Microfinance to get a regulator in Nabard

A worried government has put on fast track the proposed bill to regulate micro-lenders, as it seeks to ensure that over-regulation by states does not kill the sector that is envisaged to play a big role in furthering financial inclusion. The finance ministry could move a bill in the winter session of Parliament that will make Nabard responsible for regulation of all non-profit microfinance institutions structured as trusts, cooperatives, or mutual benefit societies.

At present, micro-lenders follow the relevant sector law, depending on the way they are structured. The new law will treat microfinance as a separate business and will also consider bringing nonbanking finance companies in the microfinance sector under the ambit of the legislation. The decision to fast-track the bill follows the October 15 ordinance, or emergency law, issued by Andhra Pradesh that imposed severe restrictions and debt restructuring obligation on lenders following a spate of suicides that were blamed on coercion by microlenders to recover their dues.

As many as 15 states already have laws on money lenders in place under which they attempt to regulate the high interest rates and usurious practices followed by micro-lenders. The state governments say although the RBI protects the interests of the depositors, there is no framework to safeguard the interests of the borrower who are at times charged interest rates as high as 30%. The finance ministry wants to prepare a comprehensive law after discussing the issue with the regulators.

The Micro Financial Sector (Development and Regulation) bill was first introduced in Parliament in 2007 and referred to the standing committee on finance. However, the bill subsequently lapsed due to dissolution of the Lok Sabha and has been in the works since then as the government decided to again hold consultations with the stakeholders.

The new draft of the bill defines the role of the regulator more explicitly. It has a provision for registration of microfinance organisations collecting thrift from individual members of self-help groups or through a group mechanism. The bill provides for creation of a reserve fund that would be 15% of a microfinance institution’s net profit or surplus. The bill will also empower Nabard to appoint microfinance ombudsmen for settlement of disputes.