A commentary on the micronance legislations in India

Anish Shankar Menon January 2, 2014

Abstract This paper provides a commentary of the micronance legislations in India namely the Andhra Pradhesh Micro Finance (Regulation and Money Lending) Act, 2011 and the Micronance Institutions (Development and Regulation) Bill, 2012.

Introduction

Micronance was unregulated by any legislation for most part of its existence in India. Towards the end of the last decade, the Government of Andhra Pradhesh (hereinfter the AP Government) passed the Andhra Pradhesh Micro Finance (Regulation and Money Lending) Ordinance, 2010 (hereinafter the Ordinance) and correspondingly the Andhra Pradesh Micro Finance Institutions (Regulation of Money Lending) Rules 2010 (hereinafter the Rules). The Ordinance, which later became the Andhra Pradhesh Micro Finance (Regulation and Money Lending) Act, 2011 (hereinafter the Act) was enacted as a response to what the AP Government felt was the growing 1

malpractice of the micronance industry (MFI) in the State. In 2012, the Central Government tabled the Micronance Institutions (Development and Regulation) Bill, 2012 (hereinafter the Bill) which dealt with the regulation of the MFI in India. If passed, the Central Act would supersede the State legislation in matters that are dealt in both legislations. This paper tries to provide a clause by clause commentary of both the Act and the Bill.1 It provides a comparative analysis wherein the provision in the Act is analyzed rst followed by the corresponding provision (if any) of the Bill. The important sections exclusive to the Bill are then studied.

The legislations at a glance

The Ordinance was promulgated on the fteenth of October, 2010. The Act was passed on the rst of January, 2011 with retrospective eect from the date of promulgation of the Ordinance. The Ordinance has twenty four sections with forty one sub-sections while the Act has twenty ve sections with forty one sub-sections. Both the legislations have fourteen denitions. The Ordinance and the Act are almost identical except for a minor dierence in one denition. In S 2(d) of the Ordinance, under the denition of Micro Finance Institution, the Ordinance uses the term low income population while the Act uses the term below poverty line population in the same denition which is also numbered S 2(d) in the Act. The Bill is divided into twelve chapters. It has fty two clauses and eighty seven sub-clauses. It has eighteen denitions in S 2. In the following section, the paper critically comments on each provison
1 Note: Some clauses have been omitted from discussion if they are simple denitions or are self explanatory without a need for interpretation. In this matter, the author has exercised his personal choice and discretion.

of the Act and the Bill. First the section in the Act is looked at and then the corresponding clause in the Bill is examined.

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3.1

Commentary
Preliminaries

Section 1 of both the Act and the Bill provides the short title, commencement and extent of the legislations. It also elucidates the objective of the legislations. The objective of the Act is to protect the women self help groups (SHGs) from exploitation by the MFIs in the State of Andhra Pradhesh (AP). The Act clearly demonstrates that it was enacted as a reaction to some event(s) that occurred in the State which expedited the need for, according to the Government of AP, such a legislation. The title does not seem to say that the Act is for regulating MFIs in the State. Instead it says that it was enacted to protect women SHGs from explotation by MFIs. In a way it assumes that MFIs are prima facie exploitative in nature which paints such institutions in bad light. The Bill on the other hand states as its objectives, the development and regulation of MFIs. It is more broader in scope as it includes all rural poor and people from certain disadvantaged sections. Another objective is to promote nancial inclusion. Though the Bill might too have been drafted and oored in haste as a response to the Act, it is certainly more well thought out. The Act is applicable to the State of Andhra Pradhesh while the Bill extends to the whole of India. Another salient feature of the Bill is that it demonstrates the Central Governments desire to bring MFIs under the regulation of the Reserve Bank 3

of India (RBI).

