RBI rules out regulating MFIs

Even while recognising the need for regulation of the growing microfinancing sector, the Reserve Bank of India (RBI) has adopted a guarded approach towards the whole issue.

"Any regulator is keen to regulate. But we are afraid to do so with regard to microfinance institutions (MFIs) fearing that things may go wrong in the process," Y V Reddy, Governor of the RBI, said here on Saturday.

He was responding to a question as to whether any attempt to regulate the microfinancing activities will adversely impact the sector itself.

Addressing a session on the question of how to regulate microfinance institutions held at the Indian School of Business (ISB), which was organised as part of a seminar on "micro-finance: the way ahead", Reddy said that the whole issue needs to be revisited as the micro-finance assumed broader and a whole range of activities and meanings, including collection of deposits from people.

He said that the RBI too felt that the informal and flexible characteristics of microfinance have really helped the poor access the credit and hence any regulation will be inconsistent with the core-spirit of the movement.

While drawing a parallel between the cooperative banks, which were finally brought under the RBI's monitoring, and microfinance institutions, the Reddy said that lessons drawn in the case of former would help the RBI decide the future course of action.

The issue of regulation assumes significance in case of MFIs collecting deposits from people, he said, sounding that only part of the activities of MFIs deserved regulation.

In any case, if any regulation is contemplated, it may be done at the state-level with no involvement of the RBI, he said.

He, however, said that the increasing size and growth of MFIs seem to warrant a clearer policy framework to cover operation in financial services in addition to credit, in respect of both bank and Nabard-led micro-finance through SHGs and MFIs.

Though the RBI Governor highlighted the importance of the micro-finance movement in addressing the issue of financial inclusion, he, however, said that the role of this activity is only supplementary to the existing banking operations.

MFIs have flourished more in the states with well-developed banking infrastructure and outreach, which means they would seem to be supplemented than be a substitute for a developed banking infrastructure, he said.

Reddy's message on sectoral differentiation between the responsibilities of banks and MFIs was loud and clear.

According to him, the kind of situation should not be allowed where one set of banks and financial institutions cater to the poor or the unorganised and another to the rest.

"What I mean to say is that there should be multiple players even in the MFI sector," he replied to a question on whether there is any future scope for banks to consider microfinance as part of their priority lending obligations in the light of his observation.