Volume-2 Issue-2

Legal & Regulatory Framework August 2013

For Micro Finance Institutions in India

M icrofinance in India has evolved as a response to the vast exclusion of its population from the mainstream
banking network. With its unique features and operating models, microfinance institutions (MFIs) have
been acting as a as a last mile connectivity to the banks in providing financial services to the poor. Promoters of
these institutions have innovated different operating models and approaches using different legal forms. They
includes NBFC-MFIs, Section-25 Companies, Societies, Trusts, Cooperatives, LABs etc. However, lack of a
comprehensive legal and regulatory framework for this sector has also resulted in regulatory uncertainty and
thereby affecting the provision of holistic services to the target segment.

Extant Regulations New Category of NBFC-MFIs

RBI Norms on bank lending to MFIs under Priority In addition to the PSL norms as above, NBFC-MFIs are
Sector (PSL) required to adhere to the prudential norms including;

Ÿ 85% of total assets of MFI are in nature of Ÿ Minimum Net Owned Fund of `5 Cr. (for North
“Qualifying Assets”; East Region `2 Cr.)

o The loan extended to a borrower whose Ÿ Capital requirement: 15% of its aggregate risk
household annual income in rural areas does weighted assets
not exceed `60000 while for non-rural areas it Ÿ Provisioning: 50% of the aggregate loan
should not exceed `120000 installments which are overdue for more than 90
o Loan does not exceed `35000 in the first cycle days and less than 180 days and 100% of the
and `50000 in the subsequent cycles aggregate loan installments which are overdue for
180 days or more
o Total indebtedness of the borrower does not
exceed `50000 Ÿ Pricing: Interest cap removed, Margin cap at 12%,
Processing fees not exceeding 1%
o Tenure of the loan is not less than 24 months
The NBFC-MFIs are also required to follow the RBI
when loan amount exceeds `15000 with right
Fair Practice Code and must be a member of at least
to borrower prepayment without penalty.
one Credit Information Bureau (CIB)
o The loan is without collateral

o Loan is repayable by weekly, fortnightly or

monthly installments at the choice of
borrower.

Ÿ Pricing: Interest cap of individual loans at 26% per

annum on reducing balance basis, Margin cap at
12%, Processing fees not exceeding 1%, No penalty
for delayed payment, No security deposit/margin

Ÿ Income generating Loan: Not less than 70% of total

loan outstanding.

Microfinance Institutions have a vital role to play Initiatives from the Associations of MFIs on Self
in achieving financial inclusion. Together, these Regulation
institutions reach to more than 30 million clients in Ÿ Implementation of the Industry Code of Conduct.
Ÿ Implementation of client protection & grievance
the country providing loans for agriculture, animal
redressal practices
husbandry, enterprise building, housing,
Ÿ Data sharing and reporting in public domain
education, emergency purposes and others. MFIs
Ÿ Encouraging MFIs to participate with Credit
are also providing insurance, pension, remittance & Bureaus
other services. Ÿ Initiating a Responsible Finance Forum
The Micro Finance Institutions (Development & Regulation) Bill Some recent initiatives by
2012 the Government and RBI
The Micro Finance Institutions (Development & Regulation) Bill 2012 was Ÿ Introduction of the
introduced in the Lok Sabha by the Minister of Finance on May 22, 2012 and Microfinance Institutions
referred to the Standing Committee on Finance on May 28, 2012. This Bill was (Development and
drafted by a Consultative Committee with representation from State Regulation) Bill 2012
Governments, Regulators, Banks, Development Financial Institutions, Sector
Associations. This Committee was constituted by Ministry of Finance, Ÿ Creation of India
Government of India. Microfinance Equity Fund
in the Union Budget 2012-
Core Objectives 13 with a corpus of `100 Cr
and topping up it with
Ÿ To bring a formal statutory framework for the promotion, development,
`200 Cr in the Union
regulation and orderly growth of the micro finance sector
Budget 2013-14
Ÿ To enable microfinance institutions to continue under different legal forms
Ÿ Allowing MFIs to access
such as Societies, Trusts, Companies and Cooperative Societies registered
ECB and enhanced the
under various national/state Acts and provide diverse set of microfinance
ECB limit from $5 million
services to the excluded
to $10 million
Ÿ To bring the functioning of microfinance institutions under a national law
and thereby limit the restrictive interventions of state specific laws Ÿ Treatment of bank loan to
MFIs under Priority Sector
Salient Features lending
Ÿ The Bill seeks to provide a statutory framework to regulate and promote the Ÿ Creation of a separate
micro finance industry category of NBFC-MFIs
Ÿ All entities carrying on the business of microfinance irrespective of their legal Ÿ Reserve Bank of India has
form shall be regulated under this law come out with its “Fair
Practice Code” to protect
Ÿ The Reserve Bank of India (RBI) shall regulate the micro finance sector
the end consumers
Ÿ The Bill acknowledges the need for holistic financial services including
credit, thrift, insurance, remittance, and other such services Ÿ Proposal to create a Self
regulatory organization
Ÿ The Bill provides for the creation of councils and committees at central, state (SRO) for microfinance
and district level with representation from state and local administration to institutions
monitor the sector

Role of Elected Representatives/Government

Presently, the MFI Bill-2012 is under the examination of the Parliamentary Standing Committee on Finance. The
microfinance sector believes that the enactment of this Bill would streamline the provision of micro financial
services to the poor. This Bill would not only provide a formal statutory framework for the microfinance
institutions to operate but also help in enhanced flow of funds to the sector. This would ultimately lead to
increased and timely access of credit to the poor at an affordable price, support their livelihoods and lead to
micro enterprise building.
The microfinance institutions and its associations, unanimously, urge the Honorable Members of Parliament to
support the Bill and pass it in the Parliament at the earliest.

Sa-Dhan
12 & 13, Shaheed Jeet Singh Marg Micro Finance Institutions Network (MFIN)
nd
2 Floor, MPTCD Building 216, Radisson Suites,
Special Institutional Area Commercial Plaza, Sushant Lok-1,
New Delhi-110067, India. Gurgaon 122002, Haryana
Phone:+91 11 47174400 Ph.: +91- 124 – 4212570-71
E-Mail: [email protected] E-mail: [email protected],
URL: www.sa-dhan.net Web: http://mfinindia.org