RBI voices concern over State Govts regulating microfinance institutions

If State Governments start enacting their own legislations to regulate micro-finance institutions (MFIs), including the ones regulated by the Reserve Bank of India, there will be plurality of regulation leaving scope for regulatory arbitrage, says the report on ‘Trend and Progress of the Banking in India 2011-12'.

The report raises concerns on future regulation of MFIs, if other States also come out with legislation to regulate the sector, as was done by the Andhra Pradesh Government last year. “If other States also come out with legislation similar to the AP Government, it will raise concerns not only about multiple regulations but also about client protection, as borrowers would then be subject to different regulations,” says the report.

It adds that such plurality in regulation would not only make the task of regulating MFIs operating in more than one State difficult, but would also impact the business of such institutions.

Ms Achla Savyasaachi, Vice-President, Sa-Dhan, told

Business Line that the Andhra Pradesh experience has shown that impact is not only on the MFIs, but also on loans reaching the underserved segment. “We need a regulator that understands the responsibilities and challenges of those regulated, which the RBI is best placed to do,” she said. Regulators need to understand that it is indeed the depositors' money, which is granted to the MFIs and in turn to the customers, that needs to be protected.

“Credit linkage through the bank-sponsored self-help group programmes or the business correspondent model of financial inclusion is still a serious concern,” she added. According to the report, in 2010-11, the growth under the MFI-linkage programme in terms of both number and amount of loans was much higher than the corresponding growth under the SHG-bank linkage programme in 2010-11.

“We need to develop a frame-work which is client-friendly, and does not suffocate the main channels of facility,” pointed out Ms Savyasaachi.