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FM: Microfinance rules after RBI report
November, 20th 2010

Finance minister Pranab Mukherjee on Friday said the Union government will finalize a regulatory architecture for microfinance institutions after a central bank-appointed committee submits its report in January.

Despite the crisis the microfinance industry is facing in Andhra Pradesh in the wake of an ordinance aimed at prescribing stricter norms for the sector, it would be prudent to wait for the Reserve Bank of India (RBI) report, Mukherjee said at the Hindustan Times Leadership Summit on Friday.

I cant press the panic button, he said. To find remedy, (one) shouldnt bring harm to the system.

According to Mukherjee, microfinance institutions are an instrument of financial inclusion as they serve a segment of the population without access to banks.

RBI appointed a sub-committee in October under one of its board members Y.H. Malegam to study the industry and recommend ways to better its practices. Microfinance companies organized as non-banking financial companies, which have made 80% of the industrys outstanding loans, are regulated by RBI.

The microfinance industry is facing a repayment crisis in Andhra Pradesh after the state government issued an ordinance on 15 October, which imposed tough restrictions on the industrys functioning.

The ordinance, which is yet to be cleared as legislation by the state assembly, was promulgated on the heels of allegations about exorbitant interest rates and coercive recovery methods by the microfinance industry.

Mukherjee said he had read the Andhra ordinance and suggested changes in it to the state government. I do hope they will get reflected, he said.

The finance ministry is currently working on legislation to regulate the microfinance industry. Though the ministry has asked banks to push microfinance companies that are their clients to bring down interest rates, the proposed Bill will not cap interest rates.

My idea is not to strangulate it (the microfinance industry), Mukherjee said.

On 13 October, financial services secretary R. Gopalan said that the government had no plans to cap interest rates charged by microfinance institutions.

It is not feasible to control interest rates. As far as we are concerned, the microfinance regulation Bill is in the offing...and in that Bill, we will never have a provision for control of interest rate, Gopalan said on the sidelines of a function organized by Oriental Bank of Commerce in the Capital.

Mukherjee said the governments aim was to establish a framework for the microfinance industry where the interest rate on loans would not be exorbitant and coercion would not be part of the recovery process.

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