3.2

Denitions

Section 2 of both the Act and the Bill deal with denitions. This section deals with important denitions in the Act and the Bill. The focus is on denitions of common terms in the legislations. Section 2(b) of the Act denes interest. Interest according to the Act is only the return on the amount lent. However the Bill has a much wider denition in clause 2(1)(a). It uses the term "annual percentage rate" and which is an annualized rate of all amounts charged by the MFI including interest, processing fees, service charges and similar fees. This means that the MFIs according to the Act can charge higher rates as other fees and will not be in violation of any provisions. A further reading of the Act shows that only interest as dened by it is to be displayed. Hence the MFI can still earn a high margin with fees other than interest in AP. (This is taken care of by the Rules which denes eective rate of interest that includes insurance and all other fees.) Section 2(c) of the Act denes loan. The Bill does not have a denition of loan but a similar denition for micro-credit facilities exist in clause 2(1)(h) and clause 2(1)(j)(A) of the Bill. Both cases include advances in cash or kind. However the denition in the Bill is much more comprehensive. In fact the Bill denes micronance activities in clause 2(1)(j) which includes micro-credit facilities. The maximum loan amount in mentioned in the Bill to be Rupees Five Hundred Thousand or such sum as may be mentioned by the RBI. Such a limit is not mentioned in the Act. In a way this shows the Cenral Governments desire to entrust the control of MFIs to the RBI. The reason would be driven by the fact that a considerable number of MFIs are 4

registered as Non Banking Financial Companies (NBFCs) which are already under the control of the RBI. The Malegam Committee Report that was a precursor to the Bill was also commissioned by the RBI. A loan would include guarantees in the case of the Bill. Though not explicit in the Act, loan could also be construed to include guarantees since the Act includes payment on account of or on request of another person. Another noticeable dierence between the Act and the Bill is that, in the case of the Act, only loans given to SHGs are covered. Reading the denition in entirety, it has to be construed that any person would be either a member or having any relation to a member of the SHG and not a third party. Such a limitation however is not placed in the case of the Bill. The impact of this lies in the fact that the SHG model is one of the many models of micro-credit delivery. The Act aects only the SHG model of business. The other models do not seem to be covered under it. This is sought to be remedied in the denition in the Bill. Section 2(d) of the Act denes a micronance institution. The denition of the Act is not complete. It is open to questions of interpretation. For example it includes a Society registered under the Andhra Pradhesh Cooperative Societies Act, 1964, or the Andhra Pradhesh Societies Registration Act 2001 and the like, in whichever manner formed and by whatever name called. On reading this could be interpreted as being relevant only to societies. It could further be argued that co-operative societies registered under dierent legislations would also not be covered under the Act. It also means that trusts do not fall within its ambit. All other micronance activities such as microinsurance, pension services and other similar functions generally carried on by MFIs are excluded. Only MFIs that lend to the below poverty line (BPL) population are included in the denition. The dierence between

a person below the poverty line and just above it in most likelihood is negligible. It could be inferred that the BPL status is determined by whether a person holds a BPL card or not. This means that if the MFI lends to persons without the BPL card are excluded from the denition. The denition uses includes person. This could be construed as having the same meaning as S 2(31) of the Income Tax Act, 1961. This means that even individuals are included under this denition. The implication of this is that unregistered moneylenders are also included under the ambit of the Act if they lend to the SHGs as dened under the Act. However if such a reading of the denition of person is made then trusts are also included. The Bill has a much more clearer denition under clause 2(1)(i) and enumerates the forms of organizations that can be considered to be MFIs. It explicitly excludes individuals who are registered moneylenders. It extends the breadth of the denition by allowing the RBI to declare such institutions to be MFIs as it may deem t. Hence if the RBI so wishes, unregistered moneylenders too can be covered under the denition in the Bill. Section 2(g) of the Act denes registering authority. The project director of District Rural Development Agency and of MEPMA is the registering authority in case of rural and urban areas respectively. The district collector may nominate a registering authority under his discretion also. In the Bill, no such denition exists. However under clause 14 of the Bill, registration must be done with the RBI as per regulations specied. In both cases MFIs would be subject to multiple statutory requirements. For example a company carrying on micronance business would be governed by the Companies Act, 1956 and also the Bill. This would increase compliance and reporting costs signicantly. Section 2(h) of the Act denes registration to mean registration of MFIs

