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Microfinance Bill

microfinance bill

26 June 2007 -


The Micro Financial Sector (Development and Regulation) Bill, 2007 seeks to promote the sector and regulate micro financial organisations (MFO).
  • National Bank for Agriculture and Rural Development (NABARD) shall regulate the micro financial sector.
  • Every MFO that accepts deposits needs to be registered with NABARD. Conditions for registration include (a) net owned funds of at least Rs 5 lakh; and (b) at least three years in existence as an MFO. All MFOs, whether registered or not, shall submit annual financial statements to NABARD.
  • Every MFO that accepts deposits has to create a reserve fund by transferring a minimum of 15% of its net profit realised out of its thrift and micro finance services every year.
  • This page is organised as follows: The highlights of the Bill and the key issues to be considered are listed briefly first; the details of each are presented thereafter. Click here to see the highlights in detail, and here to see the detailed analysis of key issues.

    The central government may establish a Micro Finance Development Council to advise NABARD on formulation of policies related to the micro financial sector.
  • NABARD shall constitute a Micro Finance Development and Equity Fund to be utilised for the development of the sector.


    While the Bill promotes the activities of MFOs, there are differing opinions on the cost efficiency of the MFO model.
  • NABARD is designated as the regulator of the micro financial sector. However, its dual role as a key participant in the sector and the regulator could lead to conflict of interest.
  • Banks and deposit taking Non-Banking Financial Companies (NBFCs) have to comply with Reserve Bank of India's (RBI) prudential norms designed to safeguard depositors' funds. While the Bill enables NABARD to prescribe norms for MFOs, it specifies some norms which

    are less stringent than for banks and NBFCs.

  • Unlike banks regulated by RBI, the Bill does not exempt registered MFOs from the Usurious Loans Act, 1918 or state laws which cap interest rates.
  • The Bill defines 'micro financial services' to include insurance and pension services without specifying to whom such services are to be provided. This implies that every insurance and pension company would be regulated by NABARD.



    Micro finance is defined as the provision of thrift (savings), credit and other financial services and products of very small amounts to the poor for enabling them to raise their income levels and improve living standards. In India, micro finance is provided by apex development financial institutions (such as National Bank for Agriculture and Rural Development - NABARD, Small Industries Development Bank of India, and Rashtriya Mahila Kosh), commercial banks, regional rural banks, co-operative banks, non banking financial companies (NBFCs) and various not-for-profit entities.

    There are different mechanisms through which the delivery of micro credit loans takes place. Banks may lend directly to customers. Second, NABARD sponsors the Self Help Group-Bank Lending Programme (SBLP). Under SBLP, self help groups (SHGs) need to save regularly for a minimum of six months and maintain prescribed records and accounts in order to become eligible to be linked to local banks. This programme provides credit to 22.38 lakh SHGs. Third, commercial banks or apex institutions lend to micro finance organizations (MFOs) for further lending to groups or individuals (see chart below).

    Chart: Institutional flow of micro finance

    MFOs lend to SHGs and joint liability groups (JLGs, which are also known as grameen groups). The number of MFOs in India involved in lending activities is estimated to be around 800. These MFOs vary significantly in size, outreach and credit delivery methodologies. Presently, the lending activities of MFOs are not regulated except for those registered as NBFCs.

    Table 1: Difference between SHGs and Grameen/JLGs

    Category: Payday loans

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