: Opinion: Regulating MFI industry #IndiaNEWS #News By Seela Subba Rao Microfinance institutions (MFIs) have evolved into a vibrant industry exhibiting a variety of business models. In India, they

Opinion: Regulating MFI industry #IndiaNEWS #News
By Seela Subba Rao
Microfinance institutions (MFIs) have evolved into a vibrant industry exhibiting a variety of business models. In India, they exist as NGOs (registered as societies or trusts), Section 25 companies, NBFC-MFIs and other NBFCs. Commercial banks, regional rural banks, cooperative banks and other large lenders have played an important role in financing MFIs. Banks have also leveraged the SHGs channel to provide direct credit to borrowers of groups.
As per a Sa-Dhan report, the microfinance industry disbursed Rs 2,54,754 crore and Rs 2,00,081 crore during 2019-20 and 2020-21 respectively. Though banks and NBFC-MFIs, which cover a major part of loan disbursal by the microfinance channel, are regulated by the Reserve Bank of India (RBI), other NBFCs such as societies, trusts and Section 25 companies fall outside the purview of the RBI. Regulation serves to ensure the financial soundness of an MFI and reinforces public trust in these institutions.
MFI Bill
The MFI (Development and Regulation) Bill, 2012, was a major step taken by the Central government in the microfinance sector. It was introduced in the Lok Sabha on 22 May 2012 and referred to the Standing Committee on Finance on 28 May 2012. The committee under the chairmanship of Yashwant Sinha submitted its report on 13 February 2014.
The Bill seeks to provide a statutory framework to regulate and develop the microfinance industry and also provides for setting up a Microfinance Development Fund managed by the RBI. The proceeds from the fund can be used for disbursal of loans, refinance or investment in MFIs. It has a provision to create a grievance redressal system and provides safeguards against excessive interest rates. It allows RBI to set upper limits on lending rates and margins and also allows MFIs to take up pension and insurance services.
The Bill proposes the setting up of a microfinance development council with members from Central government ministries, RBI, Sidbi, Nabard, NHB etc. For greater involvement of the States, the Bill proposes the setting up of State Development councils with representatives from the State government. District Microfinance Committees will also be set up to closely monitor the MFIs.
Schools of Thought
One school of thought advocates that there is a need for a statutory body for the regulation and supervision of entities involved in the microfinance business. Self-regulation has never worked in microfinance as experience shows such as Kolar 2009 and AP 2010 crises. The role of self-regulatory organisations such as MFIN and Sa-Dhan is noteworthy but their functions are advisory and not statutory. The system of an ombudsman may also not be effective since most MFI borrowers are poor and illiterate.

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