Govt proposes to dilute UPA’s Microfinance Bill
New version unlikely to override existing state govt laws, may delay industry’s recovery in Andhra Pradesh
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New Delhi: In a potential setback to India’s Rs.28,000-crore microfinance industry, the Narendra Modi government is proposing to dilute the previous version of the microfinance Bill introduced in 2012 by the Congress-led United Progressive Alliance (UPA) administration.
The new version of the Bill that is currently being worked on is unlikely to override existing state government legislations like the earlier version proposed, said a senior government official who did not wish to be identified.
“We are holding talks with the state governments to get their feedback. But it will not be an overarching legislation like last time,” the official said, noting that the Reserve Bank of India (RBI) already oversees so-called NBFC-MFIs (non-banking financial company-microfinance institutitions).
“We could frame a model law that the state governments could follow but we do not plan to override state government legislations,” the official added.
The Microfinance Institutions (Development and Regulation) Bill, 2012, envisaged as an overarching legislative framework that would have taken MFIs outside the purview of state legislation, lapsed earlier this year.
The earlier version was drafted after a law put in place by Andhra Pradesh in 2010 forced many microlenders to shut operations in the state, then the biggest market for small loans to the poor.
The Andhra Pradesh government’s Micro Finance Institutions (Regulation of Money Lending) Act, 2010, was aimed at reining in the alleged harassment of borrowers in the state through coercive loan recovery practices.
It banned MFIs from approaching the doorsteps of their customers, lengthened the loan recollection cycle from one week to one month, and made it mandatory for the lenders to get government approval to give a second loan to the same borrower.
The law led to a shrinking of the asset base of the microfinance industry and a surge in bad debts.
A lack of a central legislation to override a state law will potentially delay the microfinance industry’s plan to reclaim its market in Andhra Pradesh.
The central government Bill, tabled in the Lok Sabha in May 2012, was rejected by the standing committee on finance which had raised concerns about the Bill that prompted a rethink.
While NBFC-MFIs are currently regulated by the central bank, other MFIs registered under various state society acts are not regulated by anyone.
RBI had expressed its inability to regulate the entire sector and was of the view that the non-corporate entities—known as NGO-MFIs (non-governmental organization-MFIs)—be left to the individual state governments to regulate, for which a model law could be passed by Parliament.
NBFC-MFIs are of the view that since they are regulated by the central bank, they should not fall under the purview of state government legislation. The Andhra Pradesh government disagrees.
The central government’s decision not to go in for an overarching legislation to regulate all categories of MFIs will not have much of an impact on the industry, said Alok Prasad, chief executive officer of Microfinance Institutions Network (MFIN), an association of micro-lenders in India.
“NBFC-MFIs, which constitute more than 90% of the sector, are already tightly regulated by the RBI with MFIN acting as the SRO (self-regulatory organization). Also, the exposure of the industry to Andhra Pradesh, which was around 45% of the aggregated pan-India loan book in 2010, has now come down to around 14%,” he said.
The total loan book of the industry was at around Rs.28,000 crore as of the end of the last fiscal year.
“Based on the standing committee’s recommendations, the government has started the consultative process with various state governments and RBI on the Bill. RBI’s broad position appears to be that since NBFC-MFIs are already regulated by the central bank, there is no need for a new law to regulate them,” Prasad added.
He pointed out that the Supreme Court, where a challenge against the Andhra Pradesh law is pending, will decide on the validity of the state’s legislation.