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RBI, the national regulator to control Microfinance Institutions


RBI, the national regulator to control MFIs
Government finally came up with conclusion by proposing a regulatory framework for the microfinance industry. Microfinance Institutions (MFIs) which gives small loans to poor people will come under the ambit of Reserve Bank of India.

The draft of 'The Micro Finance Institutions Bill' released by Finance Ministry on Wednesday entrusts more powers in the hands of RBI. Now, RBI will be the whole and sole regulator of the sector and can formulate related policies. The bill offers more clarity to the future of India's Rs 20,000 crore sector.


RBI will have powers to determine margins, interest rates, tenure of loans, periodicity of repayment schedules, processing fees, life insurance premium that a micro-finance institution charges. It can also prescribe governance norms, recovery methods, methods of operation and will also be allowed to facilitate credit rating.

The MFI sector has been facing upheavals since October of last year when Andhra Pradesh (AP), the biggest state for microfinance activities, decided to regulate the sector following reports of borrower suicides because of coercive recovery by lenders.

Every MFI in the country will have to register with the RBI within three months of the commencement of the Act, which will allow for better regulation. And, MFIs with net owned funds of less than Rs 5 lakh wouldn't be allowed to register.

The Bill said that every MFI need to set up a reserve fund and transfer a part of it annual profit to refinance other micro-finance companies. The percentage will be prescribed by RBI later.

Like banks, MFIs will also be required to maintain the percentage of margin from time to time, depending on the size of their operations and other relevant parameters. RBI will determine the percentage of margin at a later stage.


The Bill said MFIs would not be allowed to restructure their business without prior approval of RBI.

The draft Bill also proposes the setting up of a Microfinance Development Council, which will advise the government on policies and programmes required for the development of the sector.

The members of the council will represent the industry, the government, RBI, the National Housing Bank, the National Bank for Agriculture and Rural Development (Nabard) and the Small Industries Development Bank of India.

The council will create a database of clients who avail facilities of microfinance services from various agencies for better regulation.

India"s largest and only listed MFI SKS Microfinance views the bill as a huge positive for the sector and the role of the RBI as a national regulator is a good move. Dilli Raj, SKS" chief financial officer, said, “This draft bill adds to the clarity of regulatory issues which were earlier addressed by the Malegam committee report and then by the RBI notifying these recommendations. We are already regulated by the RBI on the functional side and if the bill is enacted it would just add more clarity."

When stock market opened, SKS Microfinance slipped by 7% during the initial trade and then it bounced back by 16%.

OneIndia Money

Read more about: rbi microfinance government
Story first published: Thursday, July 7, 2011, 12:03 [IST]
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