under the Act. No corresponding section exists in the Bill but as mentioned above S 13 of the Bill says that MFIs cannot conduct business without registration and clause 14 as mentioned above assigns the RBI as the registering authority. Section 2(i) of the Act denes denes a Self Help Group (SHG). According to the Act, an SHG has a few features. First, it should be formed by women on principles of self help. It should also be registered aa SHG with the Society for Elimination of Rural Poverty (SERP) in the rural areas and the Mission for Elimination of Urban Poverty in Municipal Areas (MEPMA) in urban areas. The Act targets a particular section of the people i.e., the Government sponsored SHGs. What this means is that if the SHGs consist of male members and/or is not registered under the aforementioned programs then it is not covered under the Act. Though micronance is predominantly targeted at poor women, men too fall under its purview. The Bill therefore does not dene what a SHG is. Section 2(j) of the Act denes SHG Bank Linkage. This is simply the credit provided by banks to SHGs based on a micro credit plan prepared by the SHGs for business activities. It thus does not include personal loans. This also in a way suggests that MFIs are facilitators who essentially act as intermediaries between the bank and the SHG and nothing else since the economic plan must be developed by the SHG. The denition has no mention in the Act apart from being dened and seems superuous. A similar provision does not exist in the Bill. Section 2(k) of the Act denes a SHG member. Read in conjunction with S 2(i) this would be a woman who is registered with the SHG and intends to borrow though it. This clause causes some confusion as the SHG has to be registered as per S 2(h) with the concerned authority. The registration of

the member would then be a second level of registrations where the member registers with the SHG. The process of registration and documents for proof of registration have not been mentioned in the Act. The Bill has a similar denition of client under clause 2(1)(b). The denition includes members of SHGs, MFIs or any other groups thus making it broader than the denition in the Act. The client has to be a member of the institution only amd registration is not compulsory. Also, in contrast to the Act, both men and women can be clients.

3.3

Registration

Section 3 of the Act deals with registration of MFIs. Section 3(1) of the Act requires that the MFIs in existence apply for registration within thirty days of the commencement of the Act with the registering authority. They have to furnish information of among other things of the interest rate that they would charge. This interest rate cannot be called the eective interest rates according to the Act since it only includes a return on the amount lent as per the denition of the Act and does not include any fees or ancilliary charges. However this lacunae has been solved by the Rules that denes eective rate of interest to include all other charges. The MFI also has to provide details of how it would conduct due diligence, recovery of balances and other similar information. It also has to provide a list of people involved in collecting and recovery of the loan amounts. This part of the provision is unclear since if one were to interpret this provision broadly then everyone in the MFI would be in the activity of lending and recovery of funds. If this was interpreted in a narrow perspective then this would mean the people involved in the lower levels where the loans are actually disbursed and recovery made. In either case the exercise is futile since a reasonably high level of employee turnover 8

may be expected in a MFI and the Act does not indicate that any change in employees should be notied to the registereing authority. Hence both the rationale and ecacy of this part of the provision is questionable. Chapter V of the Bill in entirety deals with the registration of the MFIs. As mentioned earlier the registration authority is the RBI. Clause 14 of the Bill deals with registration. An important point to note is that the section furthers the confusion created in clause 2(1)(j) of the Bill. Clause 2(1)(j) denes micronance services wherein it not only includes micro credit facilities but also pension and insurance services among other services. Pension is regulated by the Pension Fund Regulatory Development Authority (PFRDA) while insurance is regulated by the Insurance Regulatory Development Authority (IRDA). Service providers would therefore need multiple registrations. Section 3(3) of the Act essentially means that the registration granted is for a period of one year and has to be renewed after the end of the period. A similar renewal is not envisaged in the Bill. The renewal would add to the complexity and cost of operations of the MFI. Section 3(4) of the Act deals with the grant of renewal of registration of the MFIs. The provision says that the decision to renew or not will be takena after assessing the performance of the MFI and after hearing objections if any from the general public regarding the renewal. This provision could be subject to a lot of misuse since according to it virtually anyone could object the renewal of registration of the MFI. No corresponding provision exists in the Bill. Section 4 of the Act deals with the registering authoritys maintenance of registers of all the MFIs under its jurisdiction. On reading the Rules, the register (every jurisdiction will have only one register) contains a list of all MFIs in that jurisdiction along with some relevant information like registered

