Microfinance organisations in India have so far not been directly subject to any statutory regime. Key institutions in the field of rural credit (e.g. NABARD) have provided guidelines on the working of SHGs (Self-Help Groups) which are the primary mode in which microfinance groups have emerged in India. The RBI has also issued circulars and provided guidelines from time to time. The Microfinance Bill 2007 is the first attempt to bring informal microfinance organisations into the fold of a formal banking regime, with the NABARD as a top regulatory authority.
The Microfinance Sector (Development and Regulation) Bill 2007, introduced by the Union Finance Minister in Lok Sabha on 20th March 2007, looks to achieve ‘orderly growth and development of the microfinance sector’. The microfinance institutions have so far emerged spontaneously, or through NGO facilitation. Most of them are in the Self-Help Groups functioning very often through intermediary NGOs, and accessing credit from commercial banks.

The new Bill looks to organise this spontaneous and sporadic emergence, into a consolidated state-aided effort towards developing microfinance into formal banking sector, with the NABARD as the primary regulatory authority. The problem with this perspective on development through monitoring and regulation is that localised innovation is thwarted. The policies and mechanisms devised by a small SHG in consonance with the demands and of its members, the resources it has access to, and the end it seeks to achieve given its circumstances.

MFOs , SHGs, Individual Borrowers

The Beneficiaries: The 2007 Bill creates the category of an ‘eligible client’ who is the primary consumer of microfinance services.
An eligible client as defined in Section 2(b)¹ may be a member of a registered or unregistered group, an SHG itself, or any other formed for providing micro-finance services. She may belong to any of the categories: (i) farmers owning not more than two hectares of agricultural land or such area agricultural land as may be prescribed; (ii) disadvantaged cultivators of agricultural land including oral lessees, tenants, share croppers, (iii) landless labourers, migrant labourers, (iv) artisans, micro entrepreneurs, persons engaged in small economic activities, (v) women, (vi) other categories ‘as may be prescribed’² . A ‘group’ is defined as an association of eligible clients formed either as an SHG, joint liability group. Such groups are meant to perform two kinds of services- (i) thrift services³ - the services of collecting savings from one’s members through a group mechanism⁴ , (ii) microfinance services⁵ - to members, eligible clients or individual borrowers, in the categories of enterprise, agriculture, allied activities, housing, insurance, financial services through a business facilitator or business correspondent mechanism (as permitted by the RBI), any other services as may be specified by the NABARD.

The Providers: The Bill further creates the category of ‘microfinance organisation’ as defined under Section 2(e). The MFO is conceived as the key provider of microfinance services under the Bill. An MFO includes an ‘organisation’, which is not ‘a group established for the purpose of carrying on the business of extending micro finance services’.⁶ A myriad of organisations can qualify as an MFO. Closely held societies and trusts, cooperative societies, can perform thrift and microfinance services provided they can procure a certificate of registration from the NABARD.

It is not clear, though, from the definition clause⁷ , which MFOs are eligible to accept thrift from their members only, and which can accept from the public at large (as ‘eligible clients’), akin to a bank. The definition of MFO empowers them to extend microfinance services and does not mention thrift. But the definition of ‘thrift’ envisages collecting of money by MFOs.

A group which is registered in the manner given in section 2(e), which could be a large organisation or a small localised one, and operates to perform thrift and microfinance services, can qualify as an MFO. In such event, it is subject to regulatory mechanisms under the Bill. An MFO performs the same functions vis-à-vis a group that a non-MFO group can perform vis-à-vis its member. It can deal directly with an individual borrower as well.

The Bill ignores the fact that the resource pool, outreach, accessibility and target group for extension of services of the MFOs could vary widely in function, size and targets. But the licensing, qualification, registration, accounting standards, penalties are directed at all MFOs alike. The NABARD has been given the power to formulate policies to promote and help the MFOs. It is also against the public interest to empower closely held bodies to discharge banking functions, to accept savings from general public, especially those from economically vulnerable sections- small entrepreneurs, women, farmers.

