The Proposed Micro-Finance Bill and Regulating Micro-Finance in India: Getting The Framework Right…

Ramesh S Arunachalam

Rural Finance Practitioner

Yesterday, there was an article in the media that suggested that the proposed MF bill in India is likely to accommodate all kinds of MFIs including NBFCs, which are currently regulated by RBI. And it also mentioned that a special body would perhaps be created to regulate micro-finance. The increased interest for regulating micro-finance is clearly welcome and certainly long overdue. While we have been talking so much about the need for a comprehensive and exclusive regulatory structure for micro-finance, an important question here is: which specific institution is best positioned to perform the given responsibility?

Should it be the RBI or NABARD or a new agency or the industry associations (Sa-Dhan, MFIN or INAFI etc)? There are no easy answers but if the right process is followed, then, I am sure that we can get the framework right and institutions for this complex job… Here are some lessons from past experiences for what they are worth and what they are not and read on…

Comparative Analysis of Assets of Alternative Regulatory Structures: A regulatory system is more efficient if the responsibilities are assigned to the institutions/bodies that have the powers, resources, skills, and knowledge to perform them most effectively. If one uses this framework of analysis, the assets of a new proposed regulatory body (as per the proposed MF Bill) or SRO or similar organization (such as an industry association – Sa-Dhan or MFIn or INAFI) should be compared to the statutory regulators’ assets as they pertain to specific regulatory activities. This is a very critical exercise and must be done objectively and with utmost integrity. A related key question here is whether the proposed new body or SRO or industry association has, or can obtain, sufficient skills, resources, and capacity to perform its responsibilities effectively. If sufficient capacity does not exist or cannot be developed, building a regulatory structure that relies on such new bodies, SROs or industry associations will not yield the desired result. It may be safer to go with the major (primary) regulator in that case.

That said, other factors that should also be considered including the following:

·         Legal Jurisdictions: Which body has the legal jurisdiction to make rules and to supervise the micro-finance industry players involved – especially, given their diverse and varied legal forms?

·         Power and Authority: Which body has the power and authority to investigate, discipline, and impose effective sanctions on the micro-finance industry players involved? For example, most SROs or industry associations may have the power only to collect evidence from and to discipline member firms and their employees.

·         Conflicts of Interest: Do significant conflicts of interest arise/exist? Conflicts of interest always exist in regulatory systems but vary depending on the type of regulation and institution involved. There are obvious trade-offs and these need to be evaluated as well

·         Existing Regulatory Mechanism As A Platform: Is there an existing regulatory structure that can serve as a foundation for the proposed new micro-finance regulatory system? Has it been effective and can it be used as a platform?

·         Industry Specific Knowledge, Skills and Experience: Who possesses the knowledge, expertise, and skills required to regulate and supervise micro-finance?

·         Industry Information and Data: Which body has access to the information and data needed for the task of regulation and supervision? For example, would an SRO/industry association have access to all relevant records and information, or could an SRO/industry association obtain the necessary access?

·         Regulatory Tools: Which body has the necessary regulatory tools (including information technology tools) for the complex task of micro-finance regulation/supervision?

·         Resources Including Finance: Last but not the least, which body has the funding and resources to do a proper job and deliver in terms of regulating and supervising micro-finance in an enabling manner?

I really hope that, the concerned various stakeholders approach the issue of deciding on the micro-finance regulator using an objective and professional process, giving due consideration to issues such as those identified above…

Have A Great Day At Work!