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LATEST NEWS UPDATES | Microfinance Bill will regulate the sector to death, to the joy of moneylenders

Microfinance Bill will regulate the sector to death, to the joy of moneylenders

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published Published on May 18, 2012   modified Modified on May 18, 2012
-The Economic Times,

The Cabinet has cleared a proposed Bill empowering the Reserve Bank of India (RBI) to regulate all microfinance institutions (MFIs).

A central legislation makes sense only to the extent that it over-rides draconian state-level laws. However, the Bill suffers from many infirmities. And it is unfortunate that these have been overlooked. The law, if enacted, is likely to kill small MFIs and hurt the sector that is struggling to stay afloat.

A major flaw is capping the interest rate charged by MFIs at 26%. A cap is untenable, irrespective of the fact that it is 2% higher than the ceiling recommended by the Malegam panel. Price control will only dampen the supply of microfinance and compel the poor to turn to moneylenders.

MFIs, unlike banks, cannot accept deposits. They charge interest rates of around 30% to cover high operational costs. This is a significant improvement on moneylenders who charge interest rates of over 60% and also use force to seize assets.

Surely, an interest cap will throw small MFIs out of business as their administrative costs of delivery per borrower are much higher than for the bigger ones. Similarly, the RBI will also prescribe a threshold on margins for MFIs, tenure of the loan, periodicity of payment and so on.

Again, all this does not make sense, given that the central bank had, in the past, found it tough to monitor commercial banks that were required to comply with such stipulations. The Bill also proposes registration of all MFIs with a minimum netowned fund of Rs5 lakh against a comparable limit of Rs2 crore for non-banking companies.

The RBI may not have the bandwidth for such oversight. Also, spreading regulatory oversight too thin is fraught with risks.

So, Parliament must look at a course-correction as MFIs have succeeded where formal finance has failed. These institutions should be allowed to grow.

The banking regulator must explore new technological options for inclusive banking. Mobile phones can let formal finance access the unbanked. Mobile operators can form joint ventures with existing banks. The RBI should allow such ventures to qualify for a banking licence.

The Economic Times, 18 May, 2012, http://economictimes.indiatimes.com/opinion/editorial/microfinance-bill-will-regulate-the-sector-to-death-to-the-joy-of-moneylenders/articleshow/13239721.cms


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