Experts warn RBI may find too tough to regulate MFIs

Micro-finance companies have welcomed the new Microfinance Bill, as it says that the Reserve Bank of India (RBI), and not state governments, will be the regulator. But experts warn that the apex bank may find it too tough to regulate this sector, reports CNBC-TV18’s Gopika Gopakumar. The draft Microfinance Institutions Development Bill aims to bring all MFIs under the purview of the RBI, and asserts that the bill will override existing state laws. For MFIs who are about to lose all the money lent in Andhra Pradesh, this is a lifeline. However, several experts doubt the central bank’s ability to supervise hundreds of these tiny companies in far flung areas. Usha Thorat, Former Deputy Governor of RBI said, “It’s going to be a huge challenge because it relates to millions of borrowers for MFI, groups and purposes which loan you are giving, say, sewing machine loan and spent on education. So it’s not that easy as to how the money is mismatched and so ultimately it has to be innovatively made.” PS Reddy, principal secretary, Andhra Pradesh said, “Our understanding is that the existing RBI machinery or the proposed ombudsman may not be a solution and may not be adequate to look at ground level realities. I think that's the fact which we need to discuss further.” According to the new draft bill, microfinance is not money lending, and, therefore, not under the state governments' jurisdiction. For now, states like Andhra Pradesh are questioning the constitutional validity of this argument but legal experts are dismissing this contention. HP Ranina, member - central board of RBI said, “Even banks do money lending even non banking financial organizations do money lending but yet they are in the purview of RBI, who is the regulator of all banks and banks is necessarily which lends money to the outside world, the money lenders act which is covered by constitution part of state subject generally applies to un organized sector were money lending is done.” However, the RBI top brass is aware that state government opposition can pose problems. So, one can expect some changes to the bill before it becomes law.

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