New draft of MFI Bill to give more teeth to RBI

New draft of MFI Bill to give more teeth to RBI

Mumbai: The proposed microfinance Bill for governing India’s 22,000 crore microlending industry is set to give more teeth to the Reserve Bank of India (RBI) to regulate larger microfinance institutions (MFIs). This will be done by removing such entities from the purview of laws enacted by state governments such as the recent Andhra Pradesh Act.

The Union government last week appointed a committee under financial services joint secretary K.V. Eapen to redraft the Bill factoring in the current realities in the microfinance industry and the recommendations of the Malegam panel, appointed by RBI. The panel had suggested the creation of a new category of non-banking financial company MFIs, or NBFC-MFIs.

In keeping with the recommendations of the Malegam panel, the Bill will focus more on borrowers and strengthen the hands of RBI to regulate MFIs by way of clearly defining such institutions, according to two members of the panel.

Both of them declined to be identified because they are not supposed to talk to media until the committee redrafts the Bill.

More importantly, the modified Bill is expected to cover the entire microfinance sector, including the larger entities.

The earlier draft covered only non-NBFC MFIs incorporated as trusts and non-governmental organizations that constitute a very small part of the total industry. It also envisaged National Bank for Agriculture and Rural Development (Nabard) as the regulator for smaller MFIs.

The proposed microfinance Bill assumes significance as it is expected to resolve the regulatory uncertainty in the ailing Indian microlending sector by providing a clear framework. Most banks have stopped giving fresh loans to MFIs due to this uncertainty.

Top officials from RBI, Nabard and microfinance industry associations are members of the committee headed by Eapen.

The committee is expected to submit the modified Bill to the government by the end of April and this will be tabled in Parliament in the monsoon session, according to members of the panel.

“There is a complete clarity that it (microfinance sector) will come outside the purview of state governments. The new microfinance Bill will categorically say that microfinance is a properly defined financial service and not moneylending," one of the two members said.

“Through a process of clarifying things, the Bill will strengthen the hands of RBI with respect to MFI regulation," this person added.

So far, moneylending is treated as a state subject and, hence, a state has the powers to control MFIs. Exercising this power, the Andhra Pradesh government passed the Andhra Pradesh Micro Finance Institutions (Regulation of Money Lending) Act, 2010.

The Act defined an MFI as any person or entity “in whichever manner formed and by whatever name called, whose principal or incidental activity is to lend money or offer financial support of whatsoever nature to the low-income population".

“The committee has been formed to quickly redraft the Bill so that it can be presented at the monsoon session of Parliament. We do have the Malegam recommendations before us. The microfinance sector has evolved from the past and is on a different scale now. Hence, the need for new regulation," a second member of the government panel said.

MFIs are in the business of giving tiny loans to low-income borrowers. They typically charge their borrowers 24-32% and raise money from banks at 9-12%.

More than a quarter of India’s microfinance industry is concentrated in the southern state of Andhra Pradesh, which is home to some of the leading Indian MFIs such as SKS Microfinance Ltd, Share Microfin Ltd and Asmitha Microfin Ltd.

MFIs plunged into a crisis in mid-October following a state law by the Andhra Pradesh government to check alleged coercive recovery practices of some microlenders.

The law created an uproar among MFIs after it prohibited them from collecting dues on a weekly basis and instead asking them to do so once a month. It also made it mandatory for them to secure government approval for every second loan issued to the same borrower.

MFIs’ loan collection rates dropped to 10-20% in Andhra Pradesh and they virtually stopped issuing new loans.

This, in turn, prompted banks to stop fresh lending to MFIs.

In October, RBI appointed the Malegam panel, which suggested, among other things, capping the interest rates charged by MFIs at 24% and their margins at 10-12%.

Senior executives in the microfinance industry said the Central legislation is expected to put an end to the crisis.

“Today, all of us (MFIs) are worried about the political risk and regulatory uncertainty looming over the microfinance industry. The proposed Bill is expected to solve these issues by giving a single regulatory framework," Raja Vaidyanathan, chairman and managing director of Asirvad Microfinance Pvt. Ltd, said.

Chennai-based Asirvad has a loan book of 115 crore and 230,000 borrowers.