Home / Opinion / Online-views /  Demand for tighter microfinance Bill, neutral regulator

Proposed microfinance regulations face growing opposition, with even supporters of the Bill asking for an overhaul, according to microfinanciers and officials from credit cooperatives.

Sa-Dhan, an umbrella organization of India’s microfinance organizations in favour of regulation, made a presentation to the standing committee on finance Wednesday and outlined its concerns. It called for the National Bank for Agriculture and Rural Development (Nabard) to be removed as the proposed regulator and replaced by an independent, third-party regulator or the Reserve Bank of India, said members of the Sa-Dhan board who spoke on the condition of anonymity.

Finance minister P. Chidambaram introduced the Bill to police the growing sector and aid inclusion of India’s poor and rural women in the formal financial sector. In addition to regulation and stricter accounting standards, the legislation would allow societies and trusts to accept public deposits—a task some observers say strains the capacity of NGOs that lend small amounts to self-help groups.

Critics say this puts poor customers’ desposits at risk by forcing organizations that lack banking knowledge to operate like banks.

Many sectors of the microfinance industry have called Nabard a poor choice to oversee them, citing a conflict of interest, because it develops and promotes rural microfinance initiatives of its own.

The exact size of the microcredit industry in India is hard to measure, but Sa-Dhan data shows its 180 members had Rs2,600 crore of credit outstanding as of 31 March, with steady growth in the months subsequent.

The Hyderabad-based Cooperative Development Foundation, which represents small credit cooperatives, also has filed a clause-by-clause criticism of the Bill and said it should be redrafted.

Executive director Rama Reddy called the Bill “unconstitutional" and said he was confident it would not stand up to judicial challeges, even if passed by Parliament.

One Sa-Dhan board member said it is “extreme" to ask for the Bill to be scrapped, but added that “it needs to be heavily amended."

The ministries of rural development and of social welfare have also been critical of the Bill, which has been with the standing committee since April.

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