Cabinet approves Micro Financial Sector (Development and Regulation) Bill, 2011

The Union Cabinet cleared the Micro Financial Sector (Development and Regulation) Bill, 2011, which will bring the microfinance industry under the regulatory ambit of RBI.

As per the Bill all microfinance institution (MFIs) will now have to be registered with the RBI, which will decide the interest rate that MFIs can charge. Also it would be mandatory for micro finance institutions (MFI) to be registered with the Reserve Bank and have a minimum net-owned funds of Rs 5 lakh. A Micro-Finance Development Council will be set up to advise the government on formulation of policies, schemes and other measures required in the interest of orderly growth and development of the sector with a view to promote financial inclusion. The bill has gone soft on the issue of interest rates charged by the MFIs though the MFI sceptics were expecting the capping of the rates.

The Bill will be now sent to Parliament for consideration.

Why a need for this Bill?

The Bill was drafted in the backdrop of issues faced by the microfinance borrowers in Andhra Pradesh. Micro-lenders have been accused of aggressive lending and recovery practices and high interest rates, which attracted calls for regulation.

What is Microfinance?

Micro finance services” means one or more of the following financial services involving small

  1. Amounts to individuals or groups:
  2. Providing micro credit;
  3. Collection of thrift;
  4. Remittance of funds;
  5. Providing pension or insurance services;
  6. Any other services as may be specified.

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