Though the finance ministry proposes to make the Reserve Bank of India (RBI) the sole regulator for the countrys troubled micro finance institutions (MFIs), the central bank has said this will not override the decisions of state governments.

The Andhra Pradesh government has its own law to regulate the MFIs. About one-fourth of the MFI industry is concentrated in this state.

RBI cannot override the sovereign powers of the state. We are regulating the segment and on that we have the right to impose restrictions. That does not mean states cannot do anything, Deputy Governor K C Chakrabarty told reporters after attending a meeting of RBIs Central Board of Directors here today.

The central bank would have the powers to formulate policies for the sector and regulate it, the finance ministry said in the draft of the Micro Finance Institutions (Development and Regulation) Bill, released yesterday for public comments.

The earlier Bill of 2007, which has lapsed, had sought to regulate only those MFIs not under the ambit of any law. So, banks and a few categories of non-banking finance companies (NBFCs) were kept outside the purview of the Bill.

Last year, the Andhra Pradesh government had issued an ordinance to regulate MFIs in the state in the backdrop of a number of suicides by borrowers following alleged harassment by recovery agents. When asked about implementing a cap on interest rates for MFIs, Chakrabarty said the central bank would take a decision once the matter came to it for consideration.

The Malegam committee of RBI had recommended an average margin cap of 10 per cent for MFIs having a loan portfolio of Rs 100 crore, of 12 per cent for smaller MFIs and a cap of 24 per cent for interest on individual loans. Currently, most MFIs are charging an interest rate over 24 per cent.

Depending on the size of their operations and other relevant parameters, MFIs will be required to maintain the percentage of margin as may be specified by RBI from time to time. MFIs will have to convey to every borrower the annual percentage rate, comprising the annual interest rate, processing fees or any other charges or fees levied by them. The Bill says every micro lender must create reserve funds for loans and refinance to other micro-finance companies.

State should be part of MFI regulation

Pointing out to challenges in regulation of micro finance institutions (MFIs), Former Deputy Governor of RBI Usha Thorat said the task will be difficult and would require assistance of state governments.

On decentralisation of the regulation she said, States have a better reach to the MFIs which operate across boundaries. Hence, they should be made a part of the regulation process, while speaking on the sidelines of an event in Mumbai today.