The proposed Microfinance Bill may not see the light of day, as the finance ministry is having second thoughts on coming out with legislation to regulate the sector. This comes in the backdrop of recommendations by the Malegam committee, which said the Bill would cover only about 8 per cent of the outstanding microfinance loan portfolio.
“Our Bill is looking at only 8 per cent of the lending industry. We are yet to take a decision on whether it should be introduced. But if there is a Bill, it will be in harmony with the central bank’s regulations,” a finance ministry official, who did not wish to be identified, told Business Standard. He said the ministry would take a final call on this after the Reserve Bank of India (RBI) decided on the Malegam report.
The committee, constituted by RBI to look into various issues related to microfinance institutions (MFIs), has said that 58 per cent of the outstanding loan portfolio in the sector is owned by the self-help groups- bank linkage model and 34 per cent by designated non-banking finance companies-microfinance institutions (NBFC-MFIs).
Both banks and NBFCs are outside the scope of the proposed Act and regulated by RBI. Organisations not regulated by RBI account for only 8 per cent of the loan portfolio. Since cooperative societies, which give members voting rights, are excluded from the provisions of the proposed legislation, this percentage may be even lower, the committee said.
While the committee, headed by Y H Malegam, a senior member of RBI’s central board of directors, largely agreed that the entities not governed by the central bank should come under the Microfinance Bill to eliminate regulatory gaps, a member of the panel, Shashi Rajagopalan, disagreed.
She said as only a small number of entities were likely to be brought within the ambit of such a proposed Act, the Centre might reconsider introducing it. Further, as money lending and cooperatives are state subjects, she felt it might be inappropriate for Parliament to enact legislation on this matter.
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Some states like Andhra Pradesh have enacted their own laws to regulate MFIs. If the Centre also comes out with legislation, it might lead to a conflict.
The finance ministry official said the Centre was in the process of seeking legal opinion on the matter.
“We need to get legal advice on which law will prevail. If microfinance is a money-lending activity, then states’ laws will prevail. But if it is meant to improve the livelihood of the poor, then the Centre’s law will prevail. The idea is to take it out of money lending and make it ‘beyond credit’,” the official said.
He added the RBI regulation would be drafted in a manner agreeable to states. He said the regulation may not necessarily prescribe a cap on the interest rate charged by MFIs.
The Malegam committee had recommended a 24 per cent interest rate cap on microfinance loans to individuals.
It said lenders should provide financial services predominantly to low-income borrowers. To promote financial inclusion, it has asked for lending to this sector to be treated as priority-sector lending. The panel has suggested that its recommendations be enforced by April 1.
Chief Economic Advisor to the finance ministry Kaushik Basu has maintained that there should not be too much financial regulation of MFIs.