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Transcript of Policy Term Paper Anish
A commentary on the microfinance legislations
in India
Anish Shankar Menon
January 2, 2014
Abstract
This paper provides a commentary of the microfinance legislations
in India namely the Andhra Pradhesh Micro Finance (Regulation and
Money Lending) Act, 2011 and the Microfinance Institutions (Devel-
opment and Regulation) Bill, 2012.
1 Introduction
Microfinance was unregulated by any legislation for most part of it’s ex-
istence in India. Towards the end of the last decade, the Government of
Andhra Pradhesh (hereinfter the ’AP Government’) passed the Andhra Prad-
hesh Micro Finance (Regulation and Money Lending) Ordinance, 2010 (here-
inafter the ’Ordinance’) and correspondingly the Andhra Pradesh Micro Fi-
nance Institutions (Regulation of Money Lending) Rules 2010 (hereinafter the
’Rules’). The Ordinance, which later became the Andhra Pradhesh Micro
Finance (Regulation and Money Lending) Act, 2011 (hereinafter the ’Act’)
was enacted as a response to what the AP Government felt was the growing
1
malpractice of the microfinance industry (MFI) in the State. In 2012, the
Central Government tabled the Microfinance Institutions (Development and
Regulation) Bill, 2012 (hereinafter the ’Bill’) which dealt with the regulation
of the MFI in India. If passed, the Central Act would supersede the State
legislation in matters that are dealt in both legislations.
This paper tries to provide a clause by clause commentary of both the
Act and the Bill.1 It provides a comparative analysis wherein the provision
in the Act is analyzed first followed by the corresponding provision (if any)
of the Bill. The important sections exclusive to the Bill are then studied.
2 The legislations at a glance
The Ordinance was promulgated on the fifteenth of October, 2010. The
Act was passed on the first of January, 2011 with retrospective effect from
the date of promulgation of the Ordinance. The Ordinance has twenty four
sections with forty one sub-sections while the Act has twenty five sections
with forty one sub-sections. Both the legislations have fourteen definitions.
The Ordinance and the Act are almost identical except for a minor difference
in one definition. In S 2(d) of the Ordinance, under the definition of ’Micro
Finance Institution’, the Ordinance uses the term ’low income population’
while the Act uses the term ’below poverty line population’ in the same
definition which is also numbered S 2(d) in the Act.
The Bill is divided into twelve chapters. It has fifty two clauses and eighty
seven sub-clauses. It has eighteen definitions in S 2.
In the following section, the paper critically comments on each provison1Note: Some clauses have been omitted from discussion if they are simple definitions
or are self explanatory without a need for interpretation. In this matter, the author hasexercised his personal choice and discretion.
2
of the Act and the Bill. First the section in the Act is looked at and then
the corresponding clause in the Bill is examined.
3 Commentary
3.1 Preliminaries
Section 1 of both the Act and the Bill provides the short title, commence-
ment and extent of the legislations. It also elucidates the objective of the
legislations. The objective of the Act is to protect the women self help
groups (SHGs) from exploitation by the MFIs in the State of Andhra Prad-
hesh (AP). The Act clearly demonstrates that it was enacted as a reaction
to some event(s) that occurred in the State which expedited the need for,
according to the Government of AP, such a legislation. The title does not
seem to say that the Act is for regulating MFIs in the State. Instead it says
that it was enacted to protect women SHGs from explotation by MFIs. In a
way it assumes that MFIs are prima facie exploitative in nature which paints
such institutions in bad light.
The Bill on the other hand states as it’s objectives, the development
and regulation of MFIs. It is more broader in scope as it includes all ’rural
poor’ and people from certain disadvantaged sections. Another objective is
to promote financial inclusion. Though the Bill might too have been drafted
and floored in haste as a response to the Act, it is certainly more well thought
out.
The Act is applicable to the State of Andhra Pradhesh while the Bill
extends to the whole of India.
Another salient feature of the Bill is that it demonstrates the Central
Government’s desire to bring MFIs under the regulation of the Reserve Bank
3
of India (RBI).
3.2 Definitions
Section 2 of both the Act and the Bill deal with definitions. This section
deals with important definitions in the Act and the Bill. The focus is on
definitions of common terms in the legislations.
