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Microfinance bill puts Nabard in regulatory seat
A new microfinance law is underway, with the Union Cabinet on Friday (23rd Feb. 2007) clearing the bill despite an opposition from some official quarters citing lacunae in it. The bill will be tabled in the current session of Parliament.

The bill for microfinance will empower the National Bank for Rural and Agricultural Development (Nabard) to regulate the microfinance sector in India. While microfinance institutions, operating in the form of trusts, societies and co-operatives will now come under Nabard, non-bank finance companies have been kept out of the ambit. Significantly, the minimum capital required has been fixed at as low as Rs 1 lakh.

According to the bill, MFIs operating as co-operatives, trusts and societies need to register under the Microfinance Development Council (MDC), which will be a Nabard-promoted entity. It will permit MFIs to raise savings, but they will have to take specific approvals from the council after registration to be able to raise savings. The minimum capital requirement has been capped at Rs 1 lakh, with promoters of such MFIs having to contribute, at least, 50% of this amount.

Other provisions include the appointment of a microfinance
ombudsman. Few Nabard officials will be designated to cater to the redressal of grievances arising from the participants of the sector. This apart, it is likely that the microfinance development fund, announced in the last budget, may now be made the centralised recipient of the grants received by MFIs, mainly from overseas institutions. Senior officials from the microfinance industry are disappointed at the provisions of the bill. "Firstly, the bill destroys the entire purpose for which it was originally proposed. Nabard being a regulator for the sector does not seem ethical because it is the largest lender to self-help groups (SHGs). Secondly, the minimum capital requirement of Rs 1 lakh is miniscule, considering the total size of the industry, pegged to be around Rs 1 lakh crore," said a senior member of the MFI sector.

The Reserve Bank of India has already voiced its concern on the lack of due-diligence by banks while lending to microfinance
institutions. Now, private sector banks have to largely depend upon forces such as MFIs operating as trusts, societies, co-operatives etc to carry out micro-lending, due to the lack of an extensive branch network in rural areas. Hence, the main rationale behind proposing the bill was to legitimise these operations, which involve lending to unorganised entities.

Co-operatives are now opposing the move because the bill now brings them under a dual set of regulators - the Cooperatives Act and Nabard. In addition, they can accept savings in their existing form also. Allowing societies and trusts, the wherewithal to raise savings, given the extremely low capital adequacy requirements could also prove to be detrimental, pointed out officials. Hence, the Co-operatives Development Foundation plans to take up this issue with the members of the Parliamentary Standing Committee on Finance, when the bill is moved to Parliament.

Financially-sound MFIs operating as NBFCs cannot raise savings as they fall under the RBI's purview. Thus, while the bill has provisions which overtly favour one set of players, the larger set of players who comprise nearly two-thirds of the industry are not at all covered by the bill. Microfinance or micro credit is typically very small sized loans of Rs 5,000 to Rs 10,000 extended to an individual or a group of individuals known as self help groups. Borrowers are generally from the weaker sections of the society. Most of the lending is done in rural areas, but of late some are also lending in urban areas.
Source :
Microfinance Discussion Forum
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