address, area of operation etc. This register is open to the general public for inspection. This provision is quite welcome since it provides all the important information as regards MFIs at a single place. No corresponding provision exists in the Bill. Section 5 deals with the registering authoritys power to suspend or cancel registration. Such suspension can be enforced for violation of any of the provisions of the Act. This too is a provision that can be misused. The registering authority can, suo moto or upon complaints of the SHG or its members or on the complaints of the general public, suspend or cancel the registration of the MFI after providing sucient reasons and allowing the MFI to be heard. This means that the registering authority can entertain complaints made by anyone and initiate action against the MFI. Another provision that is a cause of worry is S 5(2) of the Act which empowers the regisration authority to suspend registration pending enquiry. Rule 11 of the Rules that deal with the suspension seems unclear. According to it, the suspension will be eected after giving the MFI the reason for suspension. The suspension will then be followed by a notice and the enquiry will be nished within fteen days of providing the reason(s) for suspension. The notice shall be issues as per Rule 10(2) which gives fteen days for the MFI to show cause. This means that there are two distinct documents that the registering authority will send to the MFI. The rst being the statement of reasons and the second being the notice. Neither the Act nor the Rules lay down as to within how many days would the notice be sent after the statement of reasons is send. The term immediately seems vague. It would be better if a time for sending the notice after the statement of reasons is xed. Section 16 of the Bill deals with cancellation of registration and is much more well drafted. No suo moto action by the registering authority is

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prima facie envisaged and clear conditions are laid out as to why cancellation of registration may take place. Another point of dierence is that in the Bill, an aggrieved MFI has a clear method by which it could appeal against the suspension or cancellation of its registration. Such a provision does not exist in the Act. The Act however proposes the setting up of fast track courts for the disposal of micronance related cases in clause 15.

3.4

Matters relating to functioning of the MFI

Section 6 of the Act prohibits membership in more than one SHG. This would limit obligations to multiple parties. In case of existing multiple memberships, the member can choose the SHG she wants to be a member of and can send a notice(s) to the SHG(s) whose membership she wants to terminate. The member must then settle the amount(s) outstanding to the SHG(s) whose membership she has terminated within three months from the commencement of this Act. This provision could cause a lot of hardship for the member. Suppose a member has loans of |15,000 each from four SHGs which she took a day before commencement of this Act. This provision would essentiall mean that she would have to repay |45,000 within three months which otherwise might have had a longer tenure. No similar provision exists in the Bill. Section 7 of the Act states that the MFIs must not obtain any security from the member. Any security already obtained will stand released forthwith. An objective of micronance was to provide loans to people who did not have security. Hence this provision is in the spirit of micronance lending as envisaged by its founders. According to clause 2(h) of the Bill, a micro credit facility is dened as a loan, advance, grant or guarantee without security. Hence this provision of the Act is welcome. No similar provision exists 11

in the Bill. Section 8 deals with the public display of the interest rates by the MFIs. Read in conjunction with Rule 14 of the Rules, the interest rate means the eective interest rate. This is a welcome provision since the members would be able to choose the MFI based on interest rates. A similar provision exists in clause 26(3) of the Bill where the MFI has to clearly convey the annual percentage rate to the borrower and this should be clearly mentioned in the loan document or sanction letter as the case may be. Section 9 of the Act is essentially the restatement of the rule of Damdupat as stated in the Hindu law. This means that the MFI cannot recover interest more than the principle amount. The maximum ceiling amount of the total repayment of principle and interest is capped at twice the amount of the principle. Any excess amount so recovered has to be refunded to the borrower and such borrower will stand discharged of the loan. No corresponding provision exists in the Bill. Section 10 of the Act prohibits further lending to an SHG or its members without prior permission from the registering authority. It is true that this provision will prevent further indebtedness of members. However this would also delay loans to members who have a good track record and who require funds urgently. Coupled with the fact that the members are prohibited from joining multiple SHGs, this provision could cause distress in genuine borrowers. The procedure laid down in the Act for the top-up loan is long-winded and would cause distress to the members who would in most cases require the loan urgently. The MFI would be better equipped to assess the creditworthiness of its members and should be given freedom in topping up existing loans without permission subject to a cap. No similar provision exists in the Bill.

