Microfinance Regulation for Financial Inclusion: The ‘Street Child’ Needs Nurturing…

Publication Date: 2007
Published by: Microfinance Regulation and Supervision Resource Center
Document Type: Paper (PDF)

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This essay discusses regulatory responses to MFI abuses in India and highlights the efforts in building a regulatory framework for microfinance.

This paper compares the Indian policy makers’ approach to microfinance to that of most people towards street children: “everyone agrees that they need nurturing”, but no one wants to do anything about it”.

The paper discusses:

• The hesitation on the part of the “Reserve Bank of India (RBI)” to provide a sound regulatory system for microfinance;
• The formal financial sector in India and the control that the central government still exerts on much of the banking sector;
• The government’s initial efforts to support MFIs;
• The impetus that these efforts provided to the microfinance sector;
• The recent regulatory concern of “client protection” and the involvement of politicians in the media outcry against MFIs;
• The introduction of “business/banking correspondents for the purpose of disbursal and recovery of “small values credit”;
• Future prospects for developing a regulatory framework for microfinance.

The paper concludes that the government’s acceptance of limited regulation of MFIs that accept thrift from members is a positive step towards financial inclusion.

The paper recommends the:

• Down-scaling of banking products and services to suit micro-clients;
• Removal of interest rate caps on small loans;
• Loosening of interest rate controls for banks and the creation of enabling regulations for MFIs.