Nabard offers to play regulator for Microfinance

By siliconindia   |   Monday, 25 October 2010, 02:48 Hrs
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New Delhi: The finance ministry could move a bill in the winter session of Parliament that will make Nabard responsible for regulation of all non-profit microfinance reports Deepshikha Sikarwar of Economic Times. Nabard will be responsible for regulation of all non-profit microfinance institutions such as trusts, cooperatives, or mutual benefit societies. Finance Minister Pranab Mukherjee has put the bill on priority list for winter session." At present, micro-lenders follow the relevant sector law, depending on the way they are structured. The new law will treat microfinance as a separate business and will also consider bringing non-banking finance companies in the microfinance sector under the ambit of the legislation. The decision to fast-track the bill follows the October 15 ordinance, or emergency law, issued by Andhra Pradesh that imposed severe restrictions and debt restructuring obligation on lenders following a spate of suicides that were blamed on coercion by micro-lenders to recover their dues. The sudden sacking of Suresh Gurumani as MD & CEO of the recently listed SKS Microfinance on October 4 by the company's board has also drawn attention to the industry.As many as 15 states already have laws on money lenders in place under which they attempt to regulate the high interest rates and usurious practices followed by micro-lenders. MFIs may get access to retail deposits.The state governments say although the RBI protects the interests of the depositors, there is no framework to safeguard the interests of the borrower who are at times charged interest rates as high as 30 percent. The finance ministry wants to prepare a comprehensive law after discussing the issue with the regulators. Industry experts agreed that there is a need for some form of regulation. "The activities have to be supervised," said Mathew Titus, executive director of Sa-dhan, an association of microfinance firms. "There is no framework for customer protection at present," he said. Microfinance Institutions Network (MFIN), the industry body, had challenged the validity of the Andhra ordinance in the state high court, which allowed them to continue their business while they register themselves with the government. The court said the interest charged could not be more than the principal and that coercion cannot be used in recovery. Even the finance ministry is keen to ensure that from an almost free run, the regulation does not swing to the other extreme and kill the industry that is still expected to play a big role in alleviating poverty by furthering financial inclusion. Therefore, while regulations are most likely to be tightened, they may also give microfinance institutions access to retail deposits that will allow them to raise cheaper funds and lend at lower interest rates.The finance companies may also have to create a microfinance business distinct from their other business, such as car/truck loans, and asked to follow the new regulation. Andhra Pradesh Chief Minister, K Rosaiah has written to the Union government asking it to bring NBFC-MFIs under the ambit of the new bill. The governments of Gujarat and Kerala have attempted to put curbs on MFIs under their money-lending Acts and look for greater clarity on the regulatory framework of such institutions. The state governments are not equipped to handle supervision and a sector supervisor is the need of the hour, said Mr Titus.