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Section 11 of the Act deals with the form of contracts between the members and the MFIs and the books to be maintained by the MFIs. The provision read along with Rule 20 of the Rules states that the terms would include the repament of the loans in instalments whose periodicity is not less than one month. Therefore the usual weekly repayments are prohibited. The interest too is calculated on a diminishing balance basis. Many MFIs used to calculate interest on the total amount, add the same to the principle and divide it into weekly instalments. The method envisaged by the Act would therefore reduce the interest received by such MFIs. The MFI has to maintain a cash book and a ledger recording its transactions. A similar provision exists in clauses 18 and 19 of the Bill. A formal set of books of accounts are to be maintained by the MFI that would be subject to audit by a Chartered Accountant or any other qualied person as determined by the RBI. The RBI too has powers to inspect the books of accounts. Under Section 11 of the Act, the MFI must also provide a statement to the borrower that clearly shows all terms of the loan within seven days of the loan being made. It must also provide receipts for repayments that are duly acknowledged by the borrower. Any document relating to the loan must be provided to the borrower if she makes an application in writing free of cost (Rule (22)). Collection of repayments must be made at a public place. It also prevents the deployment of recovery agents to recover the loans. Only those employees mentioned in Form 1 are allowed to recover loans under the provisions of the Act.2 A similar provision in the Bill is clause 25(2)(n) where the RBI can direct the MFI to disclose its acting as an agent for loan collection. However there is no provision that asks the MFI to provide a list
Rule 24. Form 1 refers to the form in which the list of persons responsible for the conduct of the business is to be provided to the registering agency and the problems associated with this has already been discussed while analyzing S 3 of the Act.
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of employees who are engaged in the activities of lending and recovery. Section 12 of the Act makes it mandatory for the MFIs to submit a monthly statement with information regarding borrowers, the amount lent and the interest charged. A similar provision exists in clause 23 of the Bill. However the periodicity of the returns and its contents are not specied.
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Section 13 of the Act provides powers to the registering authority or any ocer authorized by him to call for records, enter the premises of the MFI, search and seize any record and document. These are standard provisions usually found in land revenue and tax laws and give wide powers to the authority authorized to exercise it. Sections 100 and 102 of the Code of Criminal Procedure, 1973 apply to the search and seizure. According to Rule 26 of the Rules, witnesses can be summoned in accordance with the relevant provisions of the Code of Criminal Procedure, 1973 and Chapter X of the Land Revenue Act as the case may be. Two issues are of note in this section. First is an example of careless draftsmanship. It should have been record or document and not record and document. Second, the Act should have provided for the number of days the seized documents could be kept with the registering authority. Similar provisions exist in clause 27 (4)and (5) of the Bill. However powers of search and seizure are not provided under the Bill. This might be incorporated at a later date or mentioned in the rules that might be framed after the Bill has received assent. Section 14 of the Act empowers the SHG, its members and any member of the general public can register a complaint regarding any violation of the provisions of the Act by an MFI with the registering authority. According to Rule 28 of the Rules, this complaint has to be made in writing or over the toll free phone specially provided for this purpose and an enquiry will be
3 However the rst return according to clause 23 of the Bill has to be led within 90 days of the commencement of the Act (the Bill when passed).

