Finmin wants RBI as sole regulator for micro-finance institutions (MFIs)

Written by Arun S | New Delhi | Updated: Nov 7 2013, 20:23pm hrs
The finance ministry is in favour of the RBI becoming the sole regulator for micro-finance institutions (MFI) and this view would be conveyed to the parliamentary panel vetting the relevant Bill on Friday, official sources told FE.

The ministry is also likely to inform the panel that the Centre is ready to augment the RBI's capacity to effectively regulate the sector. The government's plan is to ensure the passage of the Micro Finance Institutions (Development and Regulation) Bill, 2012, in the winter session of Parliament.

The central bank, in its deposition before the Parliamentary Standing Committee on Finance headed by senior BJP leader Yashwant Sinha had said that since there are numerous small MFIs operating in remote corners of the country, it is difficult to effectively regulate them given the shortcomings in the RBI's current reach.

The RBI also said that it feels that the states are best suited to regulate these small entities that are not registered as companies.

However, the finance ministry is of the view that the lack of reach in remote areas is not a handicap given the spread of internet.

"We can look at the RBI's wish-list and help in capacity augmentation. But that does not mean that allocation of the function of regulation should be conditional on that wish-list. MFIs are the smallest and weakest link in the chain of financial services and it is not fair to ignore the weakest link by saying one does not have the capacity or reach," a finance ministry official said.

He said the RBI already has a pan-India presence, around 18,000 employees and the requisite expertise to effectively regulate the sector. The official added that the plan was to eliminate the multiplicity of regulators and have a uniform law.

The ministry doesn't see any legal hurdle. "States run into problems of partial regulation of the sector and only a uniform central law can manage it," another official said. The RBI had expressed doubts before the panel on whether Parliament can enact a central law when the Constitution empowers the states to frame laws to regulate locally based small entities that are not companies. Among other things, the Bill also seeks to empower the RBI for taking decisions on fixing a ceiling on lending rates and margins of MFIs. RBI currently regulates NBFC MFIs, 40 of which account for 80% of the MFI business.

Meanwhile, Nabard and Sidbi had also told the panel that they too favoured the RBI as the sole regulator for the sector. The panel will soon seek the views of the states on the Bill. Following a crisis that hit the sector, Andhra Pradesh had enacted a law to regulate the MFIs based in its jurisdiction.

Mathew Titus, executive director of Sa-Dhan a common platform for MFIs and MFI practitioners said: "One option is to go for a graded regulation, where the RBI can regulate the big MFIs and delegate the responsibility of regulating the smaller entities to organisations like ours."