Section 2(b) of the Act defines interest. Interest according to the Act
is only the return on the amount lent. However the Bill has a much wider
definition in clause 2(1)(a). It uses the term "annual percentage rate" and
which is an annualized rate of all amounts charged by the MFI including
interest, processing fees, service charges and similar fees. This means that
the MFIs according to the Act can charge higher rates as other fees and will
not be in violation of any provisions. A further reading of the Act shows
that only interest as defined by it is to be displayed. Hence the MFI can still
earn a high margin with fees other than interest in AP. (This is taken care of
by the Rules which defines ’effective rate of interest’ that includes insurance
and all other fees.)
Section 2(c) of the Act defines ’loan’. The Bill does not have a definition of
loan but a similar definition for ’micro-credit facilities’ exist in clause 2(1)(h)
and clause 2(1)(j)(A) of the Bill. Both cases include advances in cash or
kind. However the definition in the Bill is much more comprehensive. In
fact the Bill defines ’microfinance activities’ in clause 2(1)(j) which includes
micro-credit facilities. The maximum loan amount in mentioned in the Bill
to be Rupees Five Hundred Thousand or such sum as may be mentioned by
the RBI. Such a limit is not mentioned in the Act. In a way this shows the
Cenral Government’s desire to entrust the control of MFIs to the RBI. The
reason would be driven by the fact that a considerable number of MFIs are
4
registered as Non Banking Financial Companies (NBFCs) which are already
under the control of the RBI. The Malegam Committee Report that was
a precursor to the Bill was also commissioned by the RBI. A loan would
include guarantees in the case of the Bill. Though not explicit in the Act,
loan could also be construed to include guarantees since the Act includes
payment on account of or on request of another person. Another noticeable
difference between the Act and the Bill is that, in the case of the Act, only
loans given to SHGs are covered. Reading the definition in entirety, it has
to be construed that ’any person’ would be either a member or having any
relation to a member of the SHG and not a third party. Such a limitation
however is not placed in the case of the Bill. The impact of this lies in the
fact that the SHG model is one of the many models of micro-credit delivery.
The Act affects only the SHG model of business. The other models do not
seem to be covered under it. This is sought to be remedied in the definition
in the Bill.
Section 2(d) of the Act defines a ’microfinance institution’. The defini-
tion of the Act is not complete. It is open to questions of interpretation. For
example it includes ’a Society registered under the Andhra Pradhesh Cooper-
ative Societies Act, 1964, or the Andhra Pradhesh Societies Registration Act
2001 and the like, in whichever manner formed and by whatever name called’.
On reading this could be interpreted as being relevant only to societies. It
could further be argued that co-operative societies registered under different
legislations would also not be covered under the Act. It also means that
trusts do not fall within it’s ambit. All other microfinance activities such as
microinsurance, pension services and other similar functions generally car-
ried on by MFIs are excluded. Only MFIs that lend to the below poverty
line (BPL) population are included in the definition. The difference between
5
a person below the poverty line and just above it in most likelihood is neg-
ligible. It could be inferred that the BPL status is determined by whether a
person holds a BPL card or not. This means that if the MFI lends to persons
without the BPL card are excluded from the definition. The definition uses
includes ’person’. This could be construed as having the same meaning as
S 2(31) of the Income Tax Act, 1961. This means that even individuals are
included under this definition. The implication of this is that unregistered
moneylenders are also included under the ambit of the Act if they lend to the
SHGs as defined under the Act. However if such a reading of the definition
of ’person’ is made then trusts are also included. The Bill has a much more
clearer definition under clause 2(1)(i) and enumerates the forms of organiza-
tions that can be considered to be MFIs. It explicitly excludes individuals
who are registered moneylenders. It extends the breadth of the definition by
allowing the RBI to declare such institutions to be MFIs as it may deem fit.
Hence if the RBI so wishes, unregistered moneylenders too can be covered
under the definition in the Bill.
Section 2(g) of the Act defines ’registering authority’. The project director
of District Rural Development Agency and of MEPMA is the registering
authority in case of rural and urban areas respectively. The district collector
may nominate a registering authority under his discretion also. In the Bill,
no such definition exists. However under clause 14 of the Bill, registration
must be done with the RBI as per regulations specified. In both cases MFIs
would be subject to multiple statutory requirements. For example a company
carrying on microfinance business would be governed by the Companies Act,
1956 and also the Bill. This would increase compliance and reporting costs
significantly.
