Microfinance Focus, July 7, 2011: According to the draft of Microfinance Bill 2011 issued by Government on Wednesday, the Reserve Bank of India will be regulating the Indian microfinance sector. A  Micro Finance Development Council will be set up to advise the Central Government, on formulation of policies, schemes and other measures required for orderly growth and development of the sector.

The draft says that the Central Government may establish State Advisory Councils for Micro Finance at the State level and considering the extent of micro finance activities in the States, such Advisory Councils may be set up with jurisdiction over more than one State.

Under the new bill, microfinance institutions, including Non-Banking Finance Companies are required to register themselves with RBI to commence microfinance operations.

The bill requires microfinance institutions to create a reserve fund and transfer a percentage, of its net profit or surplus realized by providing microfinance services every year as disclosed in the profit and loss account or income and expenditure account before any dividend is declared or surplus is utilized for any other purpose.

The Reserve Bank of India will also have the power to intervene in matters related to income recognition, accounting standards, provisions for bad and doubtful debts, capital adequacy based on risk weights for assets and credit conversion factors for off-balance-sheet items and deployment of funds by micro finance institutions.

RBI will constitute a fund to be called the Micro Finance Development Fund for issuing grants and making equity investments in microfinance institutions.

The bill further proposes appointing Microfinance Ombudsmen for the purpose of redressal of grievances between clients of micro finance institutions.