Microfinance Institutions (Development and Regulation) Bill, 2012

There are four most important Micro Finance models prevalent in India as follows:

  • Model I – individuals or group borrowers are financed directly by banks without the intervention/facilitation of any Non-Government Organisation (NGO).
  • Model II – borrowers are financed directly with the facilitation extended by formal or informal agencies like Government, Commercial Banks and Micro-Finance Institutions (MFIs) like NGOs, Non Bank Financial Intermediaries and Co-operative Societies;
  • Model III – financing takes place through NGOs and MFIs as facilitators and financing agencies;
  • Model IV – is the Grameen Bank Model, similar to the model followed in Bangladesh.

Out of them, model II constitutes three-fourths of total micro-financing where activity/joint liability/Self-Help Groups are formed and nurtured by facilitating agencies and are linked directly with banks for the purpose of receiving credit.(source:arthapedia.in)

The Government has recently introduced the much-awaited legislation governing microfinance institutions (MFIs) in the Lok Sabha. The bill seeks to empower the central bank to regulate the sector and provide an overarching legislative framework for it. So far, MFI’s have been out of regulation, though in late 2010, RBI had issued regulations to govern MFIs operating as NBFCs based on the recommendations of an expert committee headed by Y.H. Malegam.

The MFI Bill 2012 seeks to regulate this sector in the following ways:

  1. Microfinance Institutions (Development and Regulation) Bill, 2012, will take MFIs outside the purview of state-level legislation, including the controversial Andhra Pradesh law that saw the asset base of the microfinance industry shrinking and led to a drastic increase in bad debts due to restrictions on collection practices.
  2. As per this bill, all MFIs will have to register themselves with the Reserve Bank of India (RBI). The central bank can specify lending rates and margins that can be charged by an MFI, the recovery methods to be followed, the processing fees, the tenure and ceiling of the loan. RBI will also specify a threshold on the assets deployed for classifying any institution as an MFI.
  3. The MFIs registered with RBI won’t be treated as moneylenders, thereby keeping them out of the purview of the Andhra Pradesh Micro Finance Institutions (Regulation of Money Lending) Act, 2010.
  4. The Bill proposes the setting up of a microfinance development council with members from various central government ministries, including finance and rural development, RBI, the Small Industries Development Bank of India, the National Bank for Agriculture and Rural Development, the National Housing Bank and another four independent members.
  5. The council will advise the central government on the formulation of policies for the sector and will have a non-government official with relevant banking experience as chairman.
  6. For greater involvement of the states, the Bill also proposes the setting up of state development councils with representatives from state governments.
  7. This council can report unfair recovery methods used by MFIs and also monitor over-indebtedness due to MFI lending practices. There will also be district microfinance committees to closely monitor MFI activities.
  8. The government has also retained the inclusion of thrift or collection of deposits in the definition of services that can be provided by the microfinance institutions despite objections from the Reserve Bank of India, which was concerned about the safety of depositors’ money.
  9. As per the legislation, RBI will constitute a microfinance development fund for funding MFIs, either through debt or equity participation and to fund research for development of the sector. The corpus of the fund will be partly funded by the central government.
  10. The Bill also proposes establishing credit information bureaus for the creation of a database of clients who avail of microfinance services from various agencies.

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