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made within seven days of registering the complaint. As mentioned earlier in another instance, allowing the general public to register a complaint can lead to a misuse of the provision. Grievance redressal is given under Chapter IX of the Bill and the grievance redressal mechanism is yet to be formulated. A marked dierence between the Act and the Bill is that while in the Act, proceedings may be initiated by the registering authority suo moto or on a complaint by a member of the general public, in the Bill, no court will take cognizance of an oence only on a complaint by an ocer or any other person authorized by the RBI. This would prevent a lot of vexatious litigation to which the Act would be prone.4 Section 15 of the Act deals with the establishment of Fast Track Courts to settle disputes between SHGs and its member, or the SHG and the MFI or the members of the SHG and the MFI with regard to loans granted under the Act. These courts are to be established in every district and its jurisdiction determined. The cases have to be disposed o by the fast track courts within a period of three months. The Act however does not mention as to where the appeal from a fast track court lies. Hence assuming that the appeal lies to the district court, then an additional three months is added to the legal process. A similar provision does not exist in the Bill. Section 16 of the Act deals with penalties for coercive measures. On reading it seems that only those who actually have been party to coercive practices shall be prosecuted. Coercive practices against the SHGs, members or their family members are liable to be punished. The term family members is not dened and could lead to confusion. The term coercive action is dened in this section. It includes among other things three clauses that are loosely dened. One is doing any act calculated to annoy or intimidate
4 However in order to protect the interest of the clients, the Bill also classies oences related to the acceptance of thrift (dened later in the paper) and repayment as cognizable

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the second is frequenting the house or other place where such person resides or works while the last is moving or acting in a manner which causes or is calculated to cause alarm or danger. These clauses should be read in the light of the fact that even a member of the general public can le a complaint. This makes the clauses quite dangerous since misuse could be rampant. The provision has a saving clause that exempts visits for collection or communication from the purview of this denition. However the onus of proving that the visit was for the abover purpose would rest on the employee of the MFI and would be quite dicult to establish in a court of law. The quantum of punishment is a ne upto |1,00,000 and/or prison upto three years. Section 17 provides the same quantum of punishment for conducting the business without registration or giving loans in contravention of the Act. However in S 17, all persons responsible for the day to day aairs are liable for prosecution. Normally a saving clause exempting those acting without knowledge and in good faith is provided after such a provision but there is none in the Act. Section 18 deals with a general penal provision for contravention of any other provision of the Act. The quantum of punishment in a ne of |10,000 and/or imprisonment upto six months. Rule 29 of the Rules further allows the ocer in charge of the local police station to take action for contravention of S 16 and/or S 17 either on complaint or suo moto. Chapter X of the Bill deals with oences and penalties. The nes in the Bill are much larger than those in the Act but the period of imprisonment is slightly less. Coercive action is not dened in the Bill. Penalty for wilful misstatement, furnishing wrong information and similar actions are similar to those in other legislations. It is only when the rules for the legislation as enacted by the Parliament are framed that the full list of oences will be clear. Sections 20 to 23 of the Act are standard and protect ocers who act

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in good faith from prosecution, allow the Government to make and modify rules etc. Section 24 of the Act requires that the Government prepare an annual report on the administration of the Act which shall be tabled in the Parliament. This would provide some accountability for the actions of the Government especially in a law such as this which gives it sweeping powers. There is no requirement in the Bill to prepare a report and present it in Parliament. A reason for this could be that since the RBI is envisaged as the authority responsible for the implementation of this legislation, it would exercise adequate control over the operations of the MFIs. Similarily Chapter XII of the Bill that deals with the miscellaneous aairs have provisions similar to that of the Act in regard of the powers of the Central Government which are quite standard.

