Who Should Regulate and Supervise Micro-Finance in India?

Ramesh S Arunachalam

Rural Finance and MSME Practitioner

Two aspects with regard to regulation and supervision deserve mention here. As noted in chapter 35 of my book, while the increased interest in regulating all of micro-finance is clearly welcome and certainly long overdue an important question here is: which specific institution is best positioned to perform the given responsibility? Should it be the RBI or NABARD or NHB or a new agency or even 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 we can get not only the framework right but also ensure that most appropriate institution(s) get(s) this complex job.  Here are some lessons from past experiences that could assist in helping us make the choice.

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 their roles most effectively. If one uses this framework of analysis, the assets of a proposed new body (Micro-Finance Development Council, MFDC) as per a special bill to be enacted in Parliament or SRO or similar organization (such as an industry association like 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 regulatory body or SRO or industry association has, or can obtain, sufficient skills, resources, and capacity to undertake 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 (s) in that case. That said, other factors should also be considered in choosing the institution to function as the authority and they include the following:

·         Legal jurisdictions: Which institution 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 institution 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 institution has the funding and resources to do an effective job and deliver in terms of regulating and supervising micro-finance in an enabling manner?

I really hope the various stakeholders approach the issue of finalizing the exclusive micro-finance regulator/supervisor using an objective and professional process, giving due consideration to issues such as those identified above