Microcredit banks applaud possible changes to regulation in India

The microcredit industry in India is applauding the draft of a bill that could give new oversight to the industry. The good news has even seen the stock price of microcredit giant SKS microfinance rise up in the last couple of days.

The draft calls for microcredit to be regulated under the central reserve bank instead of individual states. Currently the state of Andrea Pradesh has tight restrictions against microcredit with laws that treat responsible lenders no better that predatory moneylenders.

From the Wall Street Journal's LiveMint, writers Remya Nair and Dinesh Unnikrishnan detail the pending bill.

The Microfinance Institutions (Development and Regulation) Bill gives more powers to the Reserve Bank of India (RBI) to regulate microlenders. It will cover all MFIs, including the smaller ones. MFIs give tiny loans to poor borrowers at around 24% interest. The Bill has to be approved by the cabinet and Parliament before it becomes law.

The industry welcomed the draft, saying it offers more clarity to the future of India’s Rs.20,000 crore microlending sector. The Bill, which has been posted on the finance ministry website for public comment, says MFIs registered with the apex bank won’t be treated as moneylenders, thereby keeping them out of the purview of the Andhra Pradesh Micro Finance Institutions (Regulation of Money Lending) Act, 2010.

“This (the new draft Bill) covers all types of MFIs, including the smaller companies, which gives confidence to the sector,” said Vijay Mahajan, president of lobby group Microfinance Institutions Network. “The regulations have been drafted in line with the recommendations of Malegam committee, but go well beyond that to provide comfort to the sector. It is a new generation Bill.”

More than a quarter of the industry is concentrated in Andhra Pradesh, which promulgated a law in October restricting operations of microlenders. This led to a drastic rise in bad loans as borrowers stopped repaying debt. Banks in turn stopped lending to MFIs. The state law, which had been preceded by an ordinance, followed reports of coercion in recovering loans that allegedly led to suicides.

Early this year, RBI issued regulations to govern MFIs operating as non-banking financial companies, based on the recommendations of an expert committee headed by noted chartered accountant Y.H. Malegam. The new rules capped the interest rate MFIs can charge at 26% and made a minimum two-year tenure mandatory for all loans above Rs.15,000.