The Micro Financial Sector (Development and Regulation) Bill, 2007

Highlights of the Bill

• Micro Financial Sector (Development and Regulation) Bill, 2007 seeks to promote the sector and regulate micro financial organisations (MFO).

• National Bank for Agriculture and Rural Development (NABARD) shall regulate the micro financial sector.

• Every MFO that accepts deposits needs to be registered with NABARD. Conditions for registration include (a) net owned funds of at least Rs 5 lakh; and (b) at least three years in existence as an MFO. All MFOs, whether registered or not, shall submit annual financial statements to NABARD.

• Every MFO that accepts deposits has to create a reserve fund by transferring a minimum of 15% of its net profit realised out of its thrift and micro finance services every year.

• The central government may establish a Micro Finance Development Council to advise NABARD on formulation of policies related to the micro financial sector.

• NABARD shall constitute a Micro Finance Development and Equity Fund to be utilised for the development of the sector.

Key Issues and Analysis

• While the Bill promotes the activities of MFOs, there are differing opinions on the cost efficiency of the MFO model.

• NABARD is designated as the regulator of the micro financial sector. However, its dual role as a key participant in the sector and the regulator could lead to conflict of interest.

• Banks and deposit taking Non-Banking Financial Companies (NBFCs) have to comply with Reserve Bank of India’s (RBI) prudential norms designed to safeguard depositors’ funds. While the Bill enables NABARD to prescribe norms for MFOs, it specifies some norms which are less stringent than for banks and NBFCs.

• Unlike banks regulated by RBI, the Bill does not exempt registered MFOs from the Usurious Loans Act, 1918 or state laws which cap interest rates.

• The Bill defines “micro financial services” to include insurance and pension services without specifying to whom such services are to be provided. This implies that every insurance and pension company would be regulated by NABARD.