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Overview of Regulatory Environment There is a wide array of institutions and classifications that overlap in the India microfinance sector, making analysis difficult and identification of appropriate regulators confusing. Furthermore, the scope and reach of microfinance in India is hard to capture because direct bank lending is usually not included in microfinance analysis. Commercial banks in India are required to make a certain percentage of loans to designated "priority sectors." Microfinance is one of the priority sectors banks may choose from, and loans are made to institutions as well as individuals in order to fulfill the requirement. The majority of microfinance is provided by commercial banks, regional rural banks (RRBs), self-help groups (SHGs) (with special linkage programs to banks), cooperative societies, and microfinance institutions (MFIs) that take a variety of forms, including NGOs (registered as societies, trusts or Section 25 companies) and non-bank financial companies (NBFCs).
Banks and NBFCs are regulated by the Reserve Bank of India (RBI) (with the National Bank of Agriculture and Rural Development (NABARD) supervising and inspecting RRBs); SHGs are regulated by NABARD; cooperative societies are regulated by the state-appointed Registrar of Cooperative Societies (RCS) and state government (with NABARD conducting supervision and inspections); and cooperative banks are regulated by RBI and RCS. Because not all register as NBFCs, most MFIs fall outside of the regulatory gambit though hundreds have joined umbrella organizations including Sa-Dhan and Micro Finance India Network (MFIN). Under pressure from RBI, MFIN has created a code of conduct in order to prevent over-lending to individual borrowers and plans to form ombudsmen offices to address grievances, while Sa-Dhan is developing a code of conduct as well. NBFC MFIs have also come together to form Alpha Micro Finance Consultants P Ltd, in order to provide credit bureau services to MFIs in India.
A widely-debated Micro Financial Sector Development and Regulation Bill was introduced in 2007 but has not been passed to date. Important proposed changes to the microfinance industry include: bringing societies, trusts, cooperatives and certain other qualifying microfinance institutions under an overarching microfinance regulation; allowing certain qualifying institutions to mobilize deposits; and appointing NABARD as the new regulator for the microfinance sector. |
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Read this INFORMATIVE PROFILE of the legal and regulatory environment for microfinance in India from the Comparative Database on Regulation and Supervision. |
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Financial Regulators |
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| Reserve Bank of India | ||
| National Bank of Agriculture and Rural Development (NABARD) | ||
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Recommended Reading |
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| » | Microfinance India - State of the Sector Report N. Srinivasan (2008) |
| » | A Hundred Small Steps. Report of the Committee on Financial Sector Reforms Raghuram Rajan (2009) |
| » | Report of the Committee on Financial Inclusion NABARD (2008) |
| » | Will Reforms Enable Outreach? M-CRIL Review of Rural Banking in India Microcredit Ratings International Limited (2008) |
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Microfinance Regulation for Financial Inclusion: The Street Child Needs Nurturing S. Sinha (2007) CGAP Essays on Regulation and Supervision |
| » | Existing Legal and Regulatory Framework for the Microfinance Institutions in India: Challenges and Implications M-CRIL (2006) |
| » | Updated Notes on Regulating Branchless Banking in India Consultative Group to Assist the Poor (CGAP) (2010) |