New Bill to cover all MFIs

The Micro Finance (Development and Regulation) Bill proposes to cover all types of microfinance institutions.

The Bill's 2007 version covered only MFIs not regulated by the Reserve Bank of India.

As a result, banks and a few categories of non-banking finance companies were outside its purview.

The Bill is likely to be tabled in the monsoon session of Parliament.

The players in the sector comprise Self-Help Group-Bank linkages, which account for about 58 per cent loans, followed by NBFCs (34 per cent) and others such as trusts and societies (8 per cent of the total portfolio).

Banks and NBFCs are regulated by RBI.

There is, however, no separate category for NBFCs operating in the microfinance sector.

An RBI committee under Y H Malegam that was set up to suggest microfinance reforms had said the Bill should apply to only MFIs not covered by RBI.

"All stakeholders, including the industry and banks, feel there should be a Bill to regulate all MFIs. The new Bill will cover all kinds of MFIs, including NBFCs, non-NBFCs, trusts and societies," a finance ministry official told Business Standard.

The MFIs could be regulated by the National Bank for Agriculture and Rural Development, or RBI, or both, said

the official.

The Bill may also restrict MFIs from taking deposits.

The earlier Bill had a provision for deposit-taking NBFCs.

The Malegam committee has also expressed concern over MFIs collecting deposits.

The finance ministry is also debating whether an interest rate cap should be provided in the law itself or should the regulator be empowered to specify interest rate limits from time to time.

The Bill, officials say, may either cap the rate on individual loans or limit the difference between the amount charged to the borrower and the cost of funds to MFIs.

The official said the Bill would be in harmony with RBI's regulation for NBFCs.

He added the final call on these issues would be taken after receiving RBI's comments on the Malegam panel report.

The committee has recommended an average margin cap of 10 per cent for MFIs with a loan portfolio of Rs 100 crore (Rs 1 billion) and of 12 per cent for smaller MFIs, besides a cap of 24 per cent on individual loan rates.

Most MFIs are at present charging over 24 per cent.