After over two decades of impressive growth and increased recognition as a developmental tool designed to facilitate financial inclusion, microfinance sector in India was hit by the deepest crisis event ever. In October 2010, major crisis erupted in the state of Andhra Pradesh (AP) which was home to a quarter of the Indian microfinance industry. It triggered the collapse of the entire sector causing the growth rates for both loan portfolios and clients to drop as low as 17 percent from 95 and 57 percent in 2009. State government of AP promulgated the AP Microfinance Institutions (Regulation of Money Lending) Act 2010, effectively shutting down all microfinance operations in the state after a spate of 35 suicides committed in 45 days on account of usurious interest rates and coercive recovery techniques employed by the microfinance institutions (MFIs). The scale and density of microfinance operations in AP and the bursting of the massive debt bubble pointed out the deeper dysfunctions in the microfinance industry and precipitated the need for a comprehensive regulation and supervision of microfinance in India.
In general, microfinance regulation and supervision has been at the centre of intense policy debate and extensive research across the globe. In August 2010, the Basel Committee for Banking Supervision issued supervisory guidance for the application of its Core Principles to microfinance activities conducted by depository institutions in their jurisdictions. However, the need for regulation and supervision goes beyond deposit taking institutions, particularly in a country like ours where MFIs are not allowed to collect deposit and therefore, do not fit into the scope of supervisory framework. In response to the challenges facing the microfinance industry in India, the central government proposed The Micro Finance Institutions (Development and Regulation) Bill 2012, hoping to provide a statutory framework to regulate and develop this industry. The bill was introduced in the Lok Sabha in May, 2012 and was later referred to the Parliamentary Standing Committee on Finance that rejected the bill in February this year terming it as “sketchy with inadequate groundwork” and asked the government to bring forth a fresh legislation.
It is important to note that the microfinance bill in its present form would have failed to achieve its purpose of regulating and strengthening the microfinance sector in the country. The central government needs to rework the following provisions of the bill for it to be able to fulfill the social and developmental expectations:
The very fact that the Reserve Bank of India (RBI) was proposed as the regulator and supervisor of the entire microfinance sector raises questions on the capacity of the central bank to regulate and supervise vis-�-vis that of an independent authority such as a Microfinance Regulatory Authority. Organizational setup of the RBI is not suitable for regulating and supervising MFIs operating on small scale in remote areas. Even financial institutions like the National Bank for Agriculture and Rural Development (NABARD) and the Small Industries Development Bank of India (SIDBI) have expressed their desire to be a facilitator and not a regulator for microfinance stating their lack of wherewithal to undertake and manage this large and dispersed sector.
Former Minister of Rural Development, Mr Jairam Ramesh had criticized the bill as being “oriented to protect microfinance institutions, not their clients – the poor borrowers”. Ironically, the bill is silent on three critical borrower protection issues. Firstly, it does not address the issue of multiple lending by the MFIs and does not suggest any mechanism for monitoring multiple lending or over-indebtedness. Secondly, the bill fails to indicate effective steps for restraining MFIs from adopting coercive collection methods for recovery of dues. It is also silent on the field monitoring of operations / activities of MFIs. Thirdly, it fails to deal with the issue of multiple memberships restricting the members of self-help groups from gaining membership of multiple groups.
Standing Committee on Finance in their 84th Report pointed out that the microfinance bill defines the MFIs but omits the definition of “poor households”, “financial inclusion” and “microfinance” indicating a lack of focus on financial inclusion.
The proposed Ombudsman model of grievance redressal in microfinance sector loses its effectiveness in the light of the fact that most of the clients are poor, illiterate and placed in remote areas making it difficult for them to travel to lodge a complaint with the Ombudsman.
Proposal allowing MFIs to collect thrift has invited objections from various important committees (such as the Malegam Committee, Raghuram G. Rajan Committee and C. Rangarajan Committee) and the state governments alike. RBI has also opposed it by saying that deposits and thrift are essentially the same; and as a matter of public policy, RBI only permits the banks to accept public deposits.
Another contentious provision pertains to allowing the MFIs to provide pension and insurance services. Such services fall under the regulatory purview of the Insurance Development and Regulatory Authority (IRDA) and Pension Fund Regulatory and Development Authority (PFRDA). Allowing MFIs to enter this domain could lead to duplicity of regulation unless regulation of these services by the MFIs is left exclusively to the respective regulatory authorities.
While holding wider consultations with the state governments and the RBI, the Ministry of Finance has ignored the civil society and other stakeholders belonging to the vulnerable section of the society while drafting the bill and has therefore, failed to incorporate their concerns in the bill.
In view of these omissions and commissions, the bill has to undergo extensive review and revision before it sees the light of day. Since the bill was part of the Congress�s plan for financial sector legislative reform, all eyes are now set on the new government. Till the time new government is able to generate enough political will and consensus needed to design a new and effective regulatory and supervisory framework for Indian microfinance, the fate of microfinance regulation hangs in the balance.