The government’s proposed bill to bring the `22,000-crore microfinance industry under the regulation of a single entity — the Reserve Bank of India — has been widely welcomed, both by the industry and the public at large. In
fact, the biggest listed name in the industry welcomed the move and saw its shares jump by 20 per cent on the day the proposed bill was announced.
The government has invited comments on the bill from the public and will finalise it after taking these into account. Bringing the industry under one regulator was a long-felt need because if each state has its own rules and regulations, the situation can be pretty chaotic. Reserve Bank deputy governor K.C. Chakrabarty had said a few days earlier: “If we don’t act under a common set of regulations (for the microfinance industry), it won’t be practical to work. Five states having five different laws on the same subject will have practical difficulties for the industry.” Till a Central law is in place, the Andhra-type situation can arise again, and this will nullify whatever the Reserve Bank is trying to do to bring some order, he pointed out. Andhra Pradesh is a classic example: the state government had passed an ordinance that contained stringent regulations for the industry to follow. Not surprisingly, it was up in arms as it was unable to collect crores of rupees from borrowers. The Andhra government, however, was not wrong to enact such an ordinance — its move had followed complaints about the use of muscle power against those who had failed to pay back loans, and subsequent suicides by borrowers who could not pay up. There was also a considerable amount of misuse of funds as borrowers in some cases had used the loans to pay back others from whom they had borrowed money, something called “evergreening” in banking terminology. This was far removed from the original concept of microfinance — as developed by its pioneer, Bangladesh’s Nobel Prize-winning Grameen Bank founder Muhammed Yunus, popularly known as the father of microfinance. The industry was accused of borrowing cheap from the banks and lending at exorbitant rates — of between 30 to even 60 per cent. It was not even sure if the borrowers, who were predominantly women, were really made financially independent or were able to have a sustainable business such as vegetable vending, which was the principal objective of microfinancing.
It is to be hoped that the new bill will also provide for the independent monitoring of end users of loans — as it is absolutely vital for the borrowers to be made financially stable. Microfinance is in a way the device which can make possible “inclusive growth” — the mantra of both the Reserve Bank and the UPA government. The argument that the microfinance industry had tried to make was that it was being targeted by politically powerful moneylenders, who had a thriving business until the microfinance companies came along. There may or may not be any truth in this, and it is for the government to act against usurious moneylenders. But this certainly cannot be used to justify the way some of the microfinance companies have behaved. This bill will hopefully go a long way in regularising the industry and in laying down guidelines so that the industry is able to fulfil its true objective — of helping the urban and rural poor as well as the disadvantaged. It gives the RBI the power to register microfinance companies and set benchmark and performance standards for the entire industry to follow. It will also have powers to impose penalties on companies which violate these norms.