By G K Agrawal,

Microfinance Focus, July 30, 2011: THE MICRO FINANCE INSTITUTIONS (DEVELOPMENT AND REGULATION) BILL, 2011 (Bill) is the most timely initiative of the GOI -MOF and will be meeting the long outstanding demand of MFis and practitioners for a   formal statutory framework for its financial activities. The Bill is to provide access to financial services for the rural and urban poor and certain disadvantaged sections of the people by promoting the growth and development of micro finance institutions as extended arms of the banks and financial institutions and for the regulation of micro finance institutions. MFIs/other entities engaged in providing micro finance services both existing and new ones, except banks and coop. societies will be brought under the regulatory purview of the Reserve Bank of India. The Bill provides for a new category of MFIs viz., “Systemically important micro finance institution” deploying such amount of funds for providing micro credit to such minimum number of clients as may be specified by the Reserve Bank. The Bill provides for setting up of   Micro Finance Development Council, to advise the Central Govt., on formulation of policies, schemes and other measures required in the interest of orderly growth and development of the micro finance sector and micro finance institutions, to promote financial inclusion. The Bill also provides for setting of State Advisory Councils for Micro Finance at the State level. The Bill bestows wide ranging powers to the RBI   for registration, direction, regulating, inspection, fixing caps on margins and interest rates, setting repayment schedules, books of accounts, rating norms, capacity building, information system, etc. of MFIs. The Bill also provides for setting up of the Micro Finance Development Fund with RBI for receiving grants, donations and granting loans and other financial support for various purposes. The Bill provides for appointment of Micro Finance Ombudsmen for the purpose of redressal of grievances between clients of micro finance institutions and micro finance institutions with powers to issue directions to micro finance institutions.

The following comments /observations are made on various select provisions of the Bill, which may be taken into account by GoI MOF while finalizing the Bill.

Clause 2(f) of the Bill defines “micro finance institution” as an entity (irrespective of its organizational form), which provides micro finance services in the form and manner as may be prescribed but does not include among others banks and coop. societies.  Self Help Groups which are informal groups but constitute a significant portion of MFI lending and mf lending by cooperatives should also form part of  Micro finance institutions for the regulatory purposes.
Clause 2(g) of the Bill defines Micro Finance services. It should also stipulate a ceiling in financial terms both for individual and group micro finance services so that focus on micro finance services, mainly for poor, is not lost.

Clause 8(2) of the Bill providing for composition of State Advisory Councils for Micro Finance at the State level should also include a women representative on the pattern of composition of Micro Finance Development Council (clause 4(g))

Clause 26(1) of the Bill provides for   the Reserve Bank causing inspection to be made of books of account or any other record of any micro finance institution, by an inspecting authority approved by it. It is not clear whether such an inspecting authority will be within the ambit of the RBI or outside. 

Also, under Clause 38 (1) of the Bill, the RBI may, with the previous approval of the Central Government, delegate any of its powers conferred to it under the Act to the NABARD in respect of any micro finance institution or a class of micro finance institutions generally.
At present, the National Bank for Agriculture and Rural Development (NABARD) conducts statutory inspection of State Cooperative Banks, District Central Cooperative Banks, and Regional Rural Banks   on behalf of RBI under the Banking Regulation Act, 1949. Otherwise, also, NABARD is well conversant with the functioning of MFIs and their operations, as being pioneer of promoting Self Help Groups linked with banks and otherwise, which constitute a significant portion of MFI lending. If NABARD is envisaged to be designated as inspecting authority for MFIs, and/or delegated certain powers of RBI under the Act, it has to be ensured that its interests in promotion, development, capacity building, financial support by way of finance, refinance, bulk lending, equity support etc., to SHGs, NGOs and MFIs engaged in m f lending do not come in conflict with regulatory/inspection/delegated functions under the Act.  . Since RBI will be the policy making body for MFIs, it will be more appropriate if it conducts itself, in the initial years at least, inspection of MFIs and exercises powers under the Act, to get a pulse of MFI issues, problems, constraints and their practices especially in so far as they relate to poor to strike a balance between commercial and social lending compulsions of MFIs.

Clause 2(P) of the Bill provides for  “thrift” I.e.,  any money collected other than in the form of current account or demand deposits, by a micro finance institution from members of self-help groups or any other group of individuals by whatever name called, who are availing financial services provided by such micro finance institution.  Since MFIs will have their own limitations of expertise of managing such thrifts collected and as such thrifts will not be covered by the Deposit Insurance Corporation Act and by the statutory cash reserve/liquidity requirements, as applicable to banks, it may be advisable that such thrifts are collected as agents/Business Correspondents of banks and not otherwise.