In what was termed as a ‘truly national and sectoral bill’ by the Indian

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micro-finance industry, the Union ministry of finance has readied the Micro Finance Institutions (Development and Regulation) Bill, 2011, to be placed before Parliament for approval.

The Rs 30,000 crore micro-finance industry, which was crippled badly after the Andhra Pradesh government pro­mulgated an Act to rein in MFIs, will now be regulated by the Reserve Bank of India, overriding the AP Act.

“However, the proposed Act also provides adequate role to the state governments to play both in the development of micro-finance sector and promotion of financial inclusion,” said Vijay Mahajan, president of the Micro-finance Institutions Network (MFIN), a lobby body of MFIs.

According to the proposed Act, the union government will constitute the micro-finance development council at the national level and the states will establish state advisory councils for micro-finance at the state level considering the extent of micro-finance activities in the states.

The proposed Act ensures a fine balance between ensuring affordable finances to the poor borrowers and a sustainable development of micro-finance sector, he said.

Mahajan, who was part of the committee that drafted the bill, said, “The proposed Act effectively addresses the concerns of all the stakeholders — the borrowers, MFIs and the regulators. The Act confers all the regulatory powers to RBI, prescribes self regulatory body for the micro-finance sector with adequate powers to take disciplinary action and ombudsman system as well.”

The state governments that were feeling left out so far in regulating the microfinance sector can now play an effective role in development of the sector and ensure financial inclusion while protecting the interest of the poor borrowers.

The Act, which enables RBI to effectively prevent multiple and excessive lending by the MFIs, also brings into its purview not just the MFIs registered as non banking financial companies (NBFCs) but also those acting as MFI non-governmental organisations.

"The draft bill describes microfinance entities as an extended arm of banks and financial institutions, by manner of which it could no longer be covered by the state government. If the bill becomes a law, major concerns of the industry will be addressed,” said Alok Prasad, the CEO, Microfinance Institutions network, a self-regulatory body of a clutch of major MFIs. “It is striking a good balance between the need for single regulator and the concern for the state. The key theme of this bill is client protection.”

Industry experts also observe that the draft bill provides much-needed clarity to microfinance companies as well as funding agencies including commercial banks and private equity players.

“The regulatory issue is getting adequately addressed. The draft bill suggests for a stronger emergence of statutory framework which would probably eliminate the state government’s role in regulating MFIs,” said Padmaja Reddy, managing director, Spandana Sphoorthy. “It goes to show that the centre has recognised the role of MFIs in addressing financial needs of the downtrodden and underprivileged sections of the society.”

India’s largest and only listed MFI SKS Microfinance views the bill as a boost for the industry. Dilli Raj, SKS’ chief financial officer, said, “This draft bill adds to the clarity of regulatory issues which were earlier addressed by the Malegam committee report and then by the RBI notifying these recommendations. We are already regulated by the RBI on the functional side and if the bill is enacted it would just add more clarity.”