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Centre mulls law to facilitate services like insurance, pensions and money transfer to poor

The Centre is considering a law to enable non-governmental organisations (NGOs), trusts and public associations to provide credit, savings and leasing service to the poor directly.

The law is also likely to facilitate services like insurance, pension and money transfer to the poor in partnership with other organisations.

The draft provisions of the new Microfinance Institutions Act were discussed at a high-level meeting of the Reserve Bank of India (RBI) on December 29.

"The government and the Reserve Bank of India (RBI) are actively examining the framework for allowing NGOs and local groups to offer financial services including accepting limited deposits," said an official.

The issue has been subject to intense debate in the past, with the RBI expressing regulatory concerns about allowing players outside the banking sector to offer such services. The initiative has gathered pace in the past month due to the interest shown by the government, said the official.

In the draft proposal, it is being suggested that the micro-finance institutions (MFIs) should be regulated and supervised by a regulatory authority institutionalised by the government. This could take the form of a Micro-Finance Development and Regulation Authority (MFDRA).

The draft law specifies different capital requirements for the MFIs depending upon the loans outstanding in their books.

It suggests a capital requirement of Rs 10 lakh for the MFIs with loans outstanding in the range of Rs 20 to 50 lakh. For MFIs with loans outstanding of over Rs 1 crore, a capital requirement of Rs 50 lakh is suggested.

"The microfinance initiatives in India are currently working without any regulatory framework in an informal set up with the NGOs, trusts and individuals providing various services. The lending rate is generally higher. Although, the microfinance movement has relatively stronger footing in the southern and western parts of the country, to grow and attract donors it needs regulatory framework," Vijay Mahajan, managing director, Basix, a group of financial services and technical assistance companies promoting rural livelihood, told Business Standard.

The maximum deposit from an individual is proposed to be capped at Rs 20,000. MFIs would be able to take deposit after obtaining satisfactory ratings from accredited rating agencies. Further, all MFIs having outstandings of over Rs 50 lakh would have to obtain ratings.

The MFIs under the proposed act could be commercial organisation formed as a company, NGO, cooperative, trust, public association or a group of individuals.

The NABARD task force on micro-finance had recommended allowing entry of foreign capital for micro-finance and no ceiling on banks' lending to MFIs.

It had also suggested setting up of MF Development Fund with NABARD with a start-up contribution of Rs 100 crore from the government.

The task force had also recommended that that Deposit Insurance Credit Guarantee Corporation work out scheme for protection of the small savers under MFIs.

The national conference on the 'Regulatory Framework of Microfinance Sector' on January 19-20 would provide a platform for all the stakeholders to share their views on the draft proposal.