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The Reserve Bank of India’s (RBI’s) decision to look at a uniform regulatory framework for all microfinance lenders, though being discussed for more than five years now, has been brought into focus by an Assam government bill to regulate microlenders in the state, experts said.

Uniformity in rules has been sought since Bandhan Financial Services turned into a bank in 2015 and several other micro lenders converted into small finance banks, officials said.

“There have been several representations from the microfinance associations over the past few years seeking uniformity in regulations," according to P. Satish, executive director, Sa-Dhan, an industry body comprising 225 microfinance institutions across India.

“RBI’s decision to bring in a regulation for all microfinance players would disincentivize states from enacting their own laws on the subject," Satish said in context of Assam Microfinance Institutions (Regulation of Money Lending) Bill, 2020.

RBI announced on 5 February that there is a case for a framework that is uniformly applicable to all regulated lenders in the space. The micro lending sector has scheduled commercial banks, small finance banks, and non-banking investment and credit companies, but the regulatory focus has been on those registered as NBFC-MFIs.

“Accordingly, RBI will come out with a consultative document harmonizing the regulatory framework for various regulated lenders in the microfinance space in March 2021," the central bank said last week.

The MFI bill in Assam has had an immediate impact on microlenders in the state, with Bandhan Bank reporting lower collections days after it was passed. The lender witnessed a 10-percentage point contraction in collection efficiency between the December quarter and 1-16 January, to 78%.

Provisions of the bill include restriction on the deployment of collection agents, coercive collection practices and door-to-door collection, collection from borrowers only at gram panchayat offices or designated places suggested by deputy commissioner, and not more than two lenders per borrower, among others.

Apart from acting as a safety net against future legislations, RBI’s decision was also lauded by the industry because of its promise of a level playing field. RBI deputy governor M Rajeshwar Rao’s speech on 6 November 2020 had hinted at the willingness in brining regulatory uniformity to the sector. Rao had said that at present the share of NBFC-microfinance institutions has declined to a little over 30% of total micro loan segment but “the regulatory rigour is applicable only to a small part of the sector".

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