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A new law being drafted to regulate microfinance entities has hit a jam. According to a report by CNBC TV18, the RBI, which was always unconvinced about its ability to govern the wide gamut of MFIs operating in the country has explicitly expressed reservations about supervising micro lenders that are not companies, through a central legislation. The central bank feels it does not have the resources or reach in remote areas, and more importantly the parliament itself does not have legislative competence in the matter. The RBI feels the government could be superseding federal jurisdiction by enacting such a law, as money lending is a state subject.
The government is expected to table the Micro Finance Institutions (Development & Regulation) Bill in the winter session of parliament, after recommendations of the Standing Committee of Finance are taken on board. The bill makes RBI the sole regulator for all micro finance institutions (MFIs) including those that are not licensed. But with the banking regulator expressing strong reservations, the legislation in its current form could be under jeopardy according to the report.
NBFC MFIs recommend that the government implement dual regulations in order to take the RBI’s concerns on board, rather than delay the passage of the bill.
Larger MFIs, or what are now notified as NBFC-MFIs are currently regulated by the RBI under the framework suggested by the Malegam Committee. But draconian state ordinances like the one passed in Andhra Pradesh (which at one point constituted a fourth of lending by MFIs) after a spate of suicides due to alleged coercive practices by micro lenders, has completely crippled operations of these companies in the state. Lenders, who are banking on geographies outside Andhra for growth, are keen that the bill is passed, so other states don’t raise a similar bogey.
“There could be a dual mechanism put in place in the legislation, whereby licensed MFIs which form the bulk of microfinance lending (90%) continue to be regulated by the RBI, while the smaller players come under state purview, or are governed through some other mechanism” said Samit Ghosh, President of MFIN (Microfinance Institutions Network). “The bill mustn’t be delayed though, because otherwise it will lapse.”
A dual mechanism will also facilitate a natural consolidation of operations says Ghosh, as smaller lenders will not want to function under unfriendly state rules, and would eventually join hands with licensed players.
Over 35,000 people are pegged to have lost employment in Andhra Pradesh due to the new law according to a report in the Mint newspaper. Lenders had to take major write downs on their portfolios and an estimated Rs. 6,000 Cr worth of microfinance loans have been restructured in the last 3 years, with more recasts expected. But MFIs have gradually been showing a revival, focusing on other markets, with the country’s only listed microfinance company, SKS posting 4 straight quarters of profits.
Companies have been waiting for the new bill regulating MFIs to be passed as it will repeal the rules introduced by the state government of Andhra Pradesh, which was once a intensely penetrated market for micro lenders. But the CNBC report quoting sources says “The RBI feels that it would be appropriate to enact a model law on MFIs and give the discretion to states to adopt it.”
Whether the Standing Committee accepts that proposal, or as NBFC-MFIs are suggesting, calls for dual rules, remains to be seen.
