Kiva Scholar: In India, new microfinance regulations are on the table

India is home to 17% of the world's population and its largest microfinance market, but over the last few year's the future of the industry in the country has become increasingly uncertain.

In fall 2010, India's microfinance industry was growing rapidly, nearing $4 billion a year. But as competition heated up and more borrowers took out more loans, over-indebtedness spread like wildfire. And aggressive collection practices prompted a rash of suicides, among small farmers in particular.

Sensational journalism, combined with the lucrative $1.5 billion IPO of one of India's largest MFIs, SKS, triggered massive public outcry. In response, the Indian legislature cracked down on microcredit providers, passing a law that gave the industry a black eye and left many borrowers with zero financial options.

To restore balance following this crisis, new legislation was introduced in Parliament last month -- the Microfinance Institutions (Development and Regulation) Bill of 2012.

Shamika Ravi, assistant professor of economics and public policy at the Indian School of Business, believes the bill has the potential to “herald the next stage of microfinance growth in India.” The bill attempts to strike a balance between client protection and allowing microfinance institutions the regulatory freedom to reach as many borrowers as possible.

Recently, Ravi summarized the features of the bill for the Financial Access Initiative. Here are some of the main points:

- Recognition of the Reserve Bank of India (RBI) as the sole regulator of MFIs. The bill would empower the RBI to specify sector-related benchmarks and and performance standards pertaining to methods of operation and fair and reasonable methods of loan recovery by MFIs.

- Strengthening client protection norms. The bill would mandate the establishment of advisory councils at the central, state and district levels and restrictions on pricing and profitability. The bill provides for the constitution of the microfinance development council to advise the Central Government on formulation of policies and measures to manage orderly growth and development of microfinance institutions.

- Establishment of a Microfinance Development Fund. The fund would enable lending, equity investment, capacity building and research initiatives. The bill would empower the RBI to set up the fund to provide loans, grants and seed capital, as well as training for microfinance institution personnel.