Bill seeks to cap loan interest

Proposed law to give RBI power to fix fair recovery methods and penalise micro lenders

The government on Tuesday tabled in Parliament the Microfinance Institutions (Development & Regulation) Bill, seeking to make the Reserve Bank of India (RBI) the regulator for micro lenders too. The Bill seeks to empower RBI to cap the margins and interest rates charged by MFIs.

“The Bill provides for regulation of MFIs’ services, such as micro-credit facilities, thrift, pension or insurance services and remittance of funds, and prohibit MFIs from carrying on activities without registration with RBI,” read a copy of the Bill as introduced in the Lok Sabha. It allows non-banking finance companies (NBFCs) registered under the RBI Act to continue such services without registration.

A 2007 Bill, which lapsed with dissolution of the 14th Lok Sabha, had sought to regulate only those MFIs that were not covered under any law. Consequently, banks and a few categories of NBFCs were kept outside the purview of that Bill. The Bill tabled on Tuesday proposes to give RBI the power to specify the maximum limit of margin and annual percentage rate, sector-related benchmarks and performance standards, and fair and reasonable methods of recovery of loan. The central bank can also prohibit MFIs from closing or restructuring activities without its approval.

There is a provision for cancellation of registration if an MFI fails to carry on in line with the directions issued by the regulator. RBI will also be enabled to file a winding-up petition for closure of an MFI if it failed to repay its debt.

A Microfinance Development Council is proposed to be constituted to advise the central government on formulation of policies, schemes and other measures required for the growth of the sector.

The Bill, when enacted, is expected to override state legislations’ control of microfinance institutions. The MFI sector has been waiting for the Bill to provide definitional and regulatory clarity.

The government also introduced a Bill to allow film makers and those running amusement parks, restaurants and travel agencies to access loans from the Small Industries Development Bank of India (Sidbi). Introduced in the Lok Sabha by Finance Minister Pranab Mukherjee, it seeks to amend the Sidbi Act of 1989.

According to the statement of objectives and reasons, an amendment will replace the definition and expression of “industrial concern in small sector” with “industrial concern or micro enterprise or small enterprise or medium enterprise” in the 1989 law.