Govt asks states to convey views on new MFI law

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New Delhi | Published: November 7, 2014 3:58 AM

Narendra Modi government has asked states to convey their views...

With an overwhelming majority of the micro-finance institutions (MFIs) demanding shelving of a plan to have a new law to regulate the sector, the Narendra Modi government has asked states to convey their views to it with no further delay.

The states’ views are crucial for a final decision on whether to re-introduce the Micro Finance Institutions (Development and Regulation) Bill in Parliament.

The Bill, introduced in Lok Sabha by the  UPA-II government and on which a parliamentary standing committee on finance gave its views, lapsed as that government could not get it passed during its term. A similar Bill lapsed in 2009 due to the expiry of the 14th Lok Sabha.

The Modi government, sources said, is ascertaining whether a uniform law with a separate regulator is required for the MFI sector. It is also weighing the option of bringing a new Bill that doesn’t vest comprehensive powers with the Centre, but allows the Reserve Bank of India (RBI) to retain its powers to regulate non-banking finance companies that perform as MFIs and let states regulate small MFIs.

The UPA-II government’s now-lapsed  Bill had envisaged the RBI as the sole regulator for MFIs and provided for safeguards against MFIs charging usurious rates. The lapse of the Bill meant that small MFIs, especially those not registered as NBFCs and, therefore, not under the RBI gaze, will struggle to get funding and run their businesses.

Sources said the Centre’s final view (on whether to revive the Bill or scrap it), which will be formed after taking inputs from the states, will be conveyed to the Parliamentary Standing Committee on Finance. The panel had asked the government to consult the states and stakeholders before coming up with a view on the future of the Bill.

Alok Prasad, CEO of MFIN (an RBI-recognised self-regulatory organisation of NBFC-MFIs and representing around 93% of the MFI sector), said MFIN has informed the government that the issue of a new Bill has become irrelevant as the balance sheet of small NGO MFIs are shrinking and is only around R3,000-4,000 crore. He added that by the end of this fiscal their share will be down from 7% to around 5% of the sector.

The larger NBFC-MFIs, with a total balance sheet size of R30,000 crore, have been regulated by the RBI from December 2011 onwards, and now want to graduate to small banks, Prasad said, adding that MFIN has responded positively to the RBI draft guidelines on small banks.

However, Mathew Titus, former executive director of Sa-Dhan, which is a common platform for MFIs and MFI practitioners, said R4,000 crore worth balance sheet of small MFIs can still cause systemic problems and therefore discussions are needed on whether there is a need for an uniform supervisory mechanism or whether the Bill should delegate such powers to states or alternative institutions such as Sa-Dhan.

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