Bill to cap interest rate on MFI lending tabled

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SummaryThe government on Tuesday introduced a Bill in the Lok Sabha to empower the Reserve Bank to regulate the micro finance industry and fix interest rates ceiling on loans to be provided by lenders.

The government on Tuesday introduced a Bill in the Lok Sabha to empower the Reserve Bank to regulate the micro finance industry and fix interest rates ceiling on loans to be provided by lenders.

The Micro Finance Institutions (Development and Regulation) Bill, 2012, which was introduced in the House by finance minister Pranab Mukherjee, confers power upon the RBI to fix the maximum interest rates that MFIs can charge and also decide on the fair and reasonable method of loan recovery.

It provides for regulation of activities like micro credit, thrift, pension or insurance services and remittance of funds by micro finance institutions (MFIs).

The Bill, which was drafted in the backdrop of problems faced by borrowers of MFIs in Andhra Pradesh and other states, seeks for compulsory registration of MFIs with the RBI. They should have a minimum net-owned funds of R5 lakh.

“Since these institutions lack a formal statutory framework for providing such micro finance services, it is expedient to provide a statutory framework for the promotion, development, regulation and orderly growth for such MFIs and thereby facilitate financial inclusion,” said the Statement of Objects and Reasons of the Bill.

As per the provisions of the Bill, the RBI can inspect the accounts of the micro lenders and impose monetary penalty for non-compliance of the provisions of the proposed legislation. Besides, MFIs would need prior approval of the RBI to close or restructure their activities. Violation of the provisions of the Bill will attract penalty, which will include two years imprisonment and a fine up to R5 lakh.

The Bill would confer power upon the Reserve Bank of India (RBI) to “specify the maximum limit of the margin and annual percentage rate which can be charged by any MFI and performance standards pertaining to methods of operation, fair and reasonable methods of recovery of loan advanced by the MFIs,” it said.

Besides, RBI would make provision for constitution of the Micro Finance Development Fund which would be utilised for the purpose of providing loans and seed capital to MFIs and set up of grievance redressal mechanism.

The Bill further provides for constitution of Micro Finance Development Council to advise the Central government on formulation of policies, schemes. Its members would include representatives from the government, RBI, Sidbi and National Housing Bank.

It also makes a case for establishment of ‘State Micro Finance Council’ for considering the extent of MFI activities in the states.

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