Important provisions of the Micronance Bill in detail

The Bill follows a standard template in many ways. For example chapters II, III and IV that deal with the institutional framework of micronance administration follows a three tier approach similar to co-operative banks. Chapter II deals with the establishment of the Micro Finance Development Council (MFDC). The chairman is to be nominated by the Central Government while the requirements for the other members are also laid down. The State Micro Finance Council (SMFC) and the District Micro Finance Council (DMFC) as provided for in Chapters III and IV also have similar structures suitably scaled to their respective levels of functioning. The MFDC however has a more advisory role while the other two have some implementation, supervisory and reporting obligations. A noteworthy point in the case of the DMFC 17

is as per clause 10 of the Bill, a representative of the lead bank is to attend the meetings of the DMFC. A led bank is dened in that clause to mean a lead bank as assigned in the Lead Bank Scheme of the RBI. This again shows the intent of the Government to link MFIs with the formal banking system at a very fundamental level. Chapter VI deals with provisions regarding reserves, accounts, audits and returns. The audit provisions are standard. However the RBI has been authorized to specify a percentage of net prots earned by the MFIs from micro nance services to be transferred to a reserve. This accumulation would in the future protect the clients of the MFIs. Since it is a reserve under the RBI, MFIs would not fail to transfer the amount into the same. Chapter VII provide detailed and sweeping powers to the RBI. These include setting a cap on the margin and annual percentage rate.5 Further if the RBI feels that the MFI is conducting business detrimental to the interests of the clients then the RBI can virtually dictate all the business activities of the MFI inclduing ceiling on number of clients, amount of micro credit facilities, deployment of funds, locations and so on. Every aspect of the business is included. In eect the RBI can run the MFI business in totality if it feels that the business is run prejudicial to the interests of its clients. Such powers can be justied in case of emergencies. However allowing the RBI to x a cap on the margin (eectively the prot) of the MFI seems unjustied. All amalgamation and restructuring of the business would be done only if the scheme is approved by the RBI. The Bill also talks about the conditions under which a MFI has to wind up its business. Chapter VIII gives the details of the Micro Finance Development Fund to be administered by the RBI and used for the development of micronance
5 Annual Percentage Rate has been dened above. Margin will be dened later in the paper.

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activities. The Central Government could encourage donations to this fund by providing tax incentives for the donations. Chapter IX deals with the dispute redressal mechanism. It is still not comprehensive and only states that the ombudsman established under any scheme of the RBI will be given the authority to deal with the disputes related to micronance. Chapter X deals with oences and penalties. The maximum imprisonment is two years. However the nes are very large as in clause 34 where the ne could extend to |5,00,000 and extend to |10,000 for every day the oence continues. In addition, the RBI too can impose a ne that may extend to |5,00,000. Chapter XII deals with miscellaneous provisions. A particular provision of note is clause 43 that species that member or clients of the MFI have rst charge over the assets of the MFI and shall be second in line to recover their dues after the workmen of the MFI in case of any default. A few denitions are of particular interest. Clause 2(1)(h)denes margin. Margin is the dierence between the cost of funds and the annual percentage rate charged. The RBI has, through powers conferred upon it, a right to set a limit on the margin. This essentially is setting a limit on the protability of the MFI. This would reduce interest in MFIs as an interesting business opportunity. It has to be noted that as per the Bill, the MFIs will operate in a highly regulated regime and would spend a considerable amount on time and resources on compliance. The Government must reconsider this as limiting protability does not seem a reasonable step by the Government. Clause 2(1)(j) denes micronance services. It xes the maximum limit on a single individual borrower at |5,00,000 in normal cases and |10,00,000 in

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exceptional cases. It also includes activities pension and insurance, domestic remittances and thrift. Thrift is again dened in clause 2(1)(r) as any money collected by MFIs from its members other than current account and deman deposits. The denition is not quite clear but broadly referes to some sort of savings that are made by its members. Hence in a subtle manner the Bill also includes collection of deposits by MFIs in its denition of micronance services. However the RBI strictly regulates collection of deposits by Non Banking Financial Services. The RBI may therefore propose a new structure to govern the MFIs.

Conclusion

Andhra Pradhesh Micro Finance (Regulation and Money Lending) Act, 2011 was in response to the perceived micronance crisis in AP. The Micronance Institutions (Development and Regulation) Bill, 2012 was in response to this Act. The legislations were knee jerk reactions and hence do not seem to be quite comprehensive and well drafted. The Bill still needs to be revised and many changes need to be made. Micronance is a large business in India with immense growth opportunities. A well drafted legislation would go a long way in achieving this potential.

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