RBI Likely to Outsource Regulation of Microfin Cos

 

May focus on framing regulation, leave supervision to other agencies

The Reserve Bank of India (RBI) may outsource the regulation of microfinance institutions (MFIs) as it lacks the ammunition to do it. India has a whopping 444 MFIs and their loans run into thousands of small borrowers, which is why RBI was earlier against taking up the task of regulating the sector before the MFI Bill proposed to vest the power with it. The banking regulator is now contemplating taking the support of chartered accountants and banks to regulate micro lenders once the MFI Bill becomes an Act. RBI is also thinking of building a self-regulating organisation (SRO) for the microfinance sector. RBI Deputy Governor KC Chakrabarty told ET while RBI will have the power to frame policies for the sector, supervision can be done by outside agencies.  “If you know that the police are behind you, you don’t commit misdeeds. It is not important who does the policing,” Chakrabarty said. “We will frame the regulation, the implementation part can be outsourced,” he added. Last week, the deputy governor went on record saying the central bank is not equipped to regulate the fledgling MFI sector. In the absence of a central regulator, the sector has been going through a prolonged patch of crisis since October last year, as banks had stopped lending to them following a decision by Andhra Pradesh to slap an ordinance on them restricting their activities. “We are not saying that we are capable of regulating MFIs as of now. But we have to get equipped. This job has to be done and somebody needs to do it,” he had said last week. The draft Micro Financial Sector (Development & Regulation) Bill, 2011, proposed to vest the power with RBI to regulate MFIs and frame policies for the sector. Bandhan Financial Services founder Chandra Shekhar Ghosh said: “We welcome RBI as a central regulator as dual regulation does not work well. How does the central bank carry out the task is the bank’s prerogative.” The Malegam Committee on MFIs has recognised the importance of an SRO for the sector. “We are happy that the regulator recognised the importance of an SRO,” said Mathew Titus, executive director of Sa-Dhan, the umbrella organisation for the 444 MFIs doing micro-lending business in the country. Sa-dhan has built a database on 170 organisations capturing seven years of their operation. “With this data, Sa-Dhan can be prepared as an effective monitoring agency. If we are able to build good analytical backbone, we will be able to spot trouble, if any,” Mathew said. Chakrabarty said RBI may engage chartered accountants to conduct audits of MFIs regularly. 

ET