NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Tuesday, May 22, 2012

NEW DELHI – The Indian government Tuesday introduced a bill in Parliament that will give power to the country’s central bank to regulate the microfinance sector, where companies lend to small borrowers.

Introduced in the lower house of Parliament by Finance Minister Pranab Mukherjee, the Microfinance Institutions (Development and Regulations) Bill will give powers to the Reserve Bank of India to set the maximum interest rate that can be charged by micro lenders.

The RBI will also set performance standards for the institutions and ensure that they use “fair and reasonable methods” for the recovery of loans.

Micro lenders borrow funds mostly from banks and offer small-ticket loans of about $200 to help people start or expand small businesses.

Microfinance was once hailed as an ideal vehicle to serve the financial needs of the poor, but micro lenders in India have been criticized for charging exorbitant interest rates and using coercive means to recover debts. This prompted governments in states such as Andhra Pradesh to come up with stringent policies to govern the sector.