Section 2(h) of the Act defines ’registration’ to mean registration of MFIs
6
under the Act. No corresponding section exists in the Bill but as mentioned
above S 13 of the Bill says that MFIs cannot conduct business without regis-
tration and clause 14 as mentioned above assigns the RBI as the registering
authority.
Section 2(i) of the Act defines defines a ’Self Help Group (SHG)’. Accord-
ing to the Act, an SHG has a few features. First, it should be formed by
women on principles of self help. It should also be registered aa SHG with
the Society for Elimination of Rural Poverty (SERP) in the rural areas and
the Mission for Elimination of Urban Poverty in Municipal Areas (MEPMA)
in urban areas. The Act targets a particular section of the people i.e., the
Government sponsored SHGs. What this means is that if the SHGs consist of
male members and/or is not registered under the aforementioned programs
then it is not covered under the Act. Though microfinance is predominantly
targeted at poor women, men too fall under it’s purview. The Bill therefore
does not define what a SHG is.
Section 2(j) of the Act defines ’SHG Bank Linkage’. This is simply the
credit provided by banks to SHGs based on a micro credit plan prepared by
the SHGs for business activities. It thus does not include personal loans.
This also in a way suggests that MFIs are facilitators who essentially act
as intermediaries between the bank and the SHG and nothing else since
the economic plan must be developed by the SHG. The definition has no
mention in the Act apart from being defined and seems superfluous. A similar
provision does not exist in the Bill.
Section 2(k) of the Act defines a ’SHG member’. Read in conjunction with
S 2(i) this would be a woman who is registered with the SHG and intends
to borrow though it. This clause causes some confusion as the SHG has to
be registered as per S 2(h) with the concerned authority. The registration of
7
the member would then be a second level of registrations where the member
registers with the SHG. The process of registration and documents for proof
of registration have not been mentioned in the Act. The Bill has a similar
definition of ’client’ under clause 2(1)(b). The definition includes members of
SHGs, MFIs or any other groups thus making it broader than the definition
in the Act. The client has to be a member of the institution only amd
registration is not compulsory. Also, in contrast to the Act, both men and
women can be clients.
3.3 Registration
Section 3 of the Act deals with registration of MFIs. Section 3(1) of the Act
requires that the MFIs in existence apply for registration within thirty days
of the commencement of the Act with the registering authority. They have
to furnish information of among other things of the interest rate that they
would charge. This interest rate cannot be called the effective interest rates
according to the Act since it only includes a return on the amount lent as per
the definition of the Act and does not include any fees or ancilliary charges.
However this lacunae has been solved by the Rules that defines ’effective rate
of interest’ to include all other charges. The MFI also has to provide details
of how it would conduct due diligence, recovery of balances and other similar
information. It also has to provide a list of people involved in collecting and
recovery of the loan amounts. This part of the provision is unclear since if
one were to interpret this provision broadly then everyone in the MFI would
be in the activity of lending and recovery of funds. If this was interpreted in
a narrow perspective then this would mean the people involved in the lower
levels where the loans are actually disbursed and recovery made. In either
case the exercise is futile since a reasonably high level of employee turnover
8
may be expected in a MFI and the Act does not indicate that any change in
employees should be notified to the registereing authority. Hence both the
rationale and efficacy of this part of the provision is questionable. Chapter V
of the Bill in entirety deals with the registration of the MFIs. As mentioned
earlier the registration authority is the RBI. Clause 14 of the Bill deals with
registration. An important point to note is that the section furthers the con-
fusion created in clause 2(1)(j) of the Bill. Clause 2(1)(j) defines microfinance
services wherein it not only includes micro credit facilities but also pension
and insurance services among other services. Pension is regulated by the
Pension Fund Regulatory Development Authority (PFRDA) while insurance
is regulated by the Insurance Regulatory Development Authority (IRDA).
Service providers would therefore need multiple registrations.
Section 3(3) of the Act essentially means that the registration granted is
for a period of one year and has to be renewed after the end of the period.
A similar renewal is not envisaged in the Bill. The renewal would add to the
complexity and cost of operations of the MFI.
