Microfinance industry to be regulated by RBI

As per the draft of Microfinance Bill 2011 issued by Government on July 06, the Reserve bank of India (RBI) will be regulating the Indian microfinance sector. According to the draft bill a Micro Finance Development Council would be set up to advice Central Government on formulation of policies, schemes and other measures required for orderly growth and development of the sector. The Central Bank will constitute a fund to be called the Micro Finance Development Fund for issuing grants and making equity investments in microfinance institutions (MFIs).

In March 2007, government introduced the Micro Finance Sector Bill in Lok Sabha, however, the Bill lapsed as the term of 14 Lok Sabha expired in 2009. In that bill, government recommended National Bank for Agriculture and Rural Development (NABARD) to be the watchdog for the micro finance sector.

The draft also says that the Central Government may establish State Advisory Councils for MFIs at the State level and considering the extent of micro finance activities in the States, such Advisory Councils may be set up with jurisdiction over more than one State. Under the new bill, MFIs, including Non-Banking Finance Companies are required to register themselves with RBI to commence microfinance operations.

The recent draft bill has proposed that MFIs has to be registered with the RBI with the minimum net worth fund of Rs 5 lakh. The bill also requires MFIs to create a reserve fund and transfer a percentage, of its net profit or surplus realized by providing microfinance services every year as disclosed in the profit and loss account or income and expenditure account before any dividend is declared or surplus is utilized for any other purpose.

The Central Bank will also have the power to get involved in matters related to income recognition, accounting standards, provisions for bad and doubtful debts, capital adequacy based on risk weights for assets and credit conversion factors for off-balance-sheet items and deployment of funds by micro finance institutions.The micro finance development council will include members not below the rank of Executive Director from NABARD, National Housing Bank, Reserve Bank of India and SIDBI along with Joint Secretaries from Finance Ministry and the Ministry of Rural Development will also be members of the council.

The draft bill also recommended that any micro finance institution which is not a company resisted under the Companies Act 1956 and which becomes systemically important MFIs shall convert its institution into a company registered under the Act with or without a license under Section 25 of the Companies Act 1956. It should happen within six months from the date of the balance sheet which shows that it has become systematically important micro finance institution in terms of the rules prescribed by the Central government, draft bill noted.

The central bank could pass an order guiding micro finance institution to cease and desist from ongoing the micro finance activity if it is found acting in manner prejudicial to the interest of its clients or depositors, RBI would cancel the certificate of registration granted to a MFI if it fails to meet the terms with the directions or condition.