The Regulator:

The Bill envisages NABARD as the primary regulator of the MFOs and the microfinance ‘sector’, empowered to discharge a range of functions. A Micro Finance Development Council⁸ (Sections 3, 4, 5) is envisaged, to advise the NABARD on ‘orderly growth and development of the microfinance sector’. The procedures and functioning are to be specified under the regulation-making power of the NABARD (Section 34). The powers of this Council, are purely advisory, and their ambit is regulated by NABARD.

The Bill vests a host of powers in NABARD which is also envisaged to be the key stakeholder in the microfinance ‘sector’. NABARD is expected to manage and monitor the registration system for MFOs. No MFO under this Bill can operate without the NABARD certificate of registration. Existing MFO’s have to apply for registration within six months of the commencement of the Microfinance Act.⁹ One of the conditions for qualifying for a certificate of registration is minimum net owned funds of Rs. 5 lacs, created out of promoter’s contributions or grants or donations, and existence for at least three years. The NABARD is also given the power to cancel registration, inspect books of accounts and impose penalties.¹⁰ Every MFO is expected to create a Reserve Fund, into which they have to deposit not less than 15% of their net profits. They can only withdraw from the Fund, for purposes indicated by NABARD.

A number of cooperatives, under the MACS Act or state cooperative Acts will now be subject to this elaborate regulatory regime, without which they will be disqualified from carrying out microfinance business. Under present laws, these cooperatives are subject to the rigours of banking law, only when they want to move into banking business and want to be able to accept deposits from the public at large. So far, they have had the powers to devise their own policies, targets, arrange resource pools according to the needs of their members, and with their consent. These have emerged as autonomous, democratic institutions, able to discharge their functions, within the resource constraints and the circumstances facing them. The overriding clause in section 32¹¹ is meant to override all other related laws. Hence, the MACS Act and other cooperative Acts will be completely undermined.

NABARD is also placed in charge of managing the Microfinance Development Fund, because of which the NABARD is expected to be a refinancer in the sector as well.¹² This, more or less, implies that NABARD is in the position of a policy-maker, policy-executor and policy-arbitrator as far as the microfinance ‘sector’ is concerned.

Other Provisions

The Central Government has the power to exempt certain MFOs or a class of MFOs from the application of the Act or parts of it.¹³ The Central Government also has the power to make rules on a range of matters..¹⁴ The NABARD is given power to make regulations on a range of matters, including management of the Fund, determining terms of loans from the NABARD, forms of securities. While creating this elaborate regulation mechanism, the Bill fails to address some basic concerns of small savers/SHGs: caps on interest rates, policy on unproductive loans (on death/marriage/illness- which are not expected to create any income, and hence, are difficult to pay back), policy on securities/collateral (lack of collateral being the key reason why these sections are not able to access credit from the market).

Comments on the Bill in General

The Microfinance Bill 2007 seems to suffer from a promise of over-regulation. There may be an efficiency argument to back the aim of tidying up and regulating the microfinance activities spread across the country, in the form of a sector. However, better resource management, can be achieved through the existing structures in place. For instance, the RBI has urged commercial banks to earmark some amount of funds for micro-credit from time to time, and have even issued guidelines in this regard. The State Cooperative Societies Acts can be strengthened. The NABARD can be involved sector-wise, in agriculture, small industries, urban small enterprise, etc. What the Bill seems to lack is a real idea of how these informal institutions have been working.

The documentation of the experience of SHGs so far seems to suggest that these have pooled in not only collective savings, but also collective judgment about how best a certain problem or obstacle can be tackled. And this can be done only through micro-interventions and micro-thinking. The policies that may be formulated at a national level by the NABARD, in exercise of its abundant power in the Bill, are not going to affect small farmers, autorickshaw-owners, cash-crop-growers alike.

Hence, the Bill seems to be doing the unnecessary and creating impediments in the emergence of decentralised, participatory, autonomous self-help units, which have been the goals of most micro-credit movement across the world. Microcredit movements have not only represented an initiative towards the alleviation of poverty, but also decentralised democracy. It defeats the purpose of an effort towards a successful ‘microfinance sector’ if it is regulated, aided, controlled and supervised by state-aided institutions.