Thursday, July 7, 2011

Micro Finance Institutions: Draft Bill

Micro Financial Institutions (MFIs) are entities which provide small credits to individual(s) or groups. Typically MFIs provide micro credit facilities, assist in remittance of funds, provide pension and insurance services etc. MFIs do not strictly fall within the category of a banking company or a co operative society engaged primarily in agricultural operation or industrial activity. The MFIs are seen more as an extended arm of the banking system which provides credit or other financial services to the poor households and their micro enterprises.

Last year the Andhra Pradesh Government introduced the Micro Finance Institutions (Regulations and Money Lending) Act, 2010 which had thrown the industry into crisis by imposing several restrictions. As a result the Reserve Bank of India appointed an expert committee lead by Y.H. Malegam. The Malegam Committee submitted its report on January 19, 2011 and based on the recommendations of the committee the government has introduced the Micro Finance Institutions (Development and Regulation) Bill, 2011. The object of the bill is “to provide a formal statutory framework for the promotion, development, regulation and orderly growth of the micro finance sector and thereby to facilitate universal access to integrated financial services for the unbanked population.”

Some of the salient features of the Bill are as follows:

-Establishing a Micro Finance Development Council which will advice and assist the government in framing policies for the sector. The bill also seeks to establish a State Advisory Council.

-The MFIs can only operate business after obtaining a certificate of registration from the Reserve Bank of India. The existing MFIs will also have to apply for the registration within three months from the commencement of the Act.

-Any MFI which becomes ‘systemically important’ will have to convert its institution into a Company registered under the Companies Act, 1956. An MFI can become ‘systemically important’ if it deploys a certain amount of funds for providing micro credit to a minimum number of clients. The exact figures relating to the amount and the clients are not specified in the bill and rightly so. The RBI has been delegated the power to frame rules in this regard.

-The Bill gives wide powers to the RBI. Some of the specific powers conferred on the RBI are (i) to formulate policies (ii) to prescribe minimum standards required to be followed by MFIs in relation to method of operation, recovery, management and governance (iii) calling for information and data from the MFIs, among others.

-Any restructuring of the MFIs will require the prior approval of the RBI.

-The Bill mandates the establishment of a Micro Finance Development Fund. The fund will be applied towards providing the MFIs with financial assistance.

-The Bill once it comes into force will override the provisions of all other existing laws. Further, the Bill provides that any MFI registered with the RBI under the provisions of this Act (now bill) will not be treated as a money lender for the purposes of any state enactment. In effect this implies quite clearly that the Andhra Pradesh Micro Finance Institutions (Regulations and Money Lending) Act, 2010 would not be applicable to the MFIs holding a certificate of registration under the provision of this Act/Bill.

The Bill is of immense socio economic importance. The views of the Industry and further analysis of the Bill is available on live mint and the Wall Street Journal.

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