Microfinance Bill- Frequently Asked Questions

By Deepti KC

Union Cabinet has recently cleared the Microfinance Bill and the bill is now introduced in Lok Sabha. If approved, the microfinance bill will take MFIs outside the purview of state-level legislation and make the central bank to regulate the sector. If you are wondering what microfinance bill is and why it matters to the sector and a research institute like Centre for Micro Finance (CMF), I have tried to summarize some of the key features in this blog. (Detailed information: Here)What is microfinance bill?
It is “a bill to provide access to financial services for the rural and urban poor and certain disadvantaged sections of the people by promoting the growth and development of micro finance institutions as extended arms of the banks and financial institutions and for the regulation of micro finance institutions and for matters connected therewith and incidental thereto.”

The bill acknowledges (and a very important acknowledgment for the industry) that “MFIs play a role in Financial Inclusion”

Who can register as MFIs?
The applicant should be engaged in the promotion and development of financial inclusion by providing “microfinance service” and have a net owned fund of at least Rs. 5 lakhs. (A banking company and a cooprative society are not considered as MFIs)

How does the bill define ‘microfinance services’?
Small amounts to individual or groups (i) providing micro credit (ii) collection of thrift (iii) remittance of funds (iv) providing pension or insurance services

If the bill is approved, what will be the role of Reserve Bank of India?
There is a promotional role for Reserve Bank of India as they get wide powers with respect to regulations, prudential norms, governance and detailed operations.

What roles will State Advisory and Central Government Councils play?
Micro-Finance Development Council can establish Central Government Council, State Councils  and District Committees and these Councils will advise on formulation of policies, schemes and other measures required. (State level Councils can only advise not act on it)

What are the functions of State Councils and District Committees?
To monitor

  • Whether lending activities undertaken by MFIs is resulting in over-indebtedness and consequent large scale defaults.
  • Whether recovery practices adopted by MFIs are fair and reasonable
  • Whether the grievance re-dressal mechanism is working satisfactorily
  • Overall assessment of the impact of measures for financial literacy and inclusion on an annual basis

What are the functions of Central Government Council?

  • Adoption of any innovations and use of technology.
  • Establishment of credit information bureaus.
  • Suggest modifications of the systems to protect the interest of clients.
  • Any other matter which may be referred to the Council by the Central Government in the interest of promotion of financial inclusion and protecting the interest.

There is a funding opportunity for all including a research institute like CMF. The RBI shall create  a fund called the Micro Finance Development Fund and are available to:

  • Provide loans, refinance, grant, seed capital or any other financial assistance to MFIs.
  • Give grants or loans for training and capacity building of institutions
  • Invest in equity or any other form of capital of a MFI
  • Meet expenses related to collection, analysis, dissemination of information relating to microfinance, conduct of research, experiments or studies, and to design, promote and propagate such practices as may be considered conductive to the growth of microfinance services.