Microfinance in India: A New Regulatory Structure
This paper analyzes the strengths and weaknesses of the current regulatory structure in India, including the pending Malegam Micro Finance Institutions (Development and Regulations) Bill 2011. It examines how MFIs view the proposed Reserve Bank of India (RBI) regulation, and concludes by offering a perspective regarding the future of microfinance regulation in India.
The paper predicts that the latter half of 2011 will be telling for the future of the microfinance regulatory regime as RBI clarifies the acceptance of the Malegam Report and its role with regards to MFIs. Conclusions include:
- Regulation will be refined as MFIs implement the new requirements and consumers and regulators see a theoretical framework put into practice;
- Some of the more restrictive requirements of RBI regulation will be reduced or eliminated as the sector returns to a state of normalcy;
- Regulation seems to favor larger institutions that can adapt to changes more easily due to economies of scale, advanced MIS systems, and higher operational efficiencies.
The paper predicts the birth of innovative companies and microfinance models that aim to circumvent the new regulatory structure. It recommends that regulators must address issues such as implementation of priority sector lending requirements, diversification of funding, and acceptance of public deposits, as the sector develops.