Section 3(4) of the Act deals with the grant of renewal of registration of
the MFIs. The provision says that the decision to renew or not will be takena
after assessing the performance of the MFI and after hearing objections if
any from the general public regarding the renewal. This provision could be
subject to a lot of misuse since according to it virtually anyone could object
the renewal of registration of the MFI. No corresponding provision exists in
the Bill.
Section 4 of the Act deals with the registering authority’s maintenance
of registers of all the MFIs under it’s jurisdiction. On reading the Rules, the
register (every jurisdiction will have only one register) contains a list of all
MFIs in that jurisdiction along with some relevant information like registered
9
address, area of operation etc. This register is open to the general public for
inspection. This provision is quite welcome since it provides all the important
information as regards MFIs at a single place. No corresponding provision
exists in the Bill.
Section 5 deals with the registering authority’s power to suspend or cancel
registration. Such suspension can be enforced for violation of any of the
provisions of the Act. This too is a provision that can be misused. The
registering authority can, suo moto or upon complaints of the SHG or it’s
members or on the complaints of the general public, suspend or cancel the
registration of the MFI after providing sufficient reasons and allowing the
MFI to be heard. This means that the registering authority can entertain
complaints made by anyone and initiate action against the MFI. Another
provision that is a cause of worry is S 5(2) of the Act which empowers the
regisration authority to suspend registration pending enquiry. Rule 11 of
the Rules that deal with the suspension seems unclear. According to it, the
suspension will be effected after giving the MFI the reason for suspension.
The suspension will then be followed by a notice and the enquiry will be
finished within fifteen days of providing the reason(s) for suspension. The
notice shall be issues as per Rule 10(2) which gives fifteen days for the MFI
to show cause. This means that there are two distinct documents that the
registering authority will send to the MFI. The first being the statement
of reasons and the second being the notice. Neither the Act nor the Rules
lay down as to within how many days would the notice be sent after the
statement of reasons is send. The term ’immediately’ seems vague. It would
be better if a time for sending the notice after the statement of reasons is
fixed. Section 16 of the Bill deals with cancellation of registration and is
much more well drafted. No suo moto action by the registering authority is
10
prima facie envisaged and clear conditions are laid out as to why cancellation
of registration may take place. Another point of difference is that in the Bill,
an aggrieved MFI has a clear method by which it could appeal against the
suspension or cancellation of it’s registration. Such a provision does not exist
in the Act. The Act however proposes the setting up of fast track courts for
the disposal of microfinance related cases in clause 15.
3.4 Matters relating to functioning of the MFI
Section 6 of the Act prohibits membership in more than one SHG. This
would limit obligations to multiple parties. In case of existing multiple mem-
berships, the member can choose the SHG she wants to be a member of
and can send a notice(s) to the SHG(s) whose membership she wants to
terminate. The member must then settle the amount(s) outstanding to the
SHG(s) whose membership she has terminated within three months from the
commencement of this Act. This provision could cause a lot of hardship for
the member. Suppose a member has loans of |15,000 each from four SHGs
which she took a day before commencement of this Act. This provision would
essentiall mean that she would have to repay |45,000 within three months
which otherwise might have had a longer tenure. No similar provision exists
in the Bill.
Section 7 of the Act states that the MFIs must not obtain any security
from the member. Any security already obtained will stand released forth-
with. An objective of microfinance was to provide loans to people who did
not have security. Hence this provision is in the spirit of microfinance lending
as envisaged by it’s founders. According to clause 2(h) of the Bill, a ’micro
credit facility’ is defined as a loan, advance, grant or guarantee without secu-
rity. Hence this provision of the Act is welcome. No similar provision exists
11
in the Bill.
Section 8 deals with the public display of the interest rates by the MFIs.
Read in conjunction with Rule 14 of the Rules, the interest rate means the
’effective interest rate.’ This is a welcome provision since the members would
be able to choose the MFI based on interest rates. A similar provision exists
in clause 26(3) of the Bill where the MFI has to clearly convey the annual
percentage rate to the borrower and this should be clearly mentioned in the
loan document or sanction letter as the case may be.
Section 9 of the Act is essentially the restatement of the rule of Damdupat
as stated in the Hindu law. This means that the MFI cannot recover interest
more than the principle amount. The maximum ceiling amount of the total
repayment of principle and interest is capped at twice the amount of the
principle. Any excess amount so recovered has to be refunded to the bor-
rower and such borrower will stand discharged of the loan. No corresponding
provision exists in the Bill.
