Central law must for orderly growth of MFI sector: RBI

Central law must for orderly growth of MFI sector: RBI

Mumbai: The senior-most deputy governor of the Reserve Bank, K C Chakrabarty, has called for central legislation to regulate the troubled microfinance sector as in its absence, states will be free to take action that may nullify the Centre’s efforts for a uniform policy.

“If we don’t act under a common set of regulations, it won’t be practical to work. Five states having five different laws on the same subject will have practical difficulties for the industry. But if still some states want to act differently, I cannot stop them. They are sovereign in their territories.

“Till a central law is in place, the Andhra type situation can arise again and will nullify what the Reserve Bank is doing to properly regulate them," Chakrabarty said.

His comments come on the heels of media reports saying the Centre has left the troubled MFI industry to fend for itself and has put the plan to enact a central legislation on the backburner.

The 20,000 crore microfinance sector was thrown into a tizzy last October when Andhra Pradesh issued an Ordinance that sought stringent regulation of the industry, following reports of a spate of suicides by harried borrowers. Andhra is the largest MFI market in the country, with over 60% of total business taking place there.

Following this, loan recovery slowed to a trickle and banks also refused to offer fresh funds to MFIs. Then a worried RBI set up a committee under the chairmanship of noted chartered accountant Y H Malegam, who submitted his report early this year.

The report recommended capping MFI interest rates at 24%, banned MFIs from lending to the individuals that have already borrowed amounts and banned coercive loan recovery by agents, among other things.

On the overall situation in the MFI space since April, when the RBI implemented some of the proposals of the Malegam panel report, such as capping interest rates, he said, “They have at least survived the crisis. Also, luckily the problem has not gone out of control and out of Andhra."

Stating that one has to wait and see how the situation evolves, Chakrabarty said since the RBI has created a framework for MFIs and has issued guidelines to them and asked banks to resume lending, he hopes it will improve now.

“There is also an agreement to restructure the debts of MFIs and banks also have assured us that they will start funding again," Chakrabarty, who looks after MFIs at the central bank, said.

Clarifying that the RBI is not in conflict with any state, Chakrabarty said, “What we said is that what Andhra wants is being taken care of by the Malegam report. But a state is sovereign and RBI cannot stop it from regulating entities operating in it. But such steps will affect the smooth operations of MFIs."

On whether he has received any communication from Andhra, he said, “Why should they get in touch with us? I have not written to them, nor they have written to me. There may be certain areas where more coordination is possible. All I am saying is that let the system be first stabilised, after which we can look at the pending issues. But states are sovereign and are free to do what they feel like doing," he concluded.