Microfinance Institutions Bill: return of the prodigal son

The recently issued draft Microfinance Institutions (Development and Regulation) Bill, 2011, offers a ray of hope for India’s crisis stricken microfinance institutions (MFIs). Over the last couple of years, the industry has been in the headlines for all the wrong reasons: the very public boardroom squabbles of a premier MFI and suicides by poor farmers, allegedly as a result of harassment by loan recovery agents.

The state of Andhra Pradesh, which accounts for approximately 40% of India’s MFIs, was the first to react to these tragedies. It promulgated an ordinance that laid down stringent norms on recovery of loans to be followed by MFIs. The fallout of this was bad debts of approximately ₹90 billion (US$2 billion) and with banks simultaneously putting the brakes on credit, many MFIs went bankrupt. The Microfinance Institutions Bill, therefore, comes at a time when the credibility of the industry is at a record low.

Legitimacy restored

At the very outset, the bill declares that MFIs will be treated as “extended arms of the banks and financial institutions” and that they will be considered as valued partners of the Reserve Bank of India (RBI) in its push for financial inclusion. This reaffirmation of the legitimacy of the microfinance sector gives greater clarity on its role in the upcoming years.

Sawant Singh is a partner at the Mumbai office of Phoenix Legal. Hemant Krishna V is an associate at the firm’s Mumbai office. They can be reached at sawant.singh@phoenixlegal.in and hemant.krishna@phoenixlegal.in.