GoM discusses microfinance bill

NEW DELHI: The Group of Ministers (GoM) has discussed the microfinance bill to regulate microfinance institutions and self-help groups. The bill is likely to prescribe broad interest rates to be charged by MFIs. It is expected to be tabled in the budget session of the Parliament.

It will also spell out accountancy norms that MFIs should follow. MFIs have justified higher interest rates in the sector, saying it was not possible to keep the transaction costs low for the system to be sustainable. The government was therefore against putting a cap on the interest rates, as it would create artificial scarcity.

The MFIs want the government to empower them to mobilise savings accounts through the legislation. But the RBI has expressed reservations about the efficacy of MFIs in handling public money since it could put the interests of the depositors in jeopardy. The bill is also expected to address this issue.

The bill also appoint NABARD as the regulator for the sector. NABARD would regulate the banking needs of more than 400 million Indians, who are currently out of the banking system.

International venture funds have forayed into the microfinance sector which is expected to grow to Rs 35,000 crore, by 2010. The big funds planning to make a foray into the sector include, the Maharashtra government promoted VC Fund -Urjankur, UK-based CDC, Unitus Private Equity and Delhi-based Lok Capital.

Waking up to the bottom of the pyramid opportunity, a dozen funds with investments in microfinance have emerged over the last one year. Though these players are concerned about regulation in the sector, with recovery levels of 99.5%, microfinance is seen as an extremely profitable venture, with low levels of non-performing assets.

Experts say only 5% of the annual credit demand is met for the population living below the poverty line. Nearly 80% of the demand is met by the informal sector.