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OVER-REGULATION MAY CRIPPLE MFI SECTOR,FEARS CENTRE
Microfinance to get a regulator in Nabard……Deepshikha Sikarwar AWORRIED government has put on fast track the proposed bill to regulate micro-lenders,as it seeks to ensure that over-regulation by states does not kill the sector that is envisaged to play a big role in furthering financial inclusion.
The finance ministry could move a bill in the winter session of Parliament that will make Nabard responsible for regulation of all non-profit microfinance institutions structured as trusts,cooperatives,or mutual benefit societies.
Finance minister Pranab Mukherjee has put the bill on priority list for winter session, a finance ministry official told ET.
At present,micro-lenders follow the relevant sector law,depending on the way they are structured.The new law will treat microfinance as a separate business and will also consider bringing nonbanking finance companies in the microfinance sector under the ambit of the legislation.The decision to fast-track the bill follows the October 15 ordinance,or emergency law,issued by Andhra Pradesh that imposed severe restrictions and debt restructuring obligation on lenders following a spate of suicides that were blamed on coercion by microlenders to recover their dues.
The sudden sacking of Suresh Gurumani as MD & CEO of the recently listed SKS Microfinance on October 4 by the companys board has also drawn attention to the industry.
As many as 15 states already have laws on money lenders in place under which they attempt to regulate the high interest rates and usurious practices followed by micro-lenders. MACRO CHANGES COMING
* New law to treat microfinance as separate business and also consider bringing NBFCs in the sector under the legislation
* Finance firms may have to create a microfinance business distinct from their other business and asked to follow the new regulation
* Nabard to be responsible for regulation of all non-profit MFIs structured as trust,cooperative or mutual benefit societies
* Bill to empower Nabard to appoint microfinance ombudsmen for settlement of disputes between MFIs and clients
* MFIs may get access to retail deposits that will allow them to raise cheaper funds and lend at lower interest rates
* Finance ministry has decided against suggesting a cap on interest rates in the draft bill
* Bill provides for registration of MFIs collecting thrift from individual members of self-help groups or through a group mechanism
* It provides for creation of a reserve fund that would be 15% of a MFI’s net profit or surplus
Micro-finance cos may get access to retail deposits
THEstate governments say although the RBI protects the interests of the depositors,there is no framework to safeguard the interests of the borrower who are at times charged interest rates as high as 30%.The finance ministry wants to prepare a comprehensive law after discussing the issue with the regulators.
Industry experts agreed that there is a need for some form of regulation.The activities have to be supervised, said Mathew Titus,executive director of Sadhan,an association of microfinance firms.There is no framework for customer protection at present, he said.
Microfinance Institutions Network (MFIN),the industry body,had challenged the validity of the Andhra ordinance in the state high court,which allowed them to continue their business while they register themselves with the government.The court said the interest charged could not be more than the principal and that coercion cannot be used in recovery.
Even the finance ministry is keen to ensure that from an almost free run,the regulation does not swing to the other extreme and kill the industry expected play a big alleviating poverty by furthering financial inclusion.Therefore,while regulations are most likely to be tightened,they may also give microfinance institutions access to retail deposits that will allow them to raise cheaper funds and lend at lower interest rates.
The finance companies may also have to create a microfinance business distinct from their other business,such as car/truck loans,and asked to follow the new regulation.
Andhra Pradesh chief minister K Rosaiah has written to the Union government asking it to bring NBFC-MFIs under the ambit of the new bill.The governments of Gujarat and Kerala have attempted to put curbs on MFIs under their money-lending Acts and look for greater clarity on the regulatory framework of such institutions.
The state governments are not equipped to handle supervision and a sector supervisor is the need of the hour,said Mr Titus.However,the finance ministry has decided against suggesting a cap on interest rates in the draft bill,said another government official privy to the deliberations.He said the Andhra chief minister has pitched capping spreads – crofinance lenders at 8%.
Industry says the government should take into account the recent events when it finalises the bill.The bill should consider what is happening at the ground level… regulator by itself is not the solution, said Gautam Bharadwaj,director,Invest India Economic Foundation.
The Micro Financial Sector (Development and Regulation) bill was first introduced in Parliament in 2007 and referred to the standing committee on finance.However,the bill subsequently lapsed due to dissolution of the Lok Sabha and has been in the works since then as the government decided to again hold consultations with the stakeholders.
The new draft of the bill defines the role of the regulator more explicitly.It has a provision for registration of microfinance organisations collecting thrift from individual members of self-help groups or through a group mechanism.The bill provides for creation of a reserve fund that would be 15% of a microfinance institutions net profit or surplus.
The bill will also empower Nabard to appoint microfinance ombudsmen for settlement of disputes.
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