The cabinet on Thursday approved a bill aimed to bring microlenders under the Reserve Bank of India’s oversight, a minister, who declined to be named as Parliament is in session, said on Thursday.
The Microfinance Institutions (Development and Regulation) Bill needs Parliament’s approval to become a law.
Microlenders have been accused of aggressive lending and recovery practices and high interest rates, which attracted calls for regulation.
India’s once-thriving microfinance sector was devastated by a crackdown more than a year ago by the government of Andhra Pradesh, which was the industry hub and largest market.
The state rules resulted in a drop-off in loan collections and a drying up of funding for microlenders.
However, the much-needed amendments suggested by industry experts and states like Andhra Pradesh seem to have gone unheard.
The Andhra Pradesh government, for instance, had objected to the description of the MFIs as extended arms of the banks, considering the pure-play money lending activities of the MFIs.
Though the MFIs have been welcoming the bill since it is expected to allow them to expand their business, the Andhra Pradesh government had also raised an objection to the free hand given to the MFIs to collect thrift from the MFI customers.
Though it was largely agreed that a central legislation, unlike the one promulgated by the AP government, would bring the much required discipline in the microlending sector, official sources are sceptical about the actual implementation of the legislation since it is the RBI that has responsibility of the regulation.
However, the bill also empowers the RBI to penalise the erring MFIs with a penalty extending up to Rs5 lakh.
The bill has gone soft on the issue of interest rates charged by the MFIs though the MFI sceptics were expecting the capping of the rates.