The Ministry of Finance has invited public comment on a proposed law to regulate microfinance institutions in India. The draft bill charges the Reserve Bank of India (RBI) with a duty to promote and ensure orderly growth of the microfinance sector. The bill contains a number of welcome provisions in this regard—at least, in three key areas.
First, on regulating the sector: the bill will allow the RBI to supervise and regulate the financial health of the sector as a whole and the financial health of different classes of microfinance institutions. The RBI will be able to do this through rules that are similar to those applied to regulate the financial health of banking and non-banking financial institutions today, e.g., capital adequacy rules, asset allocation rules, provisioning requirements and reserve requirements.
Second, on protecting customers: if the bill becomes law, the RBI will be able to protect individual customers from the various abusive practices that have plagued this industry in the past. To this end, the bill allows the RBI to prescribe maximum lending rates and permissible margins for institutions, and it also allows the RBI to penalize non-compliance.
Third, on regulating individual microfinance institutions: the bill will also allow the RBI to supervise individual microfinance institutions through specific registration and regular reporting requirements. More importantly, if needed, the RBI will even be able to direct special audits of these institutions.
A law along these lines is long overdue. Enacting a national law will prevent a fragmented state-wise regulation of the sector. The bill's approach of placing supervision and regulation in the hands of the RBI is sensible, since the RBI is without doubt the agency that is best placed to address this issue. One hopes the bill will be enacted into law soon.