Bill seeking interest rate cap on microfinance lending introduced in Par

The government today introduced a bill in the Lok Sabha to empower the Reserve Bank to regulate the micro finance industry and fix interest rates ceiling on loans to be provided by lenders.

The Micro Finance Institutions (Development and Regulation) Bill, 2012, which was introduced in the House by Finance Minister Pranab Mukherjee, confers power upon the RBI to fix the maximum interest rates that MFIs can charge and also decide on the fair and reasonable method of loan recovery.

It provides for regulation of activities like micro credit, thrift, pension or insurance services and remittance of funds by micro finance institutions (MFIs).

The bill, which was drafted in the backdrop of problems faced by borrowers of MFIs in Andhra Pradesh and other states, seeks for compulsory registration of MFIs with the RBI. They should have a minimum net-owned funds of Rs5 lakh.

"Since these institutions lack a formal statutory framework for providing such micro finance services, it is expedient to provide a statutory framework for the promotion, development, regulation and orderly growth for such MFIs and thereby facilitate financial inclusion," said the Statement of Objects and Reasons of the Bill.

As per the provisions of the bill, the RBI can inspect the accounts of the micro lenders and impose monetary penalty for non-compliance of the provisions of the proposed legislation. Besides, MFIs would need prior approval of the RBI to close or restructure their activities.

Violation of the provisions of the bill will attract penalty, which will include two years imprisonment and a fine up to Rs 5 lakh. 

The bill would confer power upon the Reserve Bank of India (RBI) to "specify the maximum limit of the margin and annual percentage rate which can be charged by any MFI and performance standards pertaining to methods of operation, fair and reasonable methods of recovery of loan advanced by the MFIs," it said.

Besides, RBI would make provision for constitution of the Micro Finance Development Fund which would be utilised for the purpose of providing loans and seed capital to MFIs and set up of grievance redressal mechanism.

The bill further provides for constitution of Micro Finance Development Council to advise the Central government on formulation of policies, schemes.

Its members would include representatives from the government, RBI, SIDBI and National Housing Bank.

It also makes a case for establishment of 'State Micro Finance Council' for considering the extent of MFI activities in the states. Also it called for creation of 'District Micro Finance Committee', headed by District Collector, to review the growth and development of MFI activities.

Micro finance -- the business of doling out small loans at high interest rates to poor people who are unable to access conventional lending instruments -- has come under intense regulatory scrutiny in the wake of an Act passed by the Andhra Pradesh government.

The Act seeks to tighten the screws on the industry, which has been blamed for a spate of suicides in the state due to high interest rates charged by MFIs. Allegations that the use of strong-arm tactics by lenders caused the suicides also dented the MFIs' image.

Andhra Pradesh accounts for nearly half of the total micro finance business in the country with major players like SKS Microfinance, Spandana Sphoorty Financial, Basix and Share Microfin present in the state.