparna Banerjee/Mint

Mumbai: A Parliamentary standing committee, headed by former finance minister Yashwant Sinha, has proposed a unified and independent regulator to govern microfinance institutions (MFIs), along the lines of other sector regulators such as Insurance Regulatory and Development Authority (Irda) and the Pension Fund Regulatory and Development Authority (PFRDA). The Sinha report is yet to be tabled in the Parliament.

MFIs offer small loans to low-income borrowers typically at 24%-36%, and borrow from commercial banks to do business.

The recommendation is in sharp contrast to the structure proposed in the microfinance Bill, one of the major initiatives of Congress party-led United Progressive Alliance (UPA) government, which had envisaged the Reserve Bank of India (RBI) as the sole regulator for the sector. The apex bank had objected to this saying it doesn’t have the wherewithal to regulate all MFIs, except those that are incorporated as non-banking financial companies (NBFCs).

An alternative proposal to nominate National Bank for Agricultural and Rural Development (Nabard) as the regulator for non-NBFC MFIs, also didn’t take off since Nabard too was reluctant to take up the role.

“In the absence of concurrence of the proposed regulator, namely, RBI and the reluctance of Nabard, it is apparent that the ministry have not done adequate ground work before bringing these proposal in the Bill," the Sinha report said.

“The committee is thus inclined to suggest constitution of a unified and independent regulator for the entire microfinance sector as a whole, which may be termed as the Microfinance and Development Regulatory Council (MFDRC)," the committee said.

Such a regulator will have representatives from RBI, Nabard and Small Industries Development Bank of India (Sidbi), besides nominees from central government and MFIs, the committee recommends. Going by the report, MFDRC will have state and district tiers that would have nominees from the state government.

“Such a unified body with an integral mechanism will be in a position to address the concerns of the state governments by involving them in their processes and procedures," the report said.

To be sure, the standing committee recommendations are unlikely to have any major implications, as the proposed national regulation—The Microfinance Institutions (Development and Regulation) Bill—itself is set to lapse for the second time since 2007. However, opposition from the standing committee will make it tough for the Bill to be passed in the current form, even if the UPA returns to power post general elections, as the Bill will have to be reworked.

The passage of a national regulation is critical for microlenders across the country, especially those who operate in the state of Andhra Pradesh—once the largest market of microlenders—since the uncertainty of state-level legislation still loom over such institutions, in turn denting the ability of the sector to grow and draw investments.

It was a controversial state-law promulgated by Andhra Pradesh that led to a crisis in the sector in October, 2010, by restricting their operations.

The law, enacted after a series of suicides were reported in the state due to alleged coercive activities of microlenders, barred MFIs from collecting money from borrowers on a weekly basis and stopped them from doing doorstep business. Besides, it also made it mandatory for MFIs to get a government approval for disbursing a second loan to the same borrower.

The law, alongwith the state wide campaign by some political parities, resulted in a sharp fall in the loan repayment rate of MFIs to below 10% and forced many MFIs to restructure their bank loans. Some are even on the verge of closing down their operations. About 6,000 crore worth of loans given by microlenders are stuck in the southern state.

The situation, however, improved after the RBI announced regulations for NBFC-MFIs in December 2011, resulting in an improvement in the level of bank funding to MFIs operating outside Andhra Pradesh.

At the end of December, bank loans outstanding to microcredit firms, which includes loans to self-help groups and joint liability groups—small groups of women borrowers—stood at 18,700 crore as compared with 15,400 crore a year ago.

“The (Parliament) committee has given a great deal of weightage to RBI’s views. It has also recognized that the RBI is the regulator for NBFC-MFIs," said Alok Prasad, chief executive of Microfinance Institutions network, or Mfin, an industry lobby, while arguing that not much will change for larger MFIs which are currently incorporated as NBFCs.

Presently, the RBI is the regulator for MFIs incorporated as NBFCs, while those that operate in the form of NGOs and trusts broadly remain unregulated. The Andhra Pradesh government is contesting the RBI’s jurisdiction over the regulation of MFIs, saying such institutions come under the state’s purview, since the subject of money lending is a state subject.

“In India, the positive side of having a sector regulator is that all MFIs, including the not-for-profit companies, can come under formal regulation," said Chandra Shekhar Ghosh, chairman and managing director of Bandhan Financial Services Pvt. Ltd.

“But the flip side is that NBFC-MFIs may face the issue of dual regulation since they are already under the purview of RBI. Banks and investors have more confidence if NBFC-MFIs remain under the regulation of RBI," Ghosh said.

According to industry estimates, NBFC-MFIs control about 80% of the industry in terms of loan assets.

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Published: 17 Feb 2014, 09:51 PM IST
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