MFI bill after RBI views: govt

Amid microfinance institutions drawing criticism for their coercive ways of functioning, the government today said it will introduce a bill on the sector after taking into account the views of the Reserve Bank and the recommendations of an RBI sub-committee.

"The Department of Financial Services proposes to introduce the Micro Finance (Development & Regulation) Bill, 2010 after taking into account the views of RBI and the Malegam Committee recommendations," Minister of State for Finance Namo Narain Meena said in a written reply to the Rajya Sabha.

Amid the controversy over the usurious rate of interest and alleged coercive recovery system adopted by micro finance institutions (MFIs), the government is looking at regulating the sector.

Last month, the Reserve Bank had set up a sub-committee, headed by Y H Malegam, to look into MFI activities, including their interest rate structures. The committee is expected to submit its report by January-end.

"While RBI does not regulate the interest rates charged by MFIs, it has issued instructions on Fair Practice Code, to be adhered to by all non-banking financial companies in terms of which the NBFCs should not charge exorbitant rates of interest and resort to undue harassment," Meena said.

He added that the boards of the NBFC were advised to lay out principles and procedures to determine interest rates and other charges.

Last week, Finance Minister Pranab Mukherjee had said the Centre does not intend to strangulate the micro finance sector, even as it is looking at ways to regulate it.

"My idea is not to strangulate them (MFIs), but to regulate it so that the interest that they charge is not exorbitant and the method of realisation, under no circumstances, should be quick," he had said.

The objective of the proposed Bill which is being drafted is to ensure development and orderly growth of micro finance sector in rural and urban areas.

RBI regulates only those MFIs which are registered with it as non-banking finance companies (NBFCs). Others are regulated by sectoral norms under which the MFIs fall.

Although the companies registered with RBI cover over 80 per cent of the micro finance business, in terms of numbers of MFI, they constitute only a small percentage.

Last month, the Andhra Pradesh state government had issued an Ordinance to control of MFIs, following a spate of suicide cases being reported across the states, apparently due to strong arm tactics of these institutions and high interest rates charged by them.

MFIs charge up to 36 per cent interest rates.