Section 10 of the Act prohibits further lending to an SHG or it’s members
without prior permission from the registering authority. It is true that this
provision will prevent further indebtedness of members. However this would
also delay loans to members who have a good track record and who require
funds urgently. Coupled with the fact that the members are prohibited from
joining multiple SHGs, this provision could cause distress in genuine borrow-
ers. The procedure laid down in the Act for the top-up loan is long-winded
and would cause distress to the members who would in most cases require the
loan urgently. The MFI would be better equipped to assess the creditwor-
thiness of it’s members and should be given freedom in topping up existing
loans without permission subject to a cap. No similar provision exists in the
Bill.
12
Section 11 of the Act deals with the form of contracts between the mem-
bers and the MFIs and the books to be maintained by the MFIs. The provi-
sion read along with Rule 20 of the Rules states that the terms would include
the repament of the loans in instalments whose periodicity is not less than
one month. Therefore the usual weekly repayments are prohibited. The in-
terest too is calculated on a diminishing balance basis. Many MFIs used to
calculate interest on the total amount, add the same to the principle and
divide it into weekly instalments. The method envisaged by the Act would
therefore reduce the interest received by such MFIs. The MFI has to main-
tain a cash book and a ledger recording it’s transactions. A similar provision
exists in clauses 18 and 19 of the Bill. A formal set of books of accounts are
to be maintained by the MFI that would be subject to audit by a Chartered
Accountant or any other qualified person as determined by the RBI. The
RBI too has powers to inspect the books of accounts.
Under Section 11 of the Act, the MFI must also provide a statement to
the borrower that clearly shows all terms of the loan within seven days of the
loan being made. It must also provide receipts for repayments that are duly
acknowledged by the borrower. Any document relating to the loan must be
provided to the borrower if she makes an application in writing free of cost
(Rule (22)). Collection of repayments must be made at a public place. It
also prevents the deployment of recovery agents to recover the loans. Only
those employees mentioned in Form 1 are allowed to recover loans under
the provisions of the Act.2 A similar provision in the Bill is clause 25(2)(n)
where the RBI can direct the MFI to disclose it’s acting as an agent for loan
collection. However there is no provision that asks the MFI to provide a list2Rule 24. Form 1 refers to the form in which the list of persons responsible for the
conduct of the business is to be provided to the registering agency and the problemsassociated with this has already been discussed while analyzing S 3 of the Act.
13
of employees who are engaged in the activities of lending and recovery.
Section 12 of the Act makes it mandatory for the MFIs to submit a
monthly statement with information regarding borrowers, the amount lent
and the interest charged. A similar provision exists in clause 23 of the Bill.
However the periodicity of the returns and it’s contents are not specified. 3
Section 13 of the Act provides powers to the registering authority or any
officer authorized by him to call for records, enter the premises of the MFI,
search and seize any record and document. These are standard provisions
usually found in land revenue and tax laws and give wide powers to the
authority authorized to exercise it. Sections 100 and 102 of the Code of
Criminal Procedure, 1973 apply to the search and seizure. According to
Rule 26 of the Rules, witnesses can be summoned in accordance with the
relevant provisions of the Code of Criminal Procedure, 1973 and Chapter
X of the Land Revenue Act as the case may be. Two issues are of note in
this section. First is an example of careless draftsmanship. It should have
been ’record or document’ and not ’record and document’. Second, the Act
should have provided for the number of days the seized documents could
be kept with the registering authority. Similar provisions exist in clause 27
(4)and (5) of the Bill. However powers of search and seizure are not provided
under the Bill. This might be incorporated at a later date or mentioned in
the rules that might be framed after the Bill has received assent.
Section 14 of the Act empowers the SHG, it’s members and any member
of the general public can register a complaint regarding any violation of the
provisions of the Act by an MFI with the registering authority. According
to Rule 28 of the Rules, this complaint has to be made in writing or over
the toll free phone specially provided for this purpose and an enquiry will be3However the first return according to clause 23 of the Bill has to be filed within 90
days of the commencement of the Act (the Bill when passed).
14
made within seven days of registering the complaint. As mentioned earlier
in another instance, allowing the general public to register a complaint can
lead to a misuse of the provision. Grievance redressal is given under Chapter
IX of the Bill and the grievance redressal mechanism is yet to be formulated.
