Govt plans bill to regulate micro finance firms

 “The government is considering to introduce a necessary legislation to regulate the functioning of MFIs keeping the legitimate interests of all stake holders,” Financial Sector Secretary in Ministry of Finance, Shashikant Sharma indicated while addressing a national conference on microfinance organised by Ficci here.

Pointing out that microfinance is an important plank in the government’s agenda for financial inclusion, he said “the sudden and rapid growth of MFIs has given rise to lending malpractices by some MFIs.”

“A strong and effective regulation of the sector is therefore imperative to put an end to undesirable practices and put the sector on the path of providing inclusive growth,” Sharma said.

The proposed legislation to regulate the functioning of MFIs would incorporate recommendations made by the Sub Committee of the Central Board of Directors of the RBI.

In the wake of growing criticism over lending malpractices by some MFIs like charging of high interest rates, coercive recovery processes, multiple lending practices, the RBI set up a high level committee to study the issues and concerns in the microfinance sector including ways and means of making interest rates charged by them reasonable.

The RBI’s Malegam Committee on microfinance in its report released in January this year has recommended creation of a separate category for Non-Banking Financial Companies (NBFCs) operating in the microfinance sector.

Such NBFCs could be designated as NBFC-MFI. The Committee has noted that “The future cannot be left entirely to the stating of good intentions. It, therefore, calls for strong regulation.”

It further said “we believe that if the recommendations made by us are implemented and if MFIs honour the commitments they have proposed in the agenda of the industry associations and if these efforts are accompanied by adequate and effective regulation, a new dawn will emerge for the microfinance sector and the need for state intervention will no longer exist.”

In the wake of reported harassment of small time consumers and farmers, who borrowed from MFIs, the Andhra Pradesh government came out with an ordinance making registration of MFIs with the state government compulsory.