MFIs can be regulated via four pillars of compliance….George Mathew
Deputy Governor of Reserve Bank of India KC Chakrabarty went on record last week saying the central bank is not capable of regulating microfinance institutions (MFIs) in the country and that it needs to get equipped to do the job. However, YH Malegam, the person who headed the RBI committee to look into MFI operations, says MFIs can be regulated through four pillars of compliance.
While Malegam admitted that its impossible for the regulator to ensure compliance when loans run into thousands, he also said, the regulator should look at whether MFIs have an internal organisation for compliance. Whether you have an internal audit department, or an inspection department.
The second pillar is an association. If one third of MFIs become members of an association, they (RBI) will recognise it. The association will have its own code of conduct. If discipline is not observed, the association, which will be something like an SRO (self-regulatory orgnisation) can remove that member, he told The Indian Express.
As per the draft Micro Financial Sector (Development & Regulation) Bill, 2011, the RBI will become the sole regulator for the micro-finance sector.
If the MFI applies for a bank loan, it can say its a member of the association and its safe. There will be a lot of incentives for MFIs to become a member, he said.
The third pillar being, banks that gives funds will supervise MFIs as this funding comes under priority sector lending. Fourth: the RBI will inspect the MFIs to see if they have the systems for internal regulation. Malegam said.
According to Malegam, MFIs which are affected are those which have substantial exposure to Andhra Pradesh.
The problems in the state is that borrowers were encouraged not to make repayments. So theres a virtual paralysis in the recovery process. There was a fair amount of over indebtedness in the state. Borrowers who took money from one MFI approached another at the time of the repayment, and then another, he said.
The change in regulations is already having its impact. When we started our work, the interest rates charged by MFIs were 35-40 per cent. Now I’m told it has come down to 24 per cent. Now thats a major benefit, Malegam said.
Once the Central Act comes into practice, it might be argued that it supersedes state laws. In this case, the Ordinance (in AP) becomes ineffective. On the other hand, states can probably argue under the Constitution, money lending is under the states purview, he said.