The Microfinance Bill 2012: A Move towards Responsible Microfinance in India

I recently welcomed the news of a new national-level microfinance bill in India. I believe the Indian microfinance sector is witnessing a movement towards greater regulatory clarity following the turmoil of the Andhra Pradesh crisis. The Microfinance Institutions (Development and Regulation) Bill 2012 introduced in the Parliament on the 22nd of May comes with modifications to the earlier Bill introduced in 2007. The industry, too, has broadly welcomed the Bill as a much better version of the 2007 Bill, which lapsed on account of the dissolution of the Lok Sabha (the lower house of India’s Parliament).

The introduction of this Bill brings a much needed strengthening of the regulatory framework and consumer protection norms of the microfinance industry in India. Regulation of financial services is necessary to protect current and future clients, but it must also be undertaken with care in order to maintain access to those services. A controversial law passed in the wake of the Andhra Pradesh crisis, for example, saw the asset base of the microfinance industry shrink and led to a drastic increase in bad debts due to restrictions on collection practices. Such stress on MFIs has the potential to decrease their ability to offer loans and other financial services to those who need them.

This new Bill both seeks to protect consumers and recognizes the need to maintain access, stating clearly that its purpose is “facilitating access to credit, thrift and other microfinance services to the rural and urban poor and certain disadvantaged sections of the people and promoting financial inclusion.”i If approved in its entirety, the Bill will take MFIs outside the purview of state-level legislation, such as the Andhra Pradesh law mentioned above, and provide a clear regulatory framework that applies to the entire country. The Bill has to be passed by both houses of Parliament before it becomes law.

The broad features of the Bill include: 

  1. Defining microfinance broadly and beyond just lending, to include savings, insurance, money transfers, etc.
  2. Inclusion of Non-banking Financial Company (NBFC) MFIs in its purview, in addition to NGO-MFIs.
  3. Recognition of the Reserve Bank of India (RBI) as the sole regulator of NBFC MFIs and exclusion of MFIs from the purview of the Money Lender Act. The Bill seeks to empower the RBI to specify sector related benchmarks and performance standards pertaining to methods of operation, fair and reasonable methods of recovery of loans advanced by MFIs.
  4. Strengthening of client protection norms – including the establishment of advisory councils at the central, state and district levels and restrictions on pricing and profitability. The Bill provides for the constitution of the microfinance development council to advise the Central Government on formulation of policies, schemes and other measures required to be taken in the interest of orderly growth and development of microfinance institutions. It also provides for the establishment of State Micro Finance Councils in each state or for two or more states, considering the extent of microfinance activities in such states. This council would have to report to the Central Government on the implementation of the measures undertaken for the promotion and development of microfinance institutions.
  5. Establishment of a Microfinance Development Fund to enable lending, equity investment, capacity building and research.ii Under the proposal, the RBI will be empowered to set up this fund, which can be applied for providing loans, grants or seed capital as well as for training of personnel engaged in microfinance institution services.

This Bill has the potential to herald the next stage of microfinance growth in India. After witnessing a decade and a half of rapid expansion and subsequent overheating and politicization, I am hopeful that the new stage of development could be one of consolidation and qualitative improvements.

i The Micro Finance Institutions (Development andRegulation) Bill, 2012. 
ii Indian Microfinance Bill Series: Comments