Microfinance Focus, November 15, 2011: In its report ‘Trend and Progress of Banking in India 2010-2011’, The Reserve Bank of India (RBI) states that if State Governments start enacting their own legislations to regulate microfinance institutions (MFIs) including the ones regulated by the Reserve Bank, there will be plurality of regulation leaving scope for regulatory arbitrage.

The responsibility for regulating NBFCs has been given to the Reserve Bank, thus, empowering it to regulate the NBFC- MFIs. If other States also come out with legislation similar to the Andhra Pradesh Government, it will raise concerns not only about multiple regulations but also about client protection, as borrowers would then be subject to different regulations.

If there are separate regulations governing NBFC-MFIs in individual states, the task of regulation by the Reserve Bank of MFIs operating in more than one State will become even more difficult. This may also impact the business of MFIs, which are operational in more than one State, it says.

According to the report, in 2010-11, 461 MFIs were provided loans by banks to the tune of Rs. 7,605 crore. The growth under the MFI-linkage programme in terms of both number and amount of loans was much higher than the corresponding growth under the SHG-Bank Linkage Programme in 2010-11.