MFI body seeks clarity over regulations in Budget

With their activities crippled in Andhra Pradesh because of a state legislation, micro finance institutions have urged the Finance Ministry to bring a long-awaited bill in the upcoming Budget session of Parliament to vest powers of regulating these companies with the Reserve Bank of India. The session is slated to begin from tomorrow.

Alok Prasad, CEO, Microfinance Institutions Network (MFIN), said,"The consistent position taken by MFIN is that the Bill is urgently required for the healthy development of the MF sector."

He said the body is in constant touch with the Finance Ministry and expects that the Micro Finance Institution Bill will be tabled in the current session of Parliament.

Prasad said under the Constitution, the powers for making laws pertaining to banks, financial institutions are vested with Parliament. The state governments can only regulate 'money -lending' activities.

The draft bill floated by the Finance Ministry in June, 2011 clearly defines microfinance as a financial activity carried out by financial institutions. It also describes MFIs as adjuncts of Banks and makes RBI the overarching regulator of the sector, he added.

The crux of the problem is that RBI has brought regulatory framework for NBFC-MFIs in December, 2011, but the Andhra Pradesh Act, effective from October, 2010, still prevails in the state, MFIN said.

"The AP Government promulgated the Andhra Pradesh Microfinance Institutions (Regulation of Moneylending) Act 2010, in October 2010. As a result of the onerous conditions imposed by the Act, Microfinance operations in AP came to a stand-still, the repercussions of which were felt by the entire industry, including the non-AP MFIs," Prasad said.

According to MFIN, the problem is while the Andhra Pradesh legislation directs MFIs to get registration  from state authorities, RBI regulations provide for registration from the central bank.

The AP MFI Act says that no MFIs will grant any loans or recover any loans without obtaining registration under this Act from the registering authority, whereas the RBI Regulation says MFI is an NBFC and under the RBI Act 1934 an NBFC can do its business without any further permissions or registrations, according to MFIN.

MFIN further says the number of Microfinance borrowers grew by just 7.5 per cent in 2010-11, while their portfolio grew by 7.2 per cent against 43 per cent and 76 per cent in 2009-10.

"Growth was uneven, with the four largest MFIs operating in AP recording negligible growth rates for the year. Other MFIs grew between 10%-50%," Prasad said.

However, according to a recent report by CRISIL fund flows to the microfinance sector have improved in recent months because of greater regulatory clarity and stable operating environment.

In particular, lenders have shown preference for large and well-managed microfinance institutions (MFIs) operating outside Andhra Pradesh (Andhra).