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In new Bill, RBI can decide MFI margins
Under the proposed MFI Bill, Finance Ministry gives RBI power to oversee micro finance institutions The Ministry of Finance has proposed to bring all micro finance institutions (MFIs) under the regulatory ambit of the Reserve Bank of India (RBI) which will have wide-ranging powers to monitor the MFI business. As proposed under the Micro Finance Institutions Development and Regulation Bill 2011, the RBI will also fix a ceiling on the amount of financial assistance that an institution can dole out, percentage of margin it can earn and the number of clients it can cater to.
The government seems to have changed its strategy by dropping its earlier plan of making NABARD as the MFI regulator. “The earlier move was to make Nabard as the regulator for smaller MFIs while the RBI would regulate MFIs which are registered as NBFCs. Now Nabard doesn’t seem to be keen to take up the MFI regulatory role. The new Bill will boost MFI lending,” said an MFI official.
In its new form the Bill also allows the RBI to regulate processing fees, interest, life insurance premium and specify the maximum annual percentage rate that can be charged by a MFI on financial assistance granted to a client.
More importantly, the MFID Bill makes it mandatory for every MFI to be registered with the RBI. In order to be get a registration certificate from the central bank the applicant will need to have a net owned fund of at least Rs 5 lakh generated either from contributions to capital, reserves or grants or donations received by it. If an MFI becomes systemically important, it will also need to register under section 25 of the Companies Act, 1956.
To ensure greater financial stability of MFIs, the Bill requires each institution to create a reserve fund and transfer a percentage of its net profit or surplus as specified by the RBI to it. “No appropriation of any sum from the reserve fund shall be made by the MFI except for the purpose, as may be specified by the Reserve Bank,” it says. The Bill empowers the RBI to issue a cease and desist order on a MFI if it finds the institution indulging in activities prejudicial to the interest of its clients or depositors or itself. The RBI will also have the powers to order an audit of accounts or any specific transactions of the institution in public interest or in the interest of its clients. If the RBI finds that a MFI is unable to pay its debt, it can also seek winding up.
In a bid to give a statutory structure to the largely unregulated MFI industry, the Bill mandates the RBI to set sector-related benchmarks and specify the form in which the books of accounts are to be maintained. On the line of regulations of banks, the RBI may also give directions to MFIs relating to income recognition, accounting standards, making provisions for bad and doubtful debts, capital adequacy based on risk weights for assets and credit conversion factors for off-balance-sheet items.
In addition, the RBI should constitute a Micro Finance Development Fund to provide loans, refinance, grant, seed capital or any other financial assistance to MFIs. The RBI will also make rules to provide a redressal mechanism for any complaints by clients of MFIs. Micro finance firms were facing trouble for the last 10 months after Andhra Pradesh enacted a law that put curbs on the MFI business. The Malegam panel set up by the RBI also proposed stringent measures to bring discipline in the MFI sector.
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