Does the RBI have the Capacity to Supervise Micro-Finance?

Recently, the Union Ministry of Finance has posted a draft micro-finance bill on its site. Among other things, the bill argues the case for RBI being the regulator/supervisor of all micro-finance in India. Let me first congratulate the Union Ministry of Finance and certainly, the proposed draft micro-finance bill is very welcome. That said, in the light of what has happened in Andhra Pradesh in 2010 and also the general/regulatory lessons learned from the present micro-finance crisis, the bill, which does not appear to have the required safeguards, runs the serious risk of implementation failure. There should be no mistake about that!

 

Stepping back from the bill, without question, it is clear that policy (and/or lack of it) has also played an important role in the disorderly growth of MFIs and the challenges arising therein. I shall look at this in detail here and outline the implications for the proposed bill! I would like the concerned stakeholders to take it in the right spirit and again, let me reiterate that the idea is to strengthen the bill rather than undermine it. Thank you Ladies and Gentlemen for a patient reading…

 

A first crucial aspect is that laws will have to follow policies and the point to note is that we have no serious national micro-finance policy in India, as on date, despite the acknowledged importance of the subject. Therefore, before (and/or at least simultaneously along with) the bill, it seems important to draft a policy in a democratic manner and this policy will have to outline various aspects including the following:

 

1. What is the proper scope of micro-finance, given the Indian context? What specific problems and issues will it be expected to address, especially based on the lessons from the present (2010) and past micro-finance crisis? This is critical as the essence of any regulation is to prevent market/institutional failures.

 

2. Which institutions (stakeholders) are providing such micro-finance services, through what delivery channels and to whom? What key lessons with regard to these different models are discernible and especially, in the light of the recent micro-finance crisis? The aspect to be noted here is that while past policy pronouncements have been well-intentioned and talked of a range of financial services that the present bill is also talking about, in reality, micro-finance has been somewhat limited to the delivery of large scale consumption credit (and perhaps some small production credit) to low income people. Therefore, the bill cannot assume that a wide range of financial services will indeed be delivered. This difference between intended and realized strategies on the ground, is an aspect that needs to be factored in thoroughly and this leads to the next question.

 

3. What is expected of micro-finance over the next 3 years? 5 Years? 10 Years? 20 years and so on

 

4. Given the above, what should the scope of regulation/supervision be? Who should be the regulator(s)? Supervisor(s)? and other aspects as required

 

Thus, the need of the hour is first a proper national micro-finance policy that can drive the laws and not vice versa and there should be no compromise on that! In fact, policy sums up aspirations and laws become enabling mechanisms to achieve that. So, it would be great if we make a simultaneous effort towards that as well.

 

OK, that said, I see three major reasons for (having) a bill of this kind:

 

a. To provide legitimacy and a proper regulatory framework to MFIs (Legitimacy For Micro-Finance Institutions and Players) and others involved in delivery of financial services to low income people

 

b. To ensure that MFIs indeed satisfy the broader objectives for which they have come into being (in the first place) and also that they operate and function in a sound and legal manner, in accordance with norms and standards required of such (pro-poor financial) institutions (Regulation and Supervision of Micro-Finance Institutions and Players), and

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