Regulating microfinance

If the Bill hopes to create an enabling environment for the microfinance sector, involving too many agencies may be counter-productive. If there is one area where the Government is acting with consistency, if not speed, it is in the microfinance sector that has, for the past year or more, taken a severe beating, especially in Andhra Pradesh, which accounts for almost 30 per cent of the total business. It was the State government's legislation against private MFI companies that exposed just how much the sector had grown without consistent oversight enforced by Central legislation. Private companies, once touted as the model for microfinance, and trudging a middle course between the Bangladesh Grameen Bank and commercial banks, were almost put out of business after the Andhra Pradesh government passed the MFI Act.  Now the Finance Ministry means to empower the RBI to regulate and fix what it calls the maximum annual percentage rate to be charged by any MFI. It was the interest rate charged by the private MFIs that had drawn the ire of the Andhra Pradesh Government. The private companies had countered that they did not charge exorbitant rates but what had added to the burden of the actual rate were other charges loaded on to the basic rate. The draft ‘Micro Finance Institutions (Development and Regulation) Bill, 2011' has taken this issue into account by defining the ‘annual percentage rate' to include interest, processing fees, service charges and any other charges or fees that MFI clients have to pay. Just to make sure that these charges are not excessive, the RBI will stipulate that the rates operate within the ‘percentage of margin' to be decided by the apex bank. The Bill attempts to create an overarching structure that would include Nabard, the agency that currently oversees the microfinance sector. Nabard was also a player through self-help groups, alongside private firms that it also refinanced. It could, therefore, oversee private firms only to a certain extent; once the latter began to source funds from equity they became answerable to their shareholders, and were thus obligated to maximise earnings. So the Bill proposes an umbrella-type structure with the RBI as regulator, which will delegate some powers to Nabard. The Bill also proposes a ‘ Micro-Finance Development Council' to frame policies, schemes and other measures for orderly growth of the sector. Questions arise at this point. What will the council do that the RBI cannot, with its vast experience and expertise? If the idea is to create an enabling environment for the troubled sector, loading on more agencies than may be required may have just the opposite effect.

Business Line