The government has proposed to bring all micro finance institutions (MFIs) under the ambit of the Reserve Bank of India (RBI). The central bank will have the powers to formulate policies for the sector and regulate it, the finance ministry said in the draft of The Micro Finance Institutions (Development and Regulation) Bill, released on Wednesday for public comment.
The earlier Bill of 2007, which has lapsed, had sought to regulate only those MFIs not under the ambit of any law. So, banks and a few categories of non-banking finance companies (NBFCs) were kept outside the purview of the Bill.
The revised Bill proposes to empower RBI to issue directions to MFIs on margin caps, tenure of loans, periodicity of repayment schedules, levy of processing fees, interest and life insurance premium, among others. It will also be allowed to specify the maximum annual percentage rate that can be charged by an MFI on the financial assistance granted to any client. The Malegam committee of RBI had recommended an average ‘margin cap’ of 10 per cent for MFIs having a loan portfolio of Rs 100 crore, of 12 per cent for smaller MFIs and a cap of 24 per cent for interest on individual loans. Currently, most MFIs are charging an interest rate over 24 per cent.
Depending on the size of their operations and other relevant parameters, MFIs will be required to maintain the percentage of margin as may be specified by RBI from time to time. MFIs will have to convey to every borrower the annual percentage rate, comprising the annual interest rate, processing fees or any other charges or fees levied by them. The Bill says every micro lender must create reserve funds for loans and refinance to other micro-finance companies.
In the sector, self-help group bank linkages account for 58 per cent of loans due, NBFCs have another 34 per cent and others such as trusts and societies account for the balance. All banks and NBFCs are regulated by RBI. There is, however, no separate category for NBFCs operating in the microfinance sector.
The Bill said MFIs would not be allowed to restructure their business without prior approval of RBI. It would be mandatory for all MFIs to register with the central bank. MFIs with net owned funds of less than Rs 5 lakh wouldn’t be allowed to register.
RBI, with the previous approval of the central government, will be allowed to delegate any of its powers conferred under this Act to the National Bank for Agriculture and Rural Development in respect of any micro finance institution or a class of micro finance institutions. The Bill also enables the Centre to constitute a Council, to be known as the Micro Finance Development Council, to advise it on formulation of policies and other measures required in the interest of orderly growth and development of the sector.