A marked difference between the Act and the Bill is that while in the Act,
proceedings may be initiated by the registering authority suo moto or on a
complaint by a member of the general public, in the Bill, no court will take
cognizance of an offence only on a complaint by an officer or any other person
authorized by the RBI. This would prevent a lot of vexatious litigation to
which the Act would be prone.4
Section 15 of the Act deals with the establishment of ’Fast Track Courts’
to settle disputes between SHGs and it’s member, or the SHG and the MFI or
the members of the SHG and the MFI with regard to loans granted under the
Act. These courts are to be established in every district and it’s jurisdiction
determined. The cases have to be disposed off by the fast track courts within
a period of three months. The Act however does not mention as to where
the appeal from a fast track court lies. Hence assuming that the appeal lies
to the district court, then an additional three months is added to the legal
process. A similar provision does not exist in the Bill.
Section 16 of the Act deals with penalties for coercive measures. On
reading it seems that only those who actually have been party to coercive
practices shall be prosecuted. Coercive practices against the SHGs, members
or their family members are liable to be punished. The term ’family mem-
bers’ is not defined and could lead to confusion. The term ’coercive action’
is defined in this section. It includes among other things three clauses that
are loosely defined. One is ’doing any act calculated to annoy or intimidate’4However in order to protect the interest of the clients, the Bill also classifies offences
related to the acceptance of thrift (defined later in the paper) and repayment as cognizable
15
the second is ’frequenting the house or other place where such person resides
or works’ while the last is ’moving or acting in a manner which causes or is
calculated to cause alarm or danger’. These clauses should be read in the
light of the fact that even a member of the general public can file a complaint.
This makes the clauses quite dangerous since misuse could be rampant. The
provision has a saving clause that exempts visits for collection or communi-
cation from the purview of this definition. However the onus of proving that
the visit was for the abover purpose would rest on the employee of the MFI
and would be quite difficult to establish in a court of law. The quantum of
punishment is a fine upto |1,00,000 and/or prison upto three years. Section
17 provides the same quantum of punishment for conducting the business
without registration or giving loans in contravention of the Act. However in
S 17, all persons responsible for the day to day affairs are liable for prose-
cution. Normally a saving clause exempting those acting without knowledge
and in good faith is provided after such a provision but there is none in the
Act. Section 18 deals with a general penal provision for contravention of any
other provision of the Act. The quantum of punishment in a fine of |10,000
and/or imprisonment upto six months. Rule 29 of the Rules further allows
the officer in charge of the local police station to take action for contraven-
tion of S 16 and/or S 17 either on complaint or suo moto. Chapter X of
the Bill deals with offences and penalties. The fines in the Bill are much
larger than those in the Act but the period of imprisonment is slightly less.
Coercive action is not defined in the Bill. Penalty for wilful misstatement,
furnishing wrong information and similar actions are similar to those in other
legislations. It is only when the rules for the legislation as enacted by the
Parliament are framed that the full list of offences will be clear.
Sections 20 to 23 of the Act are standard and protect officers who act
16
in good faith from prosecution, allow the Government to make and modify
rules etc. Section 24 of the Act requires that the Government prepare an
annual report on the administration of the Act which shall be tabled in the
Parliament. This would provide some accountability for the actions of the
Government especially in a law such as this which gives it sweeping powers.
There is no requirement in the Bill to prepare a report and present it in
Parliament. A reason for this could be that since the RBI is envisaged as
the authority responsible for the implementation of this legislation, it would
exercise adequate control over the operations of the MFIs. Similarily Chapter
XII of the Bill that deals with the miscellaneous affairs have provisions similar
to that of the Act in regard of the powers of the Central Government which
are quite standard.
4 Important provisions of the Microfinance
Bill in detail
The Bill follows a standard template in many ways. For example chapters II,
III and IV that deal with the institutional framework of microfinance admin-
istration follows a three tier approach similar to co-operative banks. Chapter
II deals with the establishment of the Micro Finance Development Council
(MFDC). The chairman is to be nominated by the Central Government while
the requirements for the other members are also laid down. The State Micro
Finance Council (SMFC) and the District Micro Finance Council (DMFC)
as provided for in Chapters III and IV also have similar structures suitably
scaled to their respective levels of functioning. The MFDC however has a
more advisory role while the other two have some implementation, supervi-
sory and reporting obligations. A noteworthy point in the case of the DMFC
17
is as per clause 10 of the Bill, a representative of the ’lead bank’ is to attend
the meetings of the DMFC. A ’led bank’ is defined in that clause to mean
a lead bank as assigned in the Lead Bank Scheme of the RBI. This again
shows the intent of the Government to link MFIs with the formal banking
system at a very fundamental level.
Chapter VI deals with provisions regarding reserves, accounts, audits
and returns. The audit provisions are standard. However the RBI has been
authorized to specify a percentage of net profits earned by the MFIs from
micro finance services to be transferred to a reserve. This accumulation would
in the future protect the clients of the MFIs. Since it is a reserve under the
RBI, MFIs would not fail to transfer the amount into the same.
Chapter VII provide detailed and sweeping powers to the RBI. These
include setting a cap on the margin and annual percentage rate.5 Further if
the RBI feels that the MFI is conducting business detrimental to the interests
of the clients then the RBI can virtually dictate all the business activities
of the MFI inclduing ceiling on number of clients, amount of micro credit
facilities, deployment of funds, locations and so on. Every aspect of the
business is included. In effect the RBI can run the MFI business in totality if
it feels that the business is run prejudicial to the interests of it’s clients. Such
powers can be justified in case of emergencies. However allowing the RBI to
fix a cap on the margin (effectively the profit) of the MFI seems unjustified.
All amalgamation and restructuring of the business would be done only if
the scheme is approved by the RBI. The Bill also talks about the conditions
under which a MFI has to wind up it’s business.
Chapter VIII gives the details of the Micro Finance Development Fund
to be administered by the RBI and used for the development of microfinance5Annual Percentage Rate has been defined above. Margin will be defined later in the
paper.
18
activities. The Central Government could encourage donations to this fund
by providing tax incentives for the donations.
Chapter IX deals with the dispute redressal mechanism. It is still not
comprehensive and only states that the ombudsman established under any
scheme of the RBI will be given the authority to deal with the disputes
related to microfinance.
Chapter X deals with offences and penalties. The maximum imprison-
ment is two years. However the fines are very large as in clause 34 where the
fine could extend to |5,00,000 and extend to |10,000 for every day the offence
continues. In addition, the RBI too can impose a fine that may extend to
|5,00,000.
Chapter XII deals with miscellaneous provisions. A particular provision
of note is clause 43 that specifies that member or clients of the MFI have
first charge over the assets of the MFI and shall be second in line to recover
their dues after the workmen of the MFI in case of any default.
A few definitions are of particular interest.
Clause 2(1)(h)defines ’margin’. Margin is the difference between the cost
of funds and the annual percentage rate charged. The RBI has, through
powers conferred upon it, a right to set a limit on the margin. This essentially
is setting a limit on the profitability of the MFI. This would reduce interest
in MFIs as an interesting business opportunity. It has to be noted that as
per the Bill, the MFIs will operate in a highly regulated regime and would
spend a considerable amount on time and resources on compliance. The
Government must reconsider this as limiting profitability does not seem a
reasonable step by the Government.
Clause 2(1)(j) defines microfinance services. It fixes the maximum limit
on a single individual borrower at |5,00,000 in normal cases and |10,00,000 in
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exceptional cases. It also includes activities pension and insurance, domestic
remittances and thrift. Thrift is again defined in clause 2(1)(r) as any money
collected by MFIs from its members other than current account and deman
deposits. The definition is not quite clear but broadly referes to some sort
of savings that are made by it’s members. Hence in a subtle manner the Bill
also includes collection of deposits by MFIs in it’s definition of microfinance
services. However the RBI strictly regulates collection of deposits by Non
Banking Financial Services. The RBI may therefore propose a new structure
to govern the MFIs.
5 Conclusion
Andhra Pradhesh Micro Finance (Regulation and Money Lending) Act, 2011
was in response to the perceived microfinance crisis in AP. The Microfinance
Institutions (Development and Regulation) Bill, 2012 was in response to this
Act. The legislations were knee jerk reactions and hence do not seem to be
quite comprehensive and well drafted. The Bill still needs to be revised and
many changes need to be made. Microfinance is a large business in India
with immense growth opportunities. A well drafted legislation would go a
long way